Wood Paneling for Your Portfolio

By Lewis Braham

After the relentless volatility of the financial markets in recent months, it's easy to see the appeal of an investment that doesn't move in concert with stock and bond markets. Buying timberland is one of the ways the big guys running pension plans and endowment funds have diversified their holdings away from financial market trends and earned fairly stable double-digit returns to boot. But timberland has been mostly off-limits to individual investors, because it requires millions of dollars to buy in.

Enter the Claymore/Clear Global Timber Index ETF (ETF). It's a new exchange-traded fund that invests in stocks of companies with the world's greatest exposure to timberland. It amps up the exposure by weighting the 27 stocks in the portfolio not by market capitalization but by actual acres companies own.

This sort of everyman version of a timberland play isn't as effective a diversifier as what the bigger players can get, but it's not bad. Timberland values have moved in line with the Standard & Poor's (MHP) 500-stock index about 36% of the time over the past 20 years. The Dow Jones World Forestry & Paper Index (NWS), a useful proxy for the Claymore fund, correlates about 59% of the time. So for about 40% of the time, timber stocks zigged when the broader market zagged. The Claymore ETF could correlate even less with stick market swings given its extra weighting in acreage.

An added attraction is the cheap price of timber stocks. The ETF's portfolio currently has a ratio of price to book value that's about 60% that of the average U.S. stock. On one measure of profitability, the ratio of price to cash flow, things look even better, with the ETF at an 80% discount to the average stock.

While prices for timberland haven't dropped, stocks of paper and lumber companies have fallen because of concerns about housing and the U.S. economy. "Cutting down trees for lumber to build homes is only a small portion of what timberland is used for," says Andrew Corn, CEO of Clear Indexes, which designed the index the ETF tracks. "Timber is used for packaging first, paper second, and then lumber. Also, most timber companies are global players. China alone plans on building 50 cities the size of London in the next 30 years. They'll need a lot of wood." The ETF's top three holdings are U.S.-based International Paper and Brazilian companies Votorantim Celulose e Papel, and Aracruz Celulose.

What pension plans like about timberland, as opposed to timber stocks, is its relatively stable value. When timber prices fall, tree farmers can delay harvesting their crop, and during that time the value of the tree expands as it grows. "If a tree stays in the ground an extra year, there's just more of it next year, and the quality of the tree is better," says Jerry Miccolis, a Morristown (N.J.) financial adviser who invests in timber stocks. "Tree farmers can afford to wait till the price cycle comes their way." The typical tree grows 7% a year, and timberland's steady returns have been double that over the past two decades.

Another new option for investors seeking pure exposure to timberland is the Wells Timberland REIT. The non-traded real estate investment trust buys directly and has a $5,000 minimum. The trust is not fully invested and so has no performance track record. If you buy in, you'll have to lock up your money at least five years. You'll also pay hefty 10% commissions up front on your investment.