Investment Strategy
Returns from timberland are influenced by three factors: (i) biological tree growth;
(ii) timber price changes; and (iii) changes in the value of the underlying land
asset. The Company aims to establish a portfolio comprising geographically diverse
assets located both in mature markets and in developing markets where potentially
higher returns may be generated but with commensurately higher risk.
The Company will initially target investments in North and South America and the Asia- Pacific region (including Australia and New Zealand), but may invest in other regions on an opportunistic basis, as determined by the Manager with the approval of the Board. The Company"s strategy is to achieve a balance between generating income and producing superior total returns to investors by establishing an optimized portfolio of timberland properties and timberland related investments diversified by location, age class and species. Different age classes of tree will provide harvestable timber over time and diversification by region and species will provide exposure to different growth rates and different market segments. The Manager believes that this approach will maximize returns and help to control volatility and risk exposure.
Investment strategies related to timber market segments, improved management, new opportunities in emerging environmental markets such as carbon credits, and reduction of project risk may be employed to increase total returns.
Geographic spread of investments Geographic diversification, which the Manager believes is integral to generating consistent risk adjusted returns, should also assist in the management of regulatory risk, environmental policy risk and natural disaster risks. It can also provide exposure to different climate zones with unique growing conditions and regional timber market prices.
Species diversification The forestry sector includes a set of markets that respond to different demand drivers and with different supply side dynamics. An analysis of these factors by the Manager indicates that the Company should target allocations to specific timber market segments. Subject to prevailing market conditions, the company"s current expectation is to de-emphasize pulpwood plantations, be neutral on softwood structural lumber, and emphasize investments producing hardwood saw logs.
Age class diversification Mature forests typically generate steady cash flows of up to 10 per cent per annum, but offer limited prospects for capital appreciation. Alternatively, new plantations will provide no cash flow and will require funding of continued operational costs during their period of growth but offer better prospects for capital appreciation and usually provide a higher rate of total returns over time. Forestry investment opportunities can be found in all stages of growth, and the Company will seek to create a portfolio (investing in plantations across all age classes) with a blended portfolio yield sufficient to support the target dividend yield. This assumes investment in assets at the immature growth stage or with unbalanced age classes which should over time facilitate potentially higher total returns, particularly in the Asia-Pacific region and South America.
< back to top
Value enhancement Traditional timberland investors have an opportunity to add value to forestry investments through a number of strategies which seek to exploit environmental option values of forests. These include, but are not limited to, the sale of carbon credits, water use rights, endangered species banks, tradable development rights, conservation easements, leasing of ridgelines to wind farm operators, development of small scale hydro-electric generation facilities, and cooperating on biomass energy development. The Investment Adviser will seek to use its expertise in this area to exploit option values which may not be fully reflected in the price of assets acquired by the Company.
In emerging markets such as those in Latin America and the Asia-Pacific region, significant value can be added by rationalizing underperforming management or changing management strategy so as to achieve greater efficiency. Many plantation operations suffer from inappropriate choice of tree species, poor timber, lack of capital for roads, plant and equipment and a general lack of management competency. Putting in place effective management can significantly increase returns.
Many emerging market transactions are complex and require negotiation with governments or governmental agencies and unsophisticated counterparties. There is a general perception of risk associated with such markets so that investors typically apply high discount rates when assessing the price of a primary transaction. However, once the assets are put under professional management, their marketability may significantly improve as the risk profile is seen to decline; this can provide substantial valuation uplift.
< back to top
The Company will initially target investments in North and South America and the Asia- Pacific region (including Australia and New Zealand), but may invest in other regions on an opportunistic basis, as determined by the Manager with the approval of the Board. The Company"s strategy is to achieve a balance between generating income and producing superior total returns to investors by establishing an optimized portfolio of timberland properties and timberland related investments diversified by location, age class and species. Different age classes of tree will provide harvestable timber over time and diversification by region and species will provide exposure to different growth rates and different market segments. The Manager believes that this approach will maximize returns and help to control volatility and risk exposure.
Investment strategies related to timber market segments, improved management, new opportunities in emerging environmental markets such as carbon credits, and reduction of project risk may be employed to increase total returns.
Geographic spread of investments Geographic diversification, which the Manager believes is integral to generating consistent risk adjusted returns, should also assist in the management of regulatory risk, environmental policy risk and natural disaster risks. It can also provide exposure to different climate zones with unique growing conditions and regional timber market prices.
Species diversification The forestry sector includes a set of markets that respond to different demand drivers and with different supply side dynamics. An analysis of these factors by the Manager indicates that the Company should target allocations to specific timber market segments. Subject to prevailing market conditions, the company"s current expectation is to de-emphasize pulpwood plantations, be neutral on softwood structural lumber, and emphasize investments producing hardwood saw logs.
Age class diversification Mature forests typically generate steady cash flows of up to 10 per cent per annum, but offer limited prospects for capital appreciation. Alternatively, new plantations will provide no cash flow and will require funding of continued operational costs during their period of growth but offer better prospects for capital appreciation and usually provide a higher rate of total returns over time. Forestry investment opportunities can be found in all stages of growth, and the Company will seek to create a portfolio (investing in plantations across all age classes) with a blended portfolio yield sufficient to support the target dividend yield. This assumes investment in assets at the immature growth stage or with unbalanced age classes which should over time facilitate potentially higher total returns, particularly in the Asia-Pacific region and South America.
< back to top
Value enhancement Traditional timberland investors have an opportunity to add value to forestry investments through a number of strategies which seek to exploit environmental option values of forests. These include, but are not limited to, the sale of carbon credits, water use rights, endangered species banks, tradable development rights, conservation easements, leasing of ridgelines to wind farm operators, development of small scale hydro-electric generation facilities, and cooperating on biomass energy development. The Investment Adviser will seek to use its expertise in this area to exploit option values which may not be fully reflected in the price of assets acquired by the Company.
In emerging markets such as those in Latin America and the Asia-Pacific region, significant value can be added by rationalizing underperforming management or changing management strategy so as to achieve greater efficiency. Many plantation operations suffer from inappropriate choice of tree species, poor timber, lack of capital for roads, plant and equipment and a general lack of management competency. Putting in place effective management can significantly increase returns.
Many emerging market transactions are complex and require negotiation with governments or governmental agencies and unsophisticated counterparties. There is a general perception of risk associated with such markets so that investors typically apply high discount rates when assessing the price of a primary transaction. However, once the assets are put under professional management, their marketability may significantly improve as the risk profile is seen to decline; this can provide substantial valuation uplift.
< back to top
