Benefits of investing in timber: low returns and no inflation protection

Institutional investors continue to be fooled into thinking that high returns in the past for timber assets are somehow indicative of fundamental characteristics - when instead they are simply a function of lots of dollars flowing into a very small asset class. This article from FundFire describes increased interest from public pension funds based on a study from Merrill Lynch.

The study says that timber is not yet a widely owned class – just 37% of state pension plans are invested in timber and half of those allocate less than 1% of assets towards that class. It says slightly more than half of all university endowments are invested in timber.

The study estimates that there is $35 to $40 billion currently invested in timber and says the $4 billion predicted to enter the market could be just half of the amount investors ultimately put towards the class. Surveyors polled 80 state pension plans representing total assets of $2 trillion and 45 U.S. university endowments representing total assets of $200 billion. The $4 billion estimated does not include the other 50% of plans not questioned, the survey says.

But the survey predicts hefty inflows as investors increasingly recognize timber’s main attributes: the ability to diversify a portfolio and protect against inflation with little correlation from other asset classes. The survey predicts that investors currently funneling money towards timber will increase allocations and that those not doing so will start.

Regarding the supposed benefits of timber investing, about the only thing I agree with is that it is a long duration asset. Regarding its inflation protection benefits, I think this is completely false. Regarding its low correlation to equities, I believe that this could be true during some periods but is likely not to be true when you really need it - during a period of falling stock prices and recession (which we seem to be entering). In short, timber has been great because everyone has piled into it (attempting to copy Harvard and others). It will be a mediocre performer as long as everyone continues to stay invested - and a terrible performer when anyone decides to sell.