If you want good long-term growth, think timber

With global demand for timber soaring, we reveal what makes this asset class such an attractive investment for long-term growth.

Jeremy Grantham - chairman of Grantham Mayo and Vna Otterloo, a Boston-based firm that oversees $60bn in assets - has been scaring investors witless over the summer. At a conference in June he announced that stocks are overpriced to the extent that the market is now just about as risky as he has ever seen it. "The next few calendar years," he warned, "look like a black hole as overpriced markets, dangerous leverage and a gigantic hedge-fund business collide with the house-building phase of the US presidential cycle, plus the contraction phase of a long interest cycle." The result of this combination? He sees the Standard & Poor's index falling 38% over the next couple of years. So what's an investor to do in the face of a bear market like this? Go for quality, says Grantham. And today, that means cash, conservative hedge funds and, more interestingly, timber.

His rationale for this is simple: timber is not only a stable and predictable addition to a portfolio, but has outperformed the S&P index since 1910. It is the only asset class in existence that has gone up in three out of the four major market collapses of the 20th century. Better still, timber appears to give you a substantial degree of inflation insurance, says James Stewart in SmartMoney, and in these uncertain times that is not to be sniffed at. During the highly inflationary 1970s (1973-1981), timber's performance (up 22%) came in third behind oil and natural gas, for example - that put it well ahead of traditional inflation hedges, such as property and commodities. Even in the low inflationary 1980s and 1990s, timber was the second-best performing asset group, with average annual returns of 11% from 1982 to 2003. Other than equities, in the entire 30 years "no other asset class came close".

All this rather suggests that, long term, timber is something we should all own. But there are also a slew of shorter-term factors that suggest now is a good time to buy. Demand for wood, pulp and paper is soaring along with the global economy, and China and the US in particular appear to have nearly insatiable needs for lumber. China needs timber as it gets on with basic infrastructure and home building, and the US needs it as its citizens go on a renovation binge - in 2003 they spent $130bn on home improvements, up from $105bn in 2000. And while demand is on the up, supply isn't there to meet it: timber is renewable, but only over very long periods. No wonder that lumber prices have soared more than 50% in the last year and that Harvard University has put a "startling' 12% of its endowment cash into timber. Today, it seems if you want security and growth, you should forget the equity markets and "think of crisp pine-scented air and virgin forests: think timber".

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All the factors seem be pointing to higher prices from here, but, as ever, in the shorter term even timber is not a one-way bet. If, for example, China slows considerably, or if rising interest rates in the US mean house building there falls off, demand for lumber, and hence prices of timber and woodland, may fall. That said, the beauty of owning timber is that it can be harvested at any time. If prices are low, you just leave your trees alone to mature further (as Grantham puts it, "if the rain rains and the sun shines, then the suckers grow") until prices rise. In the meantime, your trees will just get more valuable, and in the UK you can continue to take advantage of a few rather nice tax breaks: there's no capital gains tax to pay on woodland and if you've owned it for two years, then when you die there's no inheritance tax to pay either.