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".

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