AlphaWealth offers timber investment
ASSET manager AlphaWealth is offering its clients a direct investment in eucalyptus plantations in KwaZulu-Natal that have offtake agreements with Sappi and other timber processors.
Listed companies such as Sappi, Mondi, York Timber and Masonite have sizeable timber assets on their balance sheets but derive their sales from processing logs into products such as paper, packaging and furniture.
Mirroring trends in countries like the US, AlphaWealth has assembled a portfolio with 6,500ha of mostly eucalyptus plantations, slightly larger than York Timbers’ area dedicated to the species.
AlphaWealth wealth manager Andrew Flavell said last week that the company’s special purpose vehicle was targeting 15% cash-oncash returns a year. The fund would be geared with some debt while the farmers would retain material stakes in the venture.
“Forestry investments have seen a substantial amount of inflows recently. There is a new Russian-Chinese joint venture that is putting $200m into forestry investment opportunities. Likewise, Harvard University — which has the largest endowment of any academic institution in the world — is making a major push into timber and forestry investment. Of its 11% allocation to natural resources, 80% is focused on forestry assets.”
Harvard has timber holdings in New Zealand, Brazil, Romania, Argentina, Chile, Ecuador and Uruguay. Some UK-and US-listed real estate investment trusts (Reits) are timber-focused.
Mr Flavell said after AlphaWealth clients requested access to the alternative asset class, the wealth manager chose to invest in KwaZulu-Natal after looking at opportunities in neighbouring countries.
Direct forestry investments, which were not previously available to South African investors according to AlphaWealth, were “one of few asset classes that have outperformed inflation over 100 years”. While AlphaWealth’s forestry fund resembles a Reit in that it has a strong net asset value underpin, it will not pay dividends. Returns are based on the proceeds of lumber harvests and growth of the trees.
Mr Flavell said if timber prices were low in a particular season, investors could hold off on harvesting until prices recovered.
The global direct timber asset class has in the past 54 years had five years of negative growth, according to AlphaWealth.
Since 2000, the FTSE-JSE Africa forestry and paper index, which includes Sappi and Mondi, has had eight years of negative returns, Bloomberg data show.
“This shows the contrast of the return profile when targeting the biological asset directly rather than through operating companies,” Mr Flavell said.
Sappi has weighed on the forestry and paper index as demand for its core product — paper — has dwindled with the rise of digital alternatives. The firm’s shares, while still below their R100-plus highs of the early 2000s, have recovered this year to 2008 levels of about R50.
Sappi is reducing its reliance on its traditional paper business by finding new uses for what were previously waste products.