Investment Articles

In the current investing climate many investors are seeking out alternatives to traditional investment assets in an effort to boost poor returns and bolster the limp performance of their pension portfolios. While stocks and shares continue to display the kind of up-and-down volatility that would make a rollercoaster jealous, real-assets including fine wine, stamps, land and forestry have all continued to grow in values as rising global incomes combine with a growing global population to boost demand against a backdrop of limited supply.

Whenever supplies of an asset are limited and demand increases, we see the value increase as buyers compete for the best assets, so those investors in control of finite resources are likely to continue to capture capital growth regardless of the performance of the wider economy.

Whilst in is certainly true that some alternative investment assets rely on the existence of wealth for their end-use market; for example stamps and fine wine rely on the existence of wealthy buyers, it is also true that certain essential assets will enjoy a demand even if the global economy were to collapse tomorrow. These safe haven alternative investments include agricultural land, energy-generating assets, infrastructure and commodity driven properties such as forestry investments.

There is a limited global stock of land suitable for agricultural production and demand for food commodities and feedstock for animal feed and biofuels in growing exponentially as developing nations expend their populace and rising incomes lead to greater consumption of commodities. Indeed the giant populations of India and China are entering their most resource-intensive phase of growth, just like the west during the industrial revolution. The difference here is that the populations and resource requirements of these countries is much larger. This makes agricultural land a precious resource that is likely to become one of the most valuable assets on earth. Not only that, but goof quality farmland produces annual income from the production and sale of food commodities, so income streams also rise as food prices increase. It is worth noting that the amount of arable land per person on the plant has halved since only the 1960’s, going some way to explaining why so many institutional investors are holding more and more agriculture investments.

Renewable energy investments that produce income from solar, wind or agricultural crops are also seen as a potentially great alternative investment opportunity as they continue to generate revenue regardless of dividend performance in traditional investment markets. As long as the wind keeps blowing and the sun keeps shining, those in control of renewable energy investment assets will continue to earn up to 20 per cent per annul income yields based on current project establishment costs.

For the long-term investor, forestry investments continue to grow in any economic weather, because the majority of financial returns is actually driven by the biological growth of trees, not the performance of the economy. Whilst a relatively buoyant economy is essential in order for there to be demand for timber products, it is growth in emerging market economies what will drive future demand, and so investors who own a stake in a commercial forestry investment property close to emerging markets are likely to capture non-correlated growth and be able to create substantial revenues from the sale of essential commodities as trees turn into valuable timber stands.

In summary, alternative investments are popular because they generate returns not dependent on traditional markets, but investors should always be careful as these kinds of real-asset alternative investment all carry asset, location, sector and counterparty specific risks that many investor may not recognise or be able to screen for, so the use of an experienced consultant with a good track record of identifying successful alternative investment assets is essential in order to avoid undue risk and maximise upside potential.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

As stock markets and bond markets continue to display the sort of volatility that causes Investors to break out into a cold sweat, many are starting to investigate real-asset alternatives to traditional financial assets in an effort to identify opportunities to capture growth and income that is not wholly reliant on the performance of financial markets or the general economy.

There is certainly an increasing appetite for real-asset alternative investments, from fine wine and art, through to land and collectibles, yet a lack of credible performance data and regulation leave many at a loss as to where might be a suitable home for their hard-earned savings in the alternative investment space.

Whilst assets like fine wine and art rely almost entirely on the wealthy as an end market, growing economies in developing nations are creating a super-size middle class which is consuming more resources and consumables such as food, fuel, cars and energy at an astonishing rate, creating a huge spike in demand that shows no sign of abating, creating investable opportunities for savvy Investors able to identify those areas where demand is strong and fundamental limits in the supply chain create short, mid and,long-term value growth for those in control of such assets.

Here are a few examples of real-asset alternative investments that have displayed some extremely desirable characteristics such as capital preservation and a hedge against inflation throughout the last four years of economic turmoil.

Renewable Energy Investments

As populations continue to expand, natural energy resources continue to diminish, international legislation combined with government incentives create profitable opportunities for those in control of energy-producing assets that do not depend on the input of natural resources and therefore generate energy – which can be sold at a profit – during any economic climate.

