TIR Research Library

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Timberland investors pay attention to the United States housing market because it is the leading source of lumber consumption. Stepping back, as a timberland investment manager, we are managing a factory (the land) that is producing a product – either softwood or hardwood timber. Softwood consumption is, broadly speaking, channeled into lumber (which accounts for roughly 50% of the softwood produced) and paper and engineered products such as OSB (the other 50%). From the perspective of housing‐driven demand, there is good news and bad news for timberland investors. The good news is that the U.S. housing market is on a slow, but steady, road to recovery. The bad news is that much of this growth has come in the multi‐family home sector. At present, one in three residences being built in the U.S. is a multi‐family structure. By comparison, prior to the housing crash, multi‐family homes accounted for one in five new homes being built in the United States.

Chung-Hong Fu discusses this current trend and what it means to timberland investors in his latest paper, “Do Millennials what to buy single family homes?”

Chung-Hong Fu: Managing Director Economic Research and Analysis

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When investors consider how and when to enter the timberland asset class, there are many considerations that must be weighed. In his latest white paper, “Capital Placement in Timber,” Chung-Hong Fu examines the benefits of vintage-year diversification, discusses the drawbacks associated with market timing, and reviews the importance of manager selection in the capital placement process. He begins with a recent case study to illustrate some of the challenges faced by investors and provides recommendations on how to approach the capital placement issue based on an analysis of market and historical NCREIF data.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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With the relatively recent drop in oil prices, immediate questions arose about what this drop in prices means to a timberland investor. In short, there are three primary ways in which a large adjustment in oil prices can impact the performance of timberland investments. Lower energy prices can: (a) raise the price of timber; (b) lower forest management and silvicultural costs; and (c) indirectly affect timber and land markets by influencing the world economy and global trade flows.

In “Impact of Lower Energy Prices on the Timberland Asset Class,” our Forest Economist, Chung-Hong Fu explores these questions and discusses the size of the impact.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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While investors understand the fundamental benefits of diversification within the timberland asset class, the issue of how to achieve diversification goals is often an elusive question. Among other things, a lack of quality data and a clear understanding of the underlying risk and return drivers are often the cause.

In “Timberland Diversification: Insights and Analysis,”, Chung-Hong Fu takes a careful look at the categories that contribute to diversification and quantifies the relative benefits of these categories. This paper provides useful insights for first time investors as well as the experienced investor who may want to take a closer look at the diversification characteristics of their current portfolio.

Steve Smith: Managing Director, Forest Management

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Since Timberland Investment Resources, LLC (“TIR”) was formed, it has emphasized research – both biometric and economic. Given that few investors have formal forestry backgrounds but typically have extensive finance and economic training, TIR’s economic research is both more understandable and accessible to most of our audience. However, this fact has not discouraged TIR from continuing to emphasize both the importance and differentiating quality of its biometric research effort. The cornerstone of the effort is TIR’s commitment to stand level management.

In “The Case for Using Stand Level Analysis to Manage Timberland Investments”, TIR’s Director of Forest Management, Steve Smith (who himself is a biometrician), summarizes a recent scientific study that was designed to objectively explain the concept and economics of stand level management. While having a technical forestry background will be helpful, this paper is written for those that have no formal forestry training.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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The increasingly competitive nature of timberland markets has created a perception by some that most of the value has already been extracted from the timberland investment space. In “Insights into Inefficiency and Manager Selection,” Chung-Hong Fu tested this theory by analyzing the long-term upper quartile and lower quartile returns of commingled funds and separate accounts managed by timberland-specific investment managers. The results indicate that there is a wide variability of performance across the asset class, with differences among the better and poorer performers exceeding those of many other asset classes. Moreover, this variability of performance is seen as increasing, not declining, in recent years. The results suggest that timberland remains a highly inefficient market with a great deal of complexity and depth.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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In conversations with investors, our experience suggests that they are often aware of some changes in the supply and demand outlook for wood products industry, but they often do not have a complete and informed perspective on the evolving dynamics of the sector. In “The Real Story About Paper Substitution and other Timber Market Game Changers: What Will these Trends Mean for Investors?,” Chung-Hong Fu discusses four major trends that will have a significant influence on rates of global wood consumption during the next decade and beyond. They include: (a) the replacement of writing, printing and graphic papers by electronic media; (b) product advancements that generate increased levels of raw material substitution across wood grades and species; (c) a strengthening social emphasis on the production and use of sustainably-grown timber; and (d) the advancement and adoption of engineered wood products for building and construction uses.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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As a follow up to the interest generated by “Timberland Investments: A Primer,” Hong has written a new white paper entitled “An Introduction to Global Wood Product Markets and Trade for Timberland Investors.” This paper examines how timber moves up the value chain from a commodity and standing natural resource to a variety of end-use products that are purchased and utilized by individual consumers, businesses and even governments. He follows this analysis with a review of the dynamics that drive the global trade of wood and wood products. He also highlights some of the key macro-economic factors that are expected to influence timber and wood products markets over the coming decade.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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Timberland and farmland are among the real asset categories that have garnered significant attention from investors. What makes an institutional investor choose farmland, timberland, or both? Given their similarities and key investment attributes, it can be challenging for an investor to decide which best fits their needs and interests.

In “Timberland and Farmland Investments: Separating the Bark from the Chaff,” Chung-Hong Fu provides an objective comparative assessment of timberland and farmland as asset classes. He outlines the features that make each of them attractive to investors, provides a brief summary of their historic performance, and offers an evaluation of their respective strengths and weaknesses. Finally, Hong provides a current investment outlook for both farmland and timberland.

Chung-Hong Fu: Managing Director Economic Research and Analysis

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In “A Look at the New NCREIF Timberland Fund and Separate Account Index (TFSAI)”, Chung-Hong Fu, TIR’s Director of Economic Research, provides insight on the new data that is now available to investors with the release of the NCREIF TFSAI Index. Until now, the NCREIF Timberland Property Index (which has been available since 1994) has been the primary measure for private market timberland investment performance. However, the Property Index has some limitations. Among other things, it does not include the impact of fund level fees and leverage because it only tracks the value changes of the individual properties that comprise the index. The Fund Index addresses this and other gaps and is an advancement for investors who are interested in researching the attributes and performance characteristics of the asset class.

Among the important insights obtained from analysis of Fund Index data are: 1) investment management fees account for roughly one percentage point of return across most periods of measurement; 2) the asset class appears to be less efficient than some analysts suggest; 3) smaller funds outperform larger funds, and; 4) separate accounts have tended to outperform commingled accounts over the last decade.