A tariff slapped on Canadian timber imports into the US creates a situation that can be exploited to good effect by a timber fund, its manager says.

Phaunos, a London-listed fund that invests in timberland which is managed by international group Stafford Capital Partners, sees an upside from the US administration’s tariffs on $5 billion of Canadian saw timber. The move escalates a trade dispute between the two countries, which is based on claims by US producers that their Canadian competitors are effectively subsidized. The US timber lobby claims that Canadian saw logs are grown on public land, and pricing is distorted in Canada’s favour.

New tariffs range from 3 per cent to 24.1 per cent, and came into force after the 2006 Softwood Lumber Agreement, which placed restrictions on the volume of saw timber that Canada could export to the US, expired.

The fund management firm said the opportunity stems from how timber prices in the US have shot up as a result of an expected squeeze to supply; Canadian timber represents as much as 31.5 per cent of the total US market (source: US Commerce Departmet).

Shareholders in the $300 million Phaunos Timber Fund, which owns no forestry or timber processing assets in Canada, appear set to benefit from these events, the fund’s managers said. Marek Guizot, Investment Manager at Stafford Timberland, which has managed the Phaunos Timber Fund since July 2014, said he expects to see some volatility in saw timber prices until the tariff levels are resolved, but says the new “floor price should be above 2016 levels”, and will “benefit those with US exposure”.

The fund has seven underlying investments, across three continents, and interests in more than 150,000 hectares of sustainable plantations. Its largest exposure to US softwood lumber markets is through its investment in Aurora Forestal in Uruguay.  Approximately half of Aurora’s lumber production is exported directly to the US.  

Controversy over the tariff issue comes at a time when assets such as timberland, farmland and other “hard assets” continue to attract attention in the wealth management sector from clients seeking diversification away from listed stocks, bonds and other assets. At a conference in New York hosted by the publisher of this news service late last year, it was pointed out that timberland’s value is largely immune to gyrations in the economic cycle. To coin a phrase, “Trees don’t read the Wall Street Journal – they become the Wall Street Journal.” In some parts of the world, such as the UK, timberland plantations have at times benefited from tax breaks.

Some timber funds are large. In August 2015, TIAA Global Asset Management announced the close of TIAA-CREF Global Agriculture II LLC, its second global agriculture investment partnership. The fund closed with $3 billion in commitments, exceeding its initial fundraising target of $2.5 billion. In September last year, Preqin, the firm tracking alternative investment sectors such as private equity, hedge funds and infrastructure, said more than 100 unlisted agriculture/farmland-focused funds have closed since 2006, raising approximately $22 billion in aggregate capital. 

“Fundraising has been particularly strong recently: 10 funds closed in 2015 securing an aggregate $3.9bn in investor capital, close to the record $4.0 billion in 2014. As a result, AuM currently stands at $22.2 billion, and dry powder increased significantly from $1.3 billion in 2006 to $9.3 billion in 2014, before falling slightly to $7.8 billion in December 2015 as fund managers put capital to work,” it said. Preqin added this cautionary note, however: “Developments have not been solely positive for the agriculture/farmland managers; these managers have set ambitious targets for fundraising and have tended to come in below target in recent years. Nevertheless, there remains a strong pipeline of funds coming to market, with 48 vehicles targeting $12.9 billion, and investors continue to express an interest in the sector, with 26 per cent of natural resources investors tracked by Preqin investing in agriculture/farmland.”