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By launching the timber fund û which is available worldwide û Pictet Funds is making a product that was previously reserved for private equity professional investors accessible to affluent retail investors.
The fund will not invest directly in forests and timberland but in selected listed companies that are active in the entire timber value chain. It will focus on companies that own and manage their own forest lands and have more control over forestation as well as choice of tree species and harvest periods. Pictet Funds estimates the total market capitalisation of the timber sector worldwide at $500 billion.
Forty-eight percentage of the fund will be invested in mid-cap companies. Emerging markets and North America will account for a big portion of the fund portfolio.
The fund will be managed by Gabriel Micheli, Christoph Butz and Philippe de Weck, all of whom are based in Geneva. It will start investing on September 30.
In Hong Kong, Pictet Funds says the timber fund is the first of its kind. Pictet Funds launched its retail operations in Hong Kong in February by way of offering 15 portfolios based on six themes. By launching theme-focused portfolios, the firm hopes to capture a niche in Hong KongÆs crowded market of retail players.
Amy Cho, Hong Kong-based regional head of Pictet Funds, says the timber fund will appeal to investors because of its low correlation to the stock market and its inflation hedge characteristics.
ôWe believe timber is the quintessential long-term investment. The biological growth of timber provides a niche advantage as timber investment can weather the volatility and uncertainty of the market,ö says Micheli, lead manager of Pictet Timber Fund. ôIts returns are positively correlated with inflation, which makes timber an effective long-term inflation hedge, and a potential portfolio diversifier.ö
Micheli notes that the value of forests grows with age û the older the timber, the higher the value.
Green timber is usually used for manufacturing paper and related produce, while stronger and higher density timber can be used for construction and can be sold at a higher price.
Timber grows naturally and has low correlation to the equity market. For example, Southern yellow pine harvested at 24 years of age can sell at an average of $32/tonne while it sells at an average of only $8/tonne when it is 13 years old û the value increases three-fold in 11 years.
Industrial roundwood has been in great demand along with economic and demographic growth. The worldÆs paper and board consumption is escalating with the growth of the world population, and has tripled in the last 30 years. Geographically speaking, the compound annual growth rate (CAGR) of paper and board consumption in emerging markets is 3.6% higher than in mature markets.
While the demand for timber has been increasing, the supply is increasingly under pressure. Production capacity of timber is limited by biology, competing land uses and politics. Developing countries, particularly South America and Africa, have significant negative forest area annual growth. While the growth rate of plantations is only 2.8 million hectares per year, the deforestation of existing forests is 12.9 million hectares per year. The shortage of timber has further pushed up its value.
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