In the UK, government backed feed in tariffs (FiT) creates opportunity as energy companies must purchase any electricity you generate and feed into the grid. So those in control of solar panels, wind turbines and other energy-producing assets capture market-beating income of between 10% and 20% per annum for up to 25 years. No income-generating financial assets share dividends or bonds can do that.

Forestry Investments

Timber, when considered as an alternative investment asset class is quite unique, not only does the price of timber rise over time – usually at or above the rate of inflation, at the same time trees continue to grow into larger assets with more timer to sell per tree. This combination of biological growth and price growth creates a compound return for the long-term Investors seeking to grow their wealth outside of traditional financial assets.

Forestry investments have outperformed the majority of other asset classes over a range of timeframes, with the best value to be found in emerging markets where demand for timber from growing populations and expanding economies is greatest. It is not uncommon for forestry investment to deliver returns ranging from 10% to 20% IRR over extended timelines dependent upon the location and structure of an individual investment.

Since around 2008, the UK market has come awash with direct forestry investments aimed at the retail Investor, usually based on the lease or sub-lease of a small plot within a larger, managed plantation. In most cases these products have promoted completely unrealistic returns, with some even suggesting that £20,000 could turn into over £1 million in 20 years or so. This real-estate based model also exposes the Investor to a substantial counterparty risk, being entirely reliant on the success of the Vendor for the lifetime of their investment in order to realise any returns and not simply be left with a worthless lease and no realistic access to their plot or trees.

That said, there are a few forestry investment opportunities worth considering, and investor are best advising to seek the assistance of an independent third party with experience of assessing timber investments in order to avoid undue counterparty, asset, location and sector-specific risks that can be associated with this interesting asset class.

Agriculture – Investing in land

Agricultural land is the cornerstone of the human race, it provides the food we eat, the feed used to raise our livestock, and also plays an increasingly large role in providing the fuels we use to power our transport requirements.

The global stock of land suitable for agricultural production is actually falling quite rapidly when considered on an acre per capita basis, falling from 0.42 hectare per person in the sixties, to less than half that amount today. At the same time, not only are there more mouths to feed but each person on the planet is consuming more food as population in emerging economies become richer and demand more calorific, protein based diets which require substantially more resources to produce in terms of grain, water and also energy.

Those Investors in control of productive agricultural land are likely to retain possession of the most valuable resources on our planet, and at the current rate of global expansion, those assets are likely to become ever-more valuable over time, and the income derived from them is also likely to increases as competition for food resources at the global level continues to increases, with those prepared to pay more taking the lion’s share of crops.

In the UK alone, farmland has risen in value by some 10% per year for over ten years, and land close to the food supply chain in Asia, Latin America and Africa even more so.

In summary, the investing climate in 2012 is likely to remain fraught with volatility, and alternative investments will continue to grow in popularity as Investors seek superior returns and a safe haven from potential losses.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

The primary measure of farmland investment performance in the United States is the National Council of Real Estate Investment Fiduciaries (NCREIF) Farmland Returns Index. The index provides investors with a measure of the investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes. According to the index, US farmland returned 8.6% in 2010, and 5.85% to quarter 3 in 2011.

Regional U.S. farmland growth figures vary from state to state. A new report by the Federal Reserve Bank of Kansas City showed a 12.6% increase in mountain states farmland values over 2011.

The Minneapolis Federal Reserve Bank District reported farmland values as of second quarter 2011 up 17% from the same period a year ago, while the Kansas City District reports farmland prices up 20%.

Nebraska has seen one of the largest increases, with non-irrigated land up 30%. Oklahoma ranchland, suffering from a prolonged drought, saw values up just 6.4%, with what increase there was driven by oil and gas exploration.

There has been some concern amongst the agricultural community in the United States that land values have spiralled out of control, with demand for assets fuelled almost entirely by Investors seeking to diversify out of the stock market and into tangible assets. Don McCabe, an accredited farm manager with Soy Capital Ag Services said recently at an investment forum that, about 60% of all farmland is being purchased by active operators, with 15% purchased by nonlocal investors, 13% by local area investors, 7% by institutions and investment groups and 5% by other entities.

