Forestry Investment

Overview of investing in forestry

Demand for wood is rising with the world population and the development of new economies. In the past a lot of wood has been sourced from the clearing of forests with no consideration given to conservation. This approach is being frowned on by the international community and with the development of commercial and political policies the supply of wood is coming under pressure.

Investing in wood is a long term game. Supply is hampered by the time it takes for a tree to mature sufficiently for harvest. With demand growing and supply constricting it would seem an ideal investment opportunity, especially for those companies focused on sustainable practices.

How forestry funds are managed

Forestry Investment funds in this sector can either invest in a portfolio of companies, or directly into forests. The risks and returns associated with each type will be very different.

For forestry investment funds invested in companies, their activities can range from owning forests, planting and managing forests to processing and producing timber products. Some are actively managed, and others passive, which means they track an index of forestry companies.

For a fund investing directly in forests an investor needs to understand the specific risks attached, which include natural disasters. From a fund perspective the key issue is how does the fund manager value a set of trees which may not be harvested for 25 years and what are the cash costs of managing the forest in the years preceding the timber being cut. This usually involves long range assumptions connected to a financial model and thus a valuation can be subjective.

Investor approach to investing in forestry

The long term business case for forestry assets seems assured given demographics and the world’s concern over deforestation.

Thus investment funds should benefit from the increasing demand for wood, but an investor needs to understand that investing in actual forests is very different to investing in companies making wood products.