A Timber Investment Management Organization (TIMO) is a specialized management group that aids institutional investors in the management of their timberland investment portfolios. These organizations act as brokers for clients, helping to find, scrutinize, and acquire optimal investment properties. Once an investment property is chosen, the TIMO is entrusted with managing the timberland to ensure desirable returns for the investors.
Key Takeaways For Institutional Investors
- Efficient Management: TIMOs meticulously manage timber investment portfolios on behalf of institutional investors.
- Trusted Brokers: TIMOs serve as intermediaries, acquiring and managing timber investments tailored to their clients’ needs.
- Portfolio Diversification: Timber is viewed as an excellent portfolio diversifier and an effective hedge against inflation.
Understanding Timber Investment Management Organizations (TIMOs)
TIMOs emerged in the 1970s following the Employee Retirement Income Security Act, encouraging institutional investors to diversify their portfolios. Initially well-regarded by conservationists for separating landowners from wood mills, TIMOs were later viewed more critically as their primary focus is maximizing financial returns rather than conserving forest lands.
By 2007, the Realtors Land Institute (RLI) reported that TIMOs managed approximately $60 billion in timberland. According to Forisk Consulting, TIMOs held six of the top ten positions among the largest timberland owners in the United States as of 2021.
Top 10 Timberland Owners in US and Canada (2021)
Why Invest in Timberland?
Robust Returns and Reduced Volatility
Timberland is often praised for its favorable returns, even compared to stocks, with much less risk and volatility. Despite a brief downturn following the 2008 financial crisis, timberland investments have generally shown upward trends.
Measured by the NCREIF Timberland Property Index, U.S. timberland returned just 1.46% during one period compared to an 18.4% return by the S&P 500. This highlights timberland’s long-term potential for wealth accumulation within a diversified portfolio.
Key Benefits of Timber Investment
- Increasing Demand: Timber demand has grown significantly since 2008, with each American consuming a tree measuring about 100 feet annually.
- Inflation Hedge: Timber values typically increase faster than inflation, making it an ideal asset to preserve purchasing power.
- Superior Returns: Historically, timber investment returns have exceeded those of the S&P 500 with less volatility, highlighting its beneficial risk/return profile.
- Low Correlation: Timber returns aren’t tightly correlated to other asset classes, providing enhanced portfolio diversification.
- Land Appreciation: Land purchased for timber grows in value due to its limited supply and increasing demand. Some properties may also be sold at premiums for development, adding another layer of appreciation.
Investment in timberland offers numerous benefits, but it also faces risks like market downturns and natural disasters. Nonetheless, timber provides a natural ‘warehouse’ where stock can be stored and sold later, and damaged stock often retains some value.
By strategically incorporating timber into a diverse portfolio encompassing various asset classes, institutional investors can achieve improved risk-adjusted returns.
Related Terms: Real Estate Investment Trusts, Institutional Investors, Timberland Property Index, Sharpe Ratios.
References
- Realtors Land Institute. “The Basics of Timberland Investing”.
- C. S. Binkley. The rise and fall of the timberland investment management organizations: Ownership changes in US forestland. *Pinchot distinguished lecture,*Pinchot Institute for Conservation, 2007, Page 12.
- Forisk. “North America’s Top Timberland Owners and Managers, 2021 Update”.
- YCharts. “S&P 500 Annual Total Return”.
- NCREIF. “NCREIF Timberland Property Index”.