In Canada, Farm Credit Canada (FCC) monitors the value of a basket of 245 benchmark farm properties every six months. On average, Canadian farmland increased 7.4% in the first six months of 2011, and 9.5% for the year ending June 2011. Saskatchewan farmland led the nation in farmland price increases, up 11.6% in the six months ending in June, and up 14.3% year on year.

New York-based TIAA-CREF, the largest U.S. pension manager for teachers and academic researchers with $469 billion of assets said in October 2011 that farmland investments may return 8% to 12% per year as global food demand increases. The company has $2.5 billion in farmland investment assets and owns about 600,000 hectares.

Investors considering farmland investment should consult with an experienced Advisor in order to plan the most relevant and effective farmland investment strategy, identify suitable opportunities and identify and mitigate risk.

David Garner is Partner at DGC Asset Management, an alternative investments boutique specialising in property transactions in the agriculture and renewable energy sectors.

Investors seeking income can no longer rely on share dividends, and saving deposit accounts often generate a negative return when adjusted for inflation. Whilst this scenario looks set to continue for the foreseeable future, we must look elsewhere for our annual pay-outs.

Agriculture Investments

At the most basic level, agriculture investments based on the acquisition of agricultural property assets generate income, either from leased payments from tenant farmers, or shared revenue from harvests when farmed as part of a contract farming agreements (CFA).

There are a number of options for investors to consider, allowing smaller investors to take a direct stake in productive farmland and benefitting from a share of the annual income as well as potential capital growth as land values rise over time.

Such options exist in Latin America, Australia and Africa, and investors should be encouraged to seek independent advice as to the suitability of any such scheme to ensure suitability for the investors specific circumstances and attitude to risk.

Renewable Energy Investments

As the global population grows demanding more energy, and natural resources such as coal oil and gas continue to diminish, the world turns to renewable sources capable of supply energy in perpetuity without causing damage to the environment and delicate global ecosystem.

Around the world, governments incentivise investment in renewable energy technologies such as wind, solar, tidal, geo thermal, waste to energy and anaerobic digestion through feed-in-tariffs, where each unit of energy fed into the national grid is paid for at a set rate which is invariably linked to inflation.

This present those looking for income capture annual revenue that shares no correlation with traditional income investment assets or financial market fundamentals. Investors may choose to establish solar panels or wind turbines, collecting feed in tariffs from energy generated. Other may choose to grow renewable energy crops for the production of biofuels or for use as biomass fuel.

Renewable energy investments then are ideal non-correlated income investment tools, replacing lost dividend or interest income and offering to hedge that income stream against the effects of inflation.

Forestry investments

Forestry investments have long been used as a tool to diversify and optimise investment portfolios by institutional investors, and now a range of options exist for smaller investors to purchase plots within larger, professionally managed timber plantations.

Trees continue to grow every year so forestry investment can grow even when other assets fall in value. Investors choose forestry to ensure at least a part of their portfolio retains value and even grow every year, and as timber prices also increase, forestry investment offer a double edged sword of capital growth.

Faster growing timber species such as bamboo (which is technically as grass), offer shorter term income opportunities as they can grow into harvestable timber within a few years, whilst other commercial species like teak take up to 25 to 30 years to reach maturity.

This means fast growing timber species make for ideal income investments, also providing coverage of capital being backed by physical property assets.

Summary

Whilst a range of alternative investment options exist, these esoteric investment options are not suitable for every investor. All of the above options lack any kind of immediate liquidity, so potential investors must be prepared to tie up their funds for at least five years.

Liquidity aside, investor must also work with an advisor with experience in these sectors, preferably being able to demonstrate that they have delivered and exited performing investment previously.

David garner is a Partner at DGC Asset Management an alternative investment boutique specialising in identifying and delivering asset-backed, alternative property investment opportunities in the agriculture, timber and renewable energy sectors.

The investment performance of the agriculture sector can be monitored via a number of devices and measures that track the performance of traditional investment assets such as quoted equities, as well as a range of measures that reflect price movements in alternative investment assets within the agriculture space such as farmland.

