There is a plethora of funds offering massive returns by investing in Forestry. Forestry is a specialist investment and holds many traps for the unwary investor.
There are a number of questions that need to be addressed before parting with your capital, some relate to good governance, some to the environment.
Obviously one needs to know the history of the company, many are jumping on the band wagon and are offering unregulated funds which leaves the investor quite exposed. If the fund isn’t regulated one need to know what guarantees do you have in the event of company failure.
You need to be sure who audits the firm and even who is the actual owner of the trees and/or land? There is often a question of what are you actually buying? Will you own rights to trees, lease over the land, is the contract with the Plantation Company or sales agent / UK Company or subsidiary? Of course the big question in view of recent failures is what protection do you have if the company goes into liquidation?
Having reassured yourself that the company you are buying from is reputable and secure the next area of concern are the trees themselves. This is often a twenty year investment and any investment of that term must stand up to detailed scrutiny.
The starting place is does the company use realistic return projections? We were recently offered a fund that suggested we could expect twenty five percent per annum over a twenty year period. Their projections had not taken into consideration many factors that could lower the returns e.g. what will be the price of timber will be in 2030? They had based theirs on current trends, not a good idea.
The country where the trees are to be planted is of course a major factor in the stability of the fund. What are the long term political risks? Go back to the 1990 and think of the number of countries that seemed politically secure that have since been involved in civil strife, countries even in Europe. Some countries will have systems of bribery and even fraud embedded in their social norms, what effect will these have on the fund’s returns?
And then one has to consider the environmental questions for these will have an effect on the fund’s performance. We all know now that England’s flora and fauna are going to change in the next few decades. Have the fund managers taken that into consideration when choosing the timber to be planted? Again over twenty years there are other risks, fire, pests, failure to achieve assumed growth rates, disease, flooding all of these present very real dangers and have to be considered.
And as one come to exit from the investment it’s important to know is this timber for local use or export, both of these carry different risks, on one hand currency fluctuation on the other a fluctuating local market price. Of course as always the tax implications cannot be forgotten, will you be paying withholding taxes or capital gain tax?
Some funds will be claiming carbon credits, are the statements being made valid?
For those investors that want to look beyond forestry as a simple investment there are deeper environmental concerns there is yet more research to be done.
Forestry plantations tend to fall into three main types:
• Monoculture with no bio-diverse elements. Typically high input monoculture production area, no protection areas – These are the old fashioned plantations and represent poor environmental benefits.
• Monoculture with bio-diverse elements. Typically high input monoculture production area and separate protection areas – these are better but an Investor needs to make sure that the protection area is well managed and the production area FSC certified
• Multi-culture, mixed species. Typically the production area itself is bio-diverse and additionally has protection areas – these are the best environmentally but once again the investor needs to establish that the manager has proof of the financial plans and technical track record.
So are Forestry funds a good idea?
A well managed plantation can bring many benefits, it brings into use often poor soil, it can increase bio diversity, and it can offer employment opportunities to the local population. Very well managed plantations will have many different types of timber, this can protect against disease and pests as well as offering a better habitat for insects, birds, and amphibians, the very best will have corridors that allow the migration of animals.
And so long as all of these issues are addressed then forestry can offer a good long term investment particularly suitable for pension planning. It goes without saying the prettiness of the picture on the brochure is no indicator of the value of this investment.
Finally remember most of the Forestry Funds are unregulated and so we cannot advise you about them – and that should start alarm bells ringing for you!!
