Forestry Is One Irish Asset That Can Only Grow

In a volatile climate it can seem wise to follow the herd, but branching out into something different can pay off PATRICK LAWLESS – 09 JUNE 2013 RIGHT now, many investors are overlooking quality Irish assets – simply because these assets are Irish. They seem to think that, if an asset is Irish, it can only be a route to lose money and should be avoided. For me, that’s never a good enough reason. Where an asset is located is undoubtedly important, it’s nowhere near as important as the income it can produce and the price at which I can buy the asset. During the bubble years, some investors were rightly scared away because they felt the prices of many Irish assets were too high. At the time, I felt the same way. My firm, Appian Asset Management, moved to the sidelines of the Irish property market when property prices had escalated. Our clients missed out as prices continued to go up. But importantly, we did not lose money on Irish property when the market crashed. We advised clients to sell Irish property in 2006. We advised them to sell shares in Irish banks in 2007. But when a market experiences the type of radical change we’ve seen since 2006 and 2007, an investor who’s looking for value should always be prepared to change his or her mind in response. I’ve changed my mind on certain asset classes in Ireland. Irish commercial property – if a highly selective approach is applied – should no longer be considered off limits to investors. We think pockets of value are emerging in this asset class after 10 years of bad value and insufficient upside. The prices of quality office and retail buildings in central locations are now approaching levels that we think will be attractive to long-term investors. Appian recently made its first-ever investment in Irish commercial property. That decision was taken after choosing to avoid this asset class throughout the company’s 10-year history. Let’s not get carried away, however. Irish commercial property should only make up a small part of any diversified investment portfolio. The extent of price falls witnessed in recent years means, in some cases, it can cost less to acquire a building than it would to rebuild it. It means there are now attractive opportunities in this asset class and being highly selective is likely to be rewarded. Aside from Irish bricks and mortar, we’ve also changed our minds on an asset class that I once considered too obscure: Irish forestry. For nearly three years now, we have been studying forestry as a potential alternative asset. We now think forestry satisfies our criteria and will further diversify our investment portfolio without reducing the return we’re aiming for. Forestry has given good long-term returns with low volatility. It’s an asset class that appears to have demonstrated a low correlation with other asset classes – it doesn’t necessarily fall when other asset classes fall, nor does it necessarily rise when other asset classes rise. We’ve also identified it has a strong positive correlation with inflation. One of the things our clients worry most about is minimising the risk of losing money – suffering a permanent destruction of capital – while getting better returns than they can get at the bank. Inflation eats away at low-risk investments, so even if clients think they’re playing it safe by keeping large amounts of their portfolio in cash, over the long term any investment that can’t at least match inflation is going to hurt their buying power. Forestry has performed well in this context. If inflation picks up in the years ahead, it’s a sector that our analysis suggests is capable of continuing to match or beat the general inflation rate. Before we put any money at risk, however, we do a lot of homework. We held discussions with a number of potential forestry investments before we saw value. We believe it’s conservative but that it can deliver what we want it to deliver. As with any asset class, however, forestry has its risks. These include a potential lack of liquidity – forestry by its nature is an illiquid asset – but this risk can be reduced in a large portfolio with a diversified maturity profile of forests. Other risks include those that can be insured against – such as fire, flooding and wind – and those that cannot, such as disease. Another factor to consider is macroeconomic risk. This is limited in the case of forestry, however, as trees continue to grow irrespective of the economic cycle. Forestry managers have the option of reducing the levels at which they harvest stock in times of lower market demand. Since 1994, forestry has delivered an average of 5.65 per cent per annum with volatility below 5 per cent. Commercial forests cover an area of almost 15,000 hectares, and the expected forest maturity dates have a wide range, from relatively recently planted to potentially immediately harvestable crops, with a diverse regional spread. We recently committed 5 per cent of our flagship fund to invest in forestry and see merit in having a limited exposure to it. In a volatile climate like today’s, it can be tempting to follow the conventional wisdom and stay with the herd. However, following the conventional wisdom in the bubble years turned out to be a costly strategy. Ignoring certain investments – just because they relate to Ireland and ignoring the factors that really matter, such as price and expected return – could be a mistake. Patrick Lawless is CEO of Appian Asset Management. The views expressed do not constitute investment advice or investment research Irish Independent Taylor Scott International

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