In reality, the agriculture sector as a whole relies on a combination of demand for its products, weighed against agricultural productivity. When demand for food, livestock feed and biofuels is high then soft-commodity prices rise, as is also the case when poor productivity creates the same widening of the gap between supply and demand. On the other hand, if demand falls back, or bumper harvests create an oversupply of produce, prices fall.

If one is able to gain an understanding of current productivity and demand dynamics, then one is best able to predict the true performance of the sector as a whole.

The performance of agricultural equities alone – as measured by agricultural indices – does not truly reflect the state of fundamentals that support the sector. In many cases, individual issues that affect specific companies can either boost or lessen demand for the stock resulting in movement in the stock price regardless of the performance of the sector as a whole.

Indeed, many consider that the most efficient method of capturing financial gains resultant of the boom in demand for commodities from a population that is growing exponentially is to acquire farmland as an investment. The value of farmland is driven at the most fundamental level by the net revenue earning capability of the individual asset in question. As an example; a one hectare lot capable of generating a net annual income after costs of £1,000, will be worth more to a Farmer than a similar plot capable of earning only £500.

Farmland values are recorded by different indices in different regions. In the U.S. the National Council of Real Estate Investment Fiduciaries (NCREIF) records the quarterly investment performance of farmland. In the UK the Land Registry offers the most accurate picture, although anecdotal evidence from estate agents such as Knight Frank offer some insight, although on a very broad, national basis.

Agricultural equity indices include Standard and Poors GSCI Agriculture Index; S-Network ITG Agriculture Index; Dow Jones-UBS Commodity Index and Société Générale Index Global Agriculture, all of which provide a different viewpoint as they measure a different set of equities or commodities and use different weightings.

Overall, agriculture investments can best be assessed individually, and conclusions drawn as to the potential for each project as a standalone entity, be it an equity investments or acquisition of tangible assets. Investing in any business should not be simply because it operates in a particular sector, farmland should not just be bought simply for its agricultural status, and alternative investments are not going to be profitable just because they are alternative.

DGC Asset Management are an alternative investment consultancy providing Investors with research, due diligence and select opportunities to participate in the acquisition and development of productive, income producing agricultural property and renewable energy assets.

The current economic climate, defined by low interest rates, volatile equity markets and poor short-term visibility, is leading Investors of all shapes and sizes to investigate alternative investment assets in an effort to boost portfolio performance whilst also reducing exposure to traditional assets like equities.

Forestry is one sector where investment returns are driven more by the biological growth of trees into valuable timber than traditional growth fundamentals. Forestry also provides a shelter for capital, and superior compound growth, even during falling markets.

Institutional Investors have led the charge into forestry investments with Pension Funds and Hedge Funds acquiring timberland properties as part of their diversification strategy. This has led to the emergence of a plethora of forestry investment products aimed at the retail Investor.

With options to acquire small forestry plots within large, managed plantations in Brazil, Costa Rica, Panama, Sri Lanka, Fiji, Thailand, Nicaragua, Australia and New Zealand, potential Investors could be forgiven for feeling confused, and the lack of quality information about the sector for Financial Advisors leads many to divert their Clients attention to other, more traditional investment assets like residential or commercial property, or even equities.

In this article we look into the main concerns regarding these retail forestry investments, and look to how risk can be properly assessed and mitigated.

The main issue regarding the vast majority of direct forestry investment products on the market is the basic structuring of the product. To avoid being classified as a collective investment scheme, many of the projects mean individual Investors purchase or lease a defined individual plot within a larger plantation, and having a notional choice of Forest Manager to look after the property and harvest / sell timber at the relevant point in the life cycle of the Forest.

Avoiding collective investment regulations means that Promoters can market and sell to any Investors freely, without the restrictions associated with collective investments which allow only certified sophisticated or high net worth individuals participate.

In reality, only two such schemes have been found to be operated in the way laid out in the marketing material, whereas the majority, it seems, do in fact manage the entire plantation as a whole, pool all plantation income and distribute to individual Investors based on their proportional ownership. Investors do not in fact receive income from their own, individual plot.

Whilst actually more secure (no physical risk to your individual plot), this structure managed in this way is quite simply a collective investment scheme. No commercial forest can be operated in any other way, fact. Most forestry investments therefore, should be collectives.

