What it means
Forests can be an attractive investment because trees grow whether or not the economy is doing well. A tree adds volume and value each year, and the owner can choose when to harvest, which gives some flexibility when timber prices are low.
Institutional investors like this combination of steady biological growth and a link to real assets. Most large investors do not want to run forests themselves, because it takes specialist knowledge of tree species, soils, road networks, harvesting contractors and timber markets.
A TIMO provides that expertise. It finds properties to buy, draws up a management plan, hires foresters and contractors, sells the timber and eventually sells the land.
Returns have three main sources. The first is biological growth, as trees get bigger and move into more valuable size categories.
The second is changes in timber prices, and the third is changes in land value, with income earned from harvests usually forming a large share of the total. TIMOs usually charge a management fee based on the value of the assets, and some also charge a performance fee when returns beat an agreed target.
Investors often hold timberland in a fund with a fixed life of ten years or more, because trees take decades to mature. Private holdings are valued by appraisal rather than daily market prices, so reported returns look smoother than the true economic risk.
Timberland is not risk-free. Fire, pests, storms and disease can destroy trees, timber prices can be volatile, and regulations on harvesting and protected areas can reduce flexibility.
Investors need to understand that the asset cannot be sold quickly if they need cash. Forests can also support carbon projects and conservation income in some countries, which has increased interest from investors focused on sustainability.
These additional sources of income are still developing, and valuations should be tested with conservative assumptions.
In practice
Real-world examples.
Example
A public pension scheme wants to add real assets that are not closely tied to the stock market. It commits $200 million to a timberland fund run by a TIMO, which buys forests in several regions to spread the risk of storms and local price changes.
Example
A university endowment holds timberland for long-term growth and for protection against inflation. The investment office compares the TIMO's returns with a timberland index and checks that fees are reasonable.
Example
A forest products company sells its timberland to raise cash and focus on its mills. A TIMO buys the land on behalf of its investors and signs a long-term contract to supply logs back to the company.
Formula
Calculation
Total return = (net harvest income + change in appraised value) / opening value
Net fee cost = management fee rate x assets under management
Suppose an investor holds timberland valued at $100,000,000 at the start of the year. Net harvest income after operating costs is $4,000,000, and the appraised value rises by $3,000,000.
Total return = (4,000,000 + 3,000,000) / 100,000,000 = 7%.
If the TIMO charges a 1% management fee on the $100,000,000 of assets, the fee is $1,000,000 a year, which reduces the return to (7,000,000 - 1,000,000) / 100,000,000 = 6%.Case study
Seen in the real world.
Cedar Hollow Endowment is an illustrative, fictional university fund with $500 million of assets. The investment committee wanted a long-term holding that would not move in line with the stock market.
It appointed a TIMO to manage a $25 million holding, equal to 5% of the fund. The TIMO bought three forests, with different ages of trees, so that some stands were ready for harvest each year and the income was reasonably steady.
In the illustrative first year, the holding earned $1.0 million of net harvest income and gained $0.5 million in appraised value, a total return of 6% before the TIMO's fee. The committee noted that the appraisal-based valuations made the returns look calm, and decided to treat the holding as a long-term position held for at least a decade.
Watch out
Common mistakes.
- Treating timberland returns as risk-free because the trees keep growing, when fire, pests and price falls can cause real losses.
- Comparing the smooth appraisal-based returns of timberland directly with the daily volatility of shares.
- Overlooking fees, when management and performance fees can take a significant share of the return.
Questions
People also ask.
What does a TIMO actually do?
It buys, manages and sells timberland for investors, handling forestry operations, timber sales and the final sale of the land.
Why do investors hold timberland?
They like the steady biological growth, the link to real assets and inflation, and the fact that returns do not move in step with the stock market.
Can the harvest be delayed when prices are low?
Often yes, because the trees keep growing, though delaying has limits and the trees must eventually be harvested.
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