InvestmentsMar 26 2012

The cost to investor and environment

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BySimona Stankovska

Money may not grow on trees – but it can be made from them and investors now stand a better chance of accessing their returns, thanks to an ever-expanding number of open-ended, closed-end and exchange traded funds (ETFs) that invest in timber.

For some time, timber prices have been on an upward trajectory, a trend many industry experts claim will continue in the medium term as the demand from developing countries, in particular China, increases. Constraints on the global supply of timber are also predicted to push prices higher.

According to the Forestry Commission, the average price of timber in England rose from £27.75 per unit in January 2005, to £39.50 in October 2011.

In the five years to March 16 2012, the FTSE 350 Forestry and Paper index has returned a whopping 298.94 per cent – more than four times the FTSE 100, which only returned 72.02 per cent in the same time period, according to FE Analytics.

With the UK’s obsession for green energy, this trend should continue, as the largest sustainable energy supply in the UK comes not from wind power, but from biofuels – one of which is wood, burnt as pellets or chips.

Climate change

Efforts to boost British forestry’s contribution to tackling climate change reached a key milestone at the beginning of March, as the amount of carbon dioxide predicted to be removed from the atmosphere by woodland planting projects registered under the new Woodland Carbon Code passed 1m tonnes.

Pam Warhurst, chair of the Forestry Commission, says: “The woodland carbon code is providing a boost in efforts to provide much-needed new woodland by giving confidence to investors that the project they invest in will ‘do what it says on the tin’. It also gives confidence to project promoters, who can now approach investors with credible, independent verification of their projects’ claims.”

As an investment, timber has certainly become more accessible to investors in recent years. Less than a decade ago, the only way for an investor to make money from trees was to buy forestry, but now, with 23 vehicles on the market, they can benefit from rising timber prices, without the added risk and responsibilities of physically owning the timber themselves.

In the three years to March 13 2012, timber ETFs made an average gain of 78.27 per cent, with the best performing, iShares S&P Timber & Forestry (DE), returning 85.62 per cent.

Open-ended funds appear to have done better, however, as the £149m Pictet Timber fund returned 108.82 per cent in the same time period, compared with the IMA Specialist sector, which made a gain of 56.04 per cent.