It is this collective management, combined with the fact that most of these investment opportunities are heavily front-loaded with profit for the Promoter and Project Developer that make for a huge counterparty risk. One such scheme in Brazil is selling a hectare of young teak trees (worth no more than $5,000 in the real estate market) to Investors for £100,000 on the basis that the timber sold will generate a profit.

Of course, investing in forestry is not a one-off capital investment; trees must be expertly managed over long periods of time and this requires capital. So the bulk of the invested capital is likely to be required to fund the on-going management of the trees and infrastructure. However only one company out of 9 assessed has been able to show that the majority of invested capital is ring-fenced for property management, in fact much of the revenue from Investors ends up in the salesmen’s pocket, earning up to 20 per cent of invested capital commissions. A different project identified in Brazil offered a 40% commission to interested Brokers!

Let’s look at the numbers and run a very basic feasibility study. One hectare of established teak will encompass circa 1,250 trees, with around 400 trees making it to year 25, at which point they will yield something like 1 cubic metre of commercially viable timber per tree. Teak timber trades at about $400 per cubic metre for processed wood and about $250 for logs, so one hectare will produce about $100,000 worth of logs to be sold at the farm gate, minus the cost of harvesting.

How then is an Investor paying the equivalent $155,000 for this hectare today supposed to make a profit if total revenue (excluding any residual revenue from intermittent thinning) is less than $100,000? Are investors reliant on timber prices increasing?

Well, if timber price were to increase at a rate of 6% per annum, then plantation income would jump up to $300,000 at harvest ($756 per log) in 25 years’ time, but factor in inflation at then current rate of 5% per annum and the income in real terms (inflation adjusted), falls back to $120,000. A 20 per cent return over 25 years equates to a simple annualised rate of less than 1%.

It is extremely likely that, once Investment eventually dries up as Investor appetite is satiated (as in the case of many similar failed Managed Investment Schemes in Australia), then the Project Developer has no economic incentive to continue, and there is no capital left to fund the continual management of the property.

At this point the Project Developer disappears and Investor are left with a few trees worth much less than they paid for them, with no way of accessing them or managing them, or even disposing of them. It is in fact most likely that the assets would be sold by receivers to recoup some capital and in that instance, Investors would get back only the real estate value of the property (remember the $5,000 per hectare).

In short, there is a huge economic incentive for Promoters to establish and sell such schemes as they make huge profits up front, but very little incentive to continue to operate them after the lion’s share of capital is invested (and syphoned off).

There is a huge risk that Investors could be left high and dry with notional ownership of assets worth nothing and no way to access them.

Although one or two good schemes do exist, the majority we have assessed have demonstrated nothing but the willingness of some ‘entrepreneurs’ to jump on the bandwagon and cash in on unsuspecting Investors.

For further information about direct forestry investments involving the acquisition of timber properties, including direct investments in UK forestry properties, please contact DGC Asset Management.

DGC Asset Management offer research, due diligence and opportunities to invest in real-assets in the agriculture, forestry and renewable energy sectors.

Download your FREE Forestry Investment Report from DGC Asset Management.

The best investment strategy for 2012 and beyond will differ from the popular investment strategy offered by most investment advisers and financial planners today. The investment landscape has changed. Here’s a strategy for making the best of it.

Up until recent times you could stay out of serious trouble by simply allocating about half of your investment assets to stocks and the other half to bonds. That’s the traditional investment strategy often recommended for average investors, and most people deal with it by putting their money in stock funds and bond funds. Stock funds are the growth half of the equation and the risky part of the strategy. Bond funds are considered the relatively safe investment designed to pay higher interest income. Over the years losses in one fund type were usually offset by good returns in the other.

Welcome to the year 2012, where bonds and bond funds will likely not be such a safe investment. Stock funds are never safe and 2012 will be no exception to the rule. Asset allocation will be only half of the story going forward. Selecting the right funds within each category will be the other key to success. Let’s look at your best investment strategy in both fund categories, and the reason why certain funds will be your best choices.

Two things stand out about the so-called recovery the USA has supposedly experienced over the past few years. First, the economy did not recover as it has in the past after a recession – 9% of the working force is out of work. This makes for a weak economy and puts pressure on the stock market and stock funds. That’s why you’ll need to be careful about which stock funds you include in your investment portfolio.

