Why Invest In Timberland?
RISK & RETURN
A key attraction of investing in timberland is the competitive returns it offers compared to other asset classes on a risk-to-return basis. Historically, the performance of timberland as an investment is most often measured by the Timberland Index, published by the National Council of Real Estate Investment Fiduciaries, or NCREIF. The index is analogous to the Property Index that NCREIF also publishes for the commercial real estate market.
Returns from timberland investments - as measured by the NCREIF Timberland Index - exceeded the Standard and Poor's 500 Index for 11 of the past 20 years from 1990 through 2009. In that period of time, the NCREIF Timberland Index annual compounded return was 11.75% versus 7.32% for the S&P500 (Table 1). Yet, the returns from timberland offered lower volatility (standard deviation) of 9.68% against the equity market's 19.73%.
Table 1. Comparison of returns from the NCREIF Timberland Index against the Standard & Poor 500 Index (1990 - 2009).
Sharpe ratio based on a 3.0% risk free rate.
Source: NCREIF, Ibbotson Associates
Figure 1. Comparison of returns of different common asset classes with timberland, as measured by the NCREIF Timberland Index (1990-2009).
Source: NCREIF, Ibbotson Associates
Timberland, as represented by the NCREIF index, has performed well against other asset classes (Figure 1). This performance has been achieved without the tradeoff of higher risk. As an asset class from 1990 through 2009, timberland investment lies above the capital market line, as shown in Figure 2.
Figure 2. Capital market line, showing the returns and volatility among asset classes. Timberland returns are represented by NCREIF Timberland Index (1990-2009).
Source: NCREIF, Ibbotson Associates