|
|
 |
|
| Feature |
Risk & Reward Retrospective
John Ferry
01/01/2006
|
The timber fund of Hancock Timber Resource
Group, a
Boston-based asset manager, returned an average of 13.9
percent per year, after
fees, between its inception in 1985 and at the
start of 2005. Compare this with
the 9.3 percent returned by the
S&P 500 over the same period and the 8.8
percent return on
long-term corporate bonds, in light of the fact that the
volatility of
timber is quite a bit lower than the other two asset classes, and
it is
easy to see why investors enjoy this wooden performance. The emergence of
TIMOs—which offer investment funds that purchase, maintain and manage
timberland
for institutions, individuals and family offices—has
facilitated the expansion
of this sector.
THEN AND NOW
Timber investments have performed well over the past several
years, with concerns about the negative effects of a housing market downturn now
largely offset by the belief that post-Katrina rebuilding needs will support
demand for lumber. But the volume of investment capital now chasing timber may
dampen the returns enjoyed by new investors. |
Probably the most
significant event affecting the industry at
the moment is the
disaggregation of forests from other assets held by integrated
paper
companies, Akers says. “Firms such as International Paper, Carter Holt
Harvey, Louisiana Pacific, Bowater and MeadWestvaco have embarked on
significant
land sales programs in an effort to focus their operations,
win back the hearts
of Wall Street and take advantage of the large
amounts of capital that is now
interested in timber as an asset class,”
he says.
This is good news for
investors, as it means there is
a supply of wood out there that TIMOs can
absorb. But Akers gives one
warning: “There is a lot of capital from
institutional investors that
has been allocated to the asset class,” he says,
“so many of these
assets seem to be fully priced. Given the rather benign global
investment climate, interest is not expected to wane anytime soon, so
investors
entering the asset class now can expect lower future returns,
all else being
equal, than those who have been in the asset class for
some time.”
6. Premium Finance Life Insurance
Financing the Future September 2004, page 98.
The economics underpinning this strategy, which involves borrowing to
finance the premium on a life insurance policy, have been eroded by the Federal
Reserve’s series of rate hikes since June 2004. When short-term interest rates
bottomed out in the wake of the dot-com bubble’s bursting, borrowing the money
needed to pay the premium on a life insurance policy seemed an especially clever
way to conserve cash while establishing a legacy that would be immune to estate
taxes.
Although the details of these policies varied depending on who sold
them, the client borrowed to fund the premium in a whole life policy. The deal
was predicated on the assumption that the value of the whole life policy’s
investments would outstrip the cost of the loan; the principal would be paid
using the proceeds after the buyer died.
THEN AND NOW
The advantages of these deals, predicated on the return of a whole
life
policy’s investments outpacing the costs of the debt used to finance its
premia, have become less compelling as short-term interest rates have risen.
However, they are still a useful way to avoid gift taxes. |
The concept gained ground due to its
appeal to those with wealth tied up in illiquid or volatile assets, such as
family businesses. For these individuals, borrowing to finance an insurance
premium frees up cash that can be invested in other business ventures.
The
transactions are typically priced at a spread of 1.25 to 2.5 percent over Libor.
The difference between the overall cost and the return on the universal life
contract—the most common policy utilized—is the leverage component. “The higher
Libor has gone in the past year, the more pressure there is on the leverage,”
notes Ken Godfrey, life insurance product manager at Wachovia Insurance Services
in Charlotte, N.C.
However, the rising rates have not killed this strategy
off: One of its main advantages, the ability to avoid the gift tax on the amount
that would otherwise be paid into a trust to fund an insurance policy’s premiums, remains attractive.
|
|
|
|
|
|
|
