Assets do grow on trees

For those looking for a more natural way to invest, agricultural products such as timber and coconuts offer alternative ways to let your money grow.

Coconuts – valued for their water, flesh, oil and timber – are among the agricultural products worth considering investment in. Getty Images

Forget what your parents told you, money really can grow on trees.

Agricultural products such as forestry, timber and coconuts can give wealthy investors the opportunity to diversify their portfolios by investing in a fast-growing sector that offers both income and growth.

You can invest hundreds of thousands of dollars buying a share in a plantation or begin on a more modest level, with an activity-managed mutual fund or index tracking exchange traded fund (ETF).

But do your research carefully before parting with your money. It can be a jungle out there. Here are three areas to consider:

Forestry

Global forestry is a slow-growth investment, but one that provides regular income through harvesting and selling timber.

Depending on where you live, it can protect your wealth with a canopy of tax breaks.

Forestry and rural land is considered a “trophy asset” for wealthy investors, says Fiona Mannix, associate director of the Land Group at the Royal Institute of Chartered Surveyors in London. “Forestry has performed strongly, outperforming other natural resources such as Brent crude oil, cereals and gold.

“The rising global population, fossil fuel limits, and ever-increasing demand for renewable raw materials could drive prices higher still, given that the amount of land is static. The future for forestry is bright.”

The NCRIEF Timberland Index shows average annual growth of 12 per cent a year from 1988 to 2012, says Caelim Parkes, director of the specialist investment manager MSS Capital Partners. “Recent growth has been driven by the recovering US domestic market as more new homes are built, and exporting wood chips to Europe and China for energy consumption.”

Wood also makes a good hedge for your portfolio, Mr Parkes says. “It protects you from swings in equity and bond markets, because forestry has a low correlation with both. During periods of lower demand, you can leave the timber where it is, where it will continue to grow until demand picks up again.”

If you want direct exposure to timberland, big sums are required. Many schemes demand minimum investment levels ranging from $50,000 to $150,000.

Alternatively, you can invest smaller amounts in real estate investment trusts (Reits) or passive index-tracking exchange traded funds (ETFs).

Leading commercial forestry Reits include Rayonier, Plum Creek Timber, Potlatch Corp and Weyerhauser, all listed on the New York Stock Exchange.

Alternatively, you could spread your risk by investing in a low-cost index tracking ETF such as the iShares S&P Global Timber & Forestry Index, which grew 55 per cent in the past five years.

Or, you could put your money into an actively-managed forestry fund, such as the Pictet-Timber Fund. This invests in a diversified portfolio of timber management, finance, production and distribution companies.

It has risen 73 per cent over the last five years, slightly behind the MSCI World Index, but with less volatility, says Christoph Butz, the fund’s co-manager. “Performance has been slow this year, largely because the disappointing US housing market, which has hit demand for lumber and wood panels.”

This may be set to change. US home construction surged in July, with housing starts up 16 per cent in a month, according to the country’s commerce department.

British expats who plan to return home could find forestry a tempting tax-efficient investment, says Anthony Crosbie Dawson, portfolio manager at FIM Services, a sustainable timberland and renewable energy investment manager.

“Investments in British forestry are exempt from UK inheritance tax after two years of ownership. Timber sales don’t attract income tax, and any increase in the value of the trees is exempt from capital gains tax as well,” he says.

But tread carefully, fraudsters lurk deep in the woods.

The United Kingdom’s Serious Fraud Office has been investigating an “ethical” tree plantations scheme, Global Forestry Investment, which claimed to be regenerating deforested land in Amazon rainforest in Brazil.

Private investors are said to have lost millions, when the scheme turned out to be a scam.

Coconuts

Coconuts are an astonishingly versatile crop. Their water, flesh, oil and timber all have commercial uses, says Ross Kelly, the founder of the specialist investment company Investor Square, which promotes Brazilian coconut investments.

“Coconuts have uses across a range of markets, including cosmetics, pharmaceuticals, nutrition, biofuels and construction materials,” he says.

Coconuts are a long-term investment. You should commit to 20 years, but can expect to start earning revenue after the second year, Mr Kelly says. A number of investment companies offer self-managed agricultural investments, which allow you to get involved with minimum hassle, he adds. “To get started, you need between $15,000 to $60,000. Your net returns can range from 8 per cent to 34 per cent.”

Again, there are also risks. “Natural disaster and crop infections, falling market values, missed crop quotas, poor crop management and rising production costs can all hit your returns,” Mr Kelly says.

The Philippines, India and Indonesia are responsible for 85 per cent of world coconut production, with Brazil catching up fast.

Mr Kelly says investors should play safe by investing in established schemes rather than riskier start-ups.

Liquid Investments currently offers a coconut plantation scheme in Brazil. Investors buy the land, but it continues to be managed by a local coconut plantation management company.

A two-hectare brownfield plot where trees are already yielding will cost you $85,000, with a projected annual return of 10.3 per cent. Or you can buy a four-hectare greenfield plot with young, growing trees for $130,000, with projected returns of up to 26 per cent a year.

Remember, these are only projected returns, as they are early stage projects, and there is no guarantee you will get anything like that amount.

Agriculture

This is probably the ultimate growth investment. Food demand is rising sharply, as the global population grows and emerging market consumers spend more of their money on protein-rich, western-style diets.

Farmers are struggling to keep up with demand, says David Garner, a partner at the property investment consultancy DGC Asset Management.

“Agricultural productivity is close to the limit of expansion using current technology, and millions of hectares of irreparable and irreplaceable productive land are lost every year to urban expansion, climate change and a host of other factors,” he says.

This growing imbalance between demand and supply looks set to drive prices higher.

The investor Jeremy Grantham has claimed these factors make agriculture “a permanent bull market”, while the commodities advocate Jim Rogers has been bullish for years.

Yet returns can be volatile. In 2008, grain prices soared, sparking riots around the world. Spotting an opportunity, investor money poured into agriculture, but the unrest was followed by two good harvests. Prices fell, investors lost out.

Commodity prices are at the mercy of weather, yields, supply, consumer trends, politics, trade policies and energy costs, Mr Garner says.

You can invest in agriculture through a string of ETFs covering just about every conceivable commodity.

Recent performance has been poor. ETFS Wheat US, for example, is down 30 per cent over one year and down 47 per cent over five years. ETFS Corn and ETF Sugar are both down about 25 per cent in the past three months.

Another option is to invest in an actively-managed agricultural mutual fund such as BlackRock Agriculture, Pictet Agriculture, Baring Global Agriculture and Schroder Agriculture.

These funds can also be volatile. Schroder Agriculture, for example, grew 28 per cent in 2010, but fell 16 per cent in 2011 and 12.5 per cent in 2012.

Agricultural commodities have fallen sharply in recent months. The fragile global economic recovery, the risk of “demand destruction” from an economic slowdown China, and abundant supplies of corn and oilseeds could force prices lower, says Rodolphe Roche a fund manager at Schroder.

But this could be offset by tensions in Ukraine, which would support grains markets, while a strong El Niño could hit crop yields, he says.

The long-term case for investing in agriculture is strong, but you must also brace yourself for storms.

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