Second, interest rates have been driven down to historically low levels to stimulate the economy in general and the pathetic housing market. Even with a 4% mortgage rate average folks can not qualify for a mortgage or afford to buy a house. Today’s ridiculously low interest rates mean savers can not earn a respectable interest income in truly safe investments. It also means that bond funds could be a trap in 2012 for people who don’t really understand bonds and bond funds. Let’s look at the best bond fund strategy first.

Even the best bond funds of the past few years could be big losers in 2012… if they hold long term bonds in their investment portfolios. When interest rates turn around and go back up the bonds they hold will lose significant value because new bonds will become available that pay more attractive (higher) interest income. Your best investment strategy for bond funds is to own funds that hold corporate bonds that mature in about 5 years to 7 years. CORPORATE BOND FUNDS pay more interest income than similar funds that invest primarily in government bonds. Funds that hold bonds maturing in 5 to 7 years (intermediate term bond funds) will be much less affected by rising interest rates than long term funds holding bonds that mature in 20 years or more. That’s a fact, and that’s how bonds work.

Your best investment strategy for stock funds will be to go with GROWTH AND INCOME funds that invest in high quality companies with a history of paying 2% or more per year in dividend income. If the stock market gets truly ugly in 2012 and beyond these funds will be your best bet to sidestep huge losses. In a bad stock market funds that pay little or nothing in dividends are usually the big losers.

Sometimes it pays to be aggressive and take on more risk. The year 2012 looks like a time to get more conservative and live to be a risk taker another day. Most investors need to hold stock funds and bond funds as well as truly safe investments like bank CDs. Your best investment strategy for 2012: allocate your investment assets with 40% going to INTERMEDIATE TERM CORPORATE BOND FUNDS and the same going to high quality GROWTH AND INCOME STOCK FUNDS paying 2% or more in dividend income. The other 20% of your investment portfolio goes to safe investments like bank CDs.

Author James Leitz teaches investment basics, stocks, bonds, mutual funds and how to invest in his investing guide for beginners called INVEST INFORMED. Put Jim’s 40 years of investing experience to work for you and get up to speed at http://www.investinformed.com. Learn how to invest.

Alternative Investment Lessons – Buy Physical Assets

In the current climate, investors are seeking alternatives to traditional investment assets, hoping to preserve capital, avoid the ravages of volatile equity markets, and generate investment returns that are not wholly dependent on the performance of the wider financial markets.

Physical assets are proving most popular with investors, items that retain a tangible value, rather than paper-based investments that can ultimately reduce in value to zero, despite the value of any underlying assets. Gold is the prime example. Whenever the stock market fall substantially, investors sell shares and buy gold. The resulting spike in demand for what is a finite asset drives up the price, creating returns for investors.

Other alternative investment assets that are becoming increasingly popular also rely on supply and demand for their capital value, but where demand is guaranteed. Farmland is a good example; there is a finite stock of suitable arable land, most of which is already being used, yet the population is not only growing in size, but also in consumption per capita of food and energy. This means that the product of farmland -crops – will continue to rise in price as demand outweighs supply. This creates an income stream with a positive correlation to population growth. Also, as the land earns more money it too becomes a more valuable assets, so farmland rises in value faster than the rate of inflation providing a good capital preserve as well as income.

Farmland as an alternative investment now forms part of the investment portfolios of a number of major pension funds, hedge funds, sovereign wealth funds and university endowments. Long-term investors that can afford to hold the asset for some time are well positioned to preserve and grow capital whilst also generating income.

Investing in real assets like farmland protects the investor from short term market volatility, as these kind of alternative investment assets have a real use, they hold real value. Some investor attempt to harness this growth in global consumption by investing in agribusinesses through the equity markets, but whilst this method of investment will capture broad sector-wide growth, the value of even great companies falls when the market dips or crashes.

Another alternative investment asset that relies on demand for essential commodities is timber. Investors that purchase commercial woodland, earn revenue from timber sales at harvest, so returns are dependent on the growth of trees, rather than financial markets. Also, trees retain their value, and grow into bigger, more valuable trees every year.

