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AN INTRODUCTION TO TIMBERLAND INVESTMENT To view the entire document, click on the PDF file below Timberland is an alternative investment that provides an excellent complement to traditional investments like stocks and bonds. As an asset class it can enhance returns while increasing diversification and reducing risk, thus creating a more efficient portfolio. Timberland has provided superior risk-adjusted returns with negative or low correlations to equities, bonds, and other types of real estate. In addition, timberland has exhibited significant inflation-hedging characteristics, outperforming other commodities in both high and low inflation environments. Timberland has very attractive investment qualities, many of which can be best explained by non-financial parameters—principally biological growth. Simply put, trees grow and add value no matter what the economy does. Another key factor is that timberland is finite and, unlike commercial real estate, for example, cannot be overbuilt. Timberland, as a “hard” (physical) asset with a limited supply, has significantly outperformed most financial assets in equity bear markets and has either maintained its gains or delivered solid, albeit relatively lower returns in equity bull markets. Additionally, an experienced and creative manager can add substantial value to a timberland investment through good silvicultural management, attention to details such as sorting of logs for the highest value markets, and the lease or sale of non-timber values such as development rights, recreation rights, public access and ecological services. This last category is what differentiates Lyme Timber’s forestland investment strategy from a more traditional timberland investment approach. The strategic use of leverage within acceptable risk parameters can also increase returns to equity. The demand for timber is expected to increase in the future as human populations and economies continue to grow. Environmental restrictions and loss of land to development pressures will also continue to diminish the global availability of timberland. While this loss of timberland will be at least partially offset by increased efficiencies (in wood use) and productivity gains (through intense management of plantations in tropical and southern hemisphere countries, and through the development of faster-growing genetic strains of trees), we believe that investments in naturally regenerating forest types like the northern hardwoods of North America (for which there are unique markets) should continue to benefit from the general trend of increasing demand and decreasing supply.
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