Are you a TIMO investor? Many of you may be. Approximately $4 billion of pension fund assets are invested in timberland investment in the form of Timberland Investment Management Organizations, TIMOs. Two recent articles, "The ABCs of TIMOs" in the The Compiler (Jenkins 1996) and "Institutional Ownership of US Timberlands: History, Rationale and Implications for Forest Management" in the Journal of Forestry (Brinkley et al. 1996), discuss timberland investment by institutional investors such as pension funds. This article will briefly summarize these two articles and suggest what TIMOs and portfolio management might mean for landowner in the Midwest.

In the "The ABCs of TIMOs", Jerkins states that most TIMOs are currently operated by major financial institutions, such as John Hancock Timber Resources Group, Wachovia Timberland Investments, The Prudential Companies' PruTimber. A few specialty investment groups - Forest Investment Associates, Atlanta and The Forestland Group, Chapel Hill - also develop and manage TIMOs for institutional investment funds. Interest in institutional investment in timberland developed for two major reasons. The Employment Retirement Income Security Act of 1974 allowed pension funds to diversify their investments. Secondly, some major forest products companies sought to reduce their direct investment in timberland by selling or cashing out part of their timberland assets. One way, short of selling the land, was to create an investment company to hold the land and allow investors to invest in the timberland. Although there are many types and forms of TIMOs, they basically sell partnerships or shares in timberland. The partners or shareholders participate in the profit when revenue is generated from, for example, timber harvest or hunting leases.

Why are pension fund investment managers attracted to TIMOs or forest investment in addition to more traditional investments such as stocks and bonds? Because timberland investments have negative beta's and positive alpha's that lead to higher portfolio returns for any level of risk, of course. What does this mean? The addition of timberland investments to a portfolio of more traditional financial assets such as stocks and bonds results in higher portfolio return and lower risk. Portfolio investment theory says "Don't put all your eggs in one basket". In addition, it says that investments that perform differently in up and down markets can be used to reduce the overall fluctuation in return and thus reduce the risk of toss.

Brinkley and others (1996) compared timberland investment return and risk with US Treasury bills, US bonds, corporate bonds, common stocks and small company stocks. For the period 1960-1994, timber investments as calculated by the John Hancock Timber Index earned a higher rate of return with lower risk (positive alpha's) than any of the above assets. In addition timberland investments tend to rise and fall counter cyclically (negative beta's) to financial assets. Therefore by combining timberland investments with financial assets, an investor can create an investment portfolio that earns a higher rate of return with lower risk.

Despite their attractive rate of return and risk, timberland investments are not going to become the only investment in a portfolio. Timberland, similar to other real estate investments, has high transaction costs and is relatively illiquid. These factors reduce the attractiveness of timberland investments. Another limitation is the indivisibility of timberland; timberland investment require substantial investments. While this is a constraint for private investors, it is not a constraint for institutional investors.

Most TIMOs and timberland investments are concentrated in the Southeast pine forests and the Northwest douglas fir forests with some investment in the New and the Lakes States. Although estimates vary widely, around 3 million acres worth from $3 to $4 billion are managed. As institutional investors become more familiar with timberland investments, there will be more demand for timberland investment opportunities. Not all timberland investments are the same. Investments in west coast douglas fir is different from Southern pine. In the future, different timberland investment combinations might be useful in diversifying different combinations or portfolios of other assets. One of those different timberland investments might be in central hardwoods, high-quality hardwood timber production.

For institutional investors to become interested in central hardwood timberland, a number of issues must be addressed. One of the thorniest is some means to predict future timber growth from mixed hardwood stands and, thus, the potential rate of return. Institutional investors require estimates of the risk and return associated with an investment. Forest economists have worked for 15 years gathering the information to support timber investment data for the current TIMOs. A similar effort is required for the hardwood timberland investment. Central hardwoods growth and yield is years behind the even-aged stand growth and yield models in both basic research and experience. Another problem is timberland areas of sufficient size to justify investment and management costs. Current TIMOs operate in areas were 100s to 1,000s of acres of timberland can be purchased in relative contiguous blocks. Development of TIMO in the hardwood region will require a different acquisition strategy. Hardwood timberland investment will require the purchase of smaller, less contiguous blocks of timberland and adoption of uneven-aged silviculture.

What do TIMO mean to Central hardwood timber owners today? Current TIMOs are a first step in moving timberland into the investment conscious of the institutional investors. These investors have lots of money that must be invested and they are looking for new, diversifying investment opportunities. If hardwood TIMOs develop in the central hardwood region, timberland prices would probably increase creating more options for current landowners. Timberland placed in TIMOs will result in long-term forest management, and research related to hardwood timber management will be in greater demand. Increased timberland value, more forest management and greater research would benefit the woodland management in the central hardwoods and all current and future woodland investors.

For more information on TIMOs and timberland investment, I suggest the following:

Brinkley, Clark S., Charles F. Raper and Courtland L. Washburn.1996. Institutional Ownership of US Timberlands: History, Rationale and Implications for Forest Management. Journal of Forestry Volume 94, No. 9 (September), pages 21-28.

Caulfield, Jun P. 1996. Assessing Timberland Investment Performance. Real estate Review (Spring) 1994, pages 76-80.

Jenkins, Hunter. 1996. The ABCs of TIMOs. The Compiler Vol. 14, No. 2, pages 38-39

Mills, W.L. 1988. Forestland: Investment attributes and diversification potential. Journal of Forestry, Volume 86, No. 1 (January), pages 19-24