Forestry investments are similar to farmland investments in a number of respects; in the first instance, they benefit from increasing demand and limited supply, they retain value when the markets crash, and investing in timber companies does not provide the same shelter as investing in the physical asset.

But timber is unique in one respect, and that is that not only do the trees grow bigger giving more timber to sell, they also grow in value as timber prices increase in line with, or faster than the rate of inflation.

There are all kinds of alternative investments, but many share very similar characteristics as laid out in this article. They rely on supply and demand, rarer items command higher prices, and their performance has a low or negative correlation to traditional assets like stock and shares. The same can be said for investing in fine wine, art or collectibles, all of which are also becoming more and more popular as alternative investments.

Download the Alternative Investment Report at the DGC Asset Management website.

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.

Investors looking to diversify their portfolios and insure their wealth against the ravages of volatility in traditional markets, will most likely have come across a range forestry investments, promising to generate superior inflation-adjusted and risk-adjusted returns for the long-term investor.

But how have timber investments performed? And how does the smaller investor participate in this interesting alternative investment asset class?

Firstly let’s look at the past performance of forestry investments, as measured by one of the main timber investment indices, the NCREIF Timberland Index; according to this basic measure of investment returns in the sector, this asset class outperformed the S&P500 by some 37 per cent in the 20 years between 1987 and 2007. When stocks delivered average annual returns of 11.5 per cent, forestry investments returned 15.8 per cent.

At the same time, returns from investing in timberland and woodlands have been proven to display a much lower volatility, an attractive characteristic for today’s investor.

Previously, the majority of investment returns from forestry investments have been mopped up by larger, institutional investors such as pension funds, insurance companies and university endowments, who have collectively placed over $40 billion into timber investments in the past decade.

So on to the second question; how do smaller investors participate in this kind of alternative investment?

According to a study by Professor John Caulfield of the University of Georgia, returns from forestry investments are three-fold;

An increase in timber volume (biological growth of trees), which accounts for some 61 per cent of return on investment.
Land price appreciation, accounting for only 6 per cent of future returns.
Increase in timber prices per unit, delivering the final 33 per cent of investment returns for timber land owners.

So the best way to harness the performance of timber investments is to take ownership of trees, either directly, or through one of the array of forestry investment funds or other structures.

Timber REITs

One way for smaller investor to participate in timber investments is through a Real Estate Investment Trust (REIT). These investment structures are like funds, in that investors can buy and sell shares in the trust on an exchange, the REIT acquires and manages timber investment properties, but unlike normal companies must pay out 90 per cent of their earnings to investors through dividends.

Some examples of Timber REITs are:

Plum Creek Timber is the largest private owner of timberland in the U.S. and the largest timber REIT with a market cap of about $5.6 billion, many investors have chosen this as their route into forestry investments.

Potlatch is also a timber investment REIT while

Rayonier generates about a 30 per cent of its REIT earnings from timber.

Weyerhaeuser has disposed of its paper and packaging businesses and will convert to a REIT by year end.

The Wells Timberland REIT is not publicly listed but may be available for purchase through Wells Real Estate Funds.

Another way for smaller investors to add forestry investments to their portfolios is to buy Exchange Traded Funds that attempt to track the performance of timber returns. This is less direct than owing timberland, or investing in a timber REIT, as the ETF may also invest in shares in companies involved in the timber supply chain including processors and distributors. This means that investing in forestry through ETFs exposes the investor to some of the volatility of equity markets.

The Guggenheim Timber ETF owns about 25 stocks and REITs involved in the global timber and paper products industry with a 30% weighting to U.S. companies.

The S&P Global Timber & Forestry Index Fund holds 23 securities and is 47 per cent invested in the U.S.

Timber Investment Management Organisations (TIMO)

Those with more capital to spare can participate in forestry investments through TIMOs, although the majority of these investment specialists require a minimum investment of $1 million to $5 million and a commitment to tie up funds for up to 15 years. TIMOs essentially trade timber land assets, acquiring suitable properties, managing them to maximise returns for investors, the disposing of them and distributing profits to shareholders.

