DGC Asset Management

Asset Class Guide [DGC/MEMBERS/ACG/FORESTRY/v.02]

Forestry as an Alternative Investment Asset Class

Fundamentals Characteristics Performance Opportunities Risks

David Garner Wendy Brittain

Northampton, UK, 2012 _________________________________________________________________________________

This important DGC Asset Management (DGC) legal notice should be reviewed carefully