How to branch out into timber

With asset prices being distorted left, right and centre by record-low interest rates, global pension funds are increasingly searching for "alternative" assets in which to invest. In 2014, around $8.4trn of pension money was allocated to alternative assets, almost 25% of the total. That's up from just 5% in 2001, reports investment manager Forestry Investment Management. These alternative assets include everything from commodities to property (by some definitions), or even rare coins and stamps.

We aren't particularly keen on the idea of viewing commodities or collectibles as part of your portfolio. Pure commodity exposure (rather than via equities) is hard to get, expensive, and prices tend to be volatile. As for the likes of art, stamps and classic cars these can certainly produce good returns if you invest in the right ones at the right time, but trading costs are high, the assets themselves aren't easy to sell at short notice, and most are almost impossible to value with any degree of accuracy, given that they are thinly traded and produce no income.

However, there is one alternative asset class that we do have time for: timber. According to the IPD UK Annual Forestry index, which surveys a sample of 133 commercial forests in Britain, forestry returned 18.4% in 2014 and has averaged a "staggering" 21% a year since 2010, relative to the FTSE 100's annual return of 7.7% and the 10.9% on commercial property, notes The Economist.

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Demand for timber looks set to increase, at least in the near future. Over half of Britain's timber has to be imported and the Forestry Commission has warned that domestic supplies may start to fall from around 2030 if new stock is not planted. Timber is also increasingly needed for house-building materials and to satisfy new markets for wood in biomass and engineered wood products.

The tax situation around forestry is favourable too: there's no capital gains or income tax payable on revenue raised from the trees (although this exemption doesn't apply to the land), and there are inheritance-tax exemptions once you have owned the forest for two years. (But bear in mind that these tax advantages could change at any time, particularly given that our government is cash-strapped.)

As with any alternative asset, forestry attracts more than its fair share of scam merchants ignore emails imploring you to invest in exotic hardwoods or "biomass". Instead, if you have a very large portfolio, you could go through a specialist investment manager, such as Forestry Investment Management (FIM), who will help you to purchase a forest, then manage it on your behalf. These services aren't cheap investments usually start at around the £2m mark. Or, for around £40,000 or so, you can invest through an FIM fund.

Alternatively, you could gain exposure via the iShares Global Timber & Forestry UCITS ETF (LSE: WOOD), which tracks the 25 largest and most-liquid listed companies in the sector. It's not as direct a route (and doesn't have the tax advantages), but it is straightforward and relatively cheap. The yield is 1.97% and the ongoing charge is 0.65%.