Many experts believe that the active management style of TIMOs ensures that they can be more reactive to market conditions than REITs, and therefore don’t tend to fall and rise in line with the market quite as much.

Direct Forestry Investments

Those with access to sufficient capital and the appropriate expert advice can invest in physical properties. Commercial timber plantations are complex operations that require skill, knowledge and expertise to manage effectively and maximise returns whilst lowering risk.

For armchair investors, or those with less capital to spare, many companies offer investors the opportunity to purchase or lease a small portion or plot within a larger, professionally managed timber plantation. Investors normally take ownership of their plot and trees via leasehold, whilst the timber investment company plants, manages and often harvest the trees on behalf of the investor.

Options for investors range from species to species and region to region, with current opportunities in Brazil, Panama, Costa Rica, Germany, Nicaragua and other, more exotic locations like Fiji.

Investors should be wary as many of these direct forestry investments are frontloaded with enormous commissions for salesmen and promoters, with many offering ‘agents’ up to 30 per cent commission for the sale of plots to investors, and in many cases, no due diligence even exits.

In some cases, the Author has seen forestry investment plots in Brazil packaged and sold to investors for over £100,000 per hectare. Investor should seek advice from an independent consultant with experience of this alternative investment asset class, and who is able to present a complete suite of due diligence material, including an independent valuation of the forestry investment property on offer.

Summary

Investors choose forestry investments due to their effect as an inflation hedge, and their ability to generate non-correlated return on investment in the long-term.

Performance of the asset class is driven by demand for timber, weighed against global supplies, and in the long-term we are using timber at a faster pace than we can grow it, making timber investments an attractive asset class for the investor seeking stable, long-term capital appreciation within their investment portfolio.

Investors looking into which type of forestry investment is right for them should consult an adviser that can demonstrate experience and expertise within the sector.

DGC Asset Management Limited is an alternative investments business, identifying opportunities to invest in non-correlated assets.

David Garner is Partner DGC Asset Management Limited.

As fears of a debt crisis in the Eurozone converge with poor economic data from the US, investors turn away from volatile traditional investment assets such as equities and bonds, choosing instead to investigate a range of alternative investments that provide shelter for the value of capital, and are less affected by market ‘noise’.

Here are three alternative investment strategies that are proving popular with investors heading towards 2012.

Coins and Stamps

Numismatic investment (investing in coins) and philatelic Investment (investing in stamps) is one area that is receiving an increased attention. As with many alternative investments, the value of rare coins and stamps is driven by supply and demand. The rarer an item, the greater the value, although with coin investing the value of the metal is also a considered factor in the value of the coin, such as is the case with gold coins for example.

Investing in stamps was popular in the 1970s, but the bubble burst and prices took many years to recover. Investing in stamps, as with any type of investment in collectibles, require in-depth knowledge and skill to identify and value the assets.

With coins, many gold coins are still considered to be legal tender in the UK, and therefore offer tax advantages with regard to capital gains tax.

Timber Investments

Another of my current selection of alternative investments would be to invest in trees. As tress grow no matter what happens in the financial markets, investing in timber plantations, either directly or through an investment fund or timber business, provide the investor with growth whilst the performance of other assets may falter.

Returns from timber investments are three-fold; the majority of return comes from the tree growing into valuable timber over many years, also, the price per unit of timber (usually cubic metres) also rises, with many of the main indices in developed markets showing timber prices rising by around 6% per annum. Finally, in some cases investors may also profit from increases in the value of the land on which the plantation is established.

Forex

The third and final of this small selection of alternative investments is Forex, or foreign exchange. This is a highly risky investment strategy, and can inv9ovle betting for or against the movement in value of one currency against another.

Investors may place their bet per unit of a rise or fall in value, and can easily lose more than the value of their original stake if the currency moves the wrong way.

So, there are a great many alternative investments to consider for the investor keen to divorce the performance of their portfolio from the performance of traditional markets.

According to recent research, institutional investors are holding up to 25% of their investment portfolios in alternatives in an effort to rebuild value lost after the recent economic crisis of 2008.

Download the alternative investments report from DGC Asset Management .

David Garner is Partner at boutique alternative investment boutique DGC Asset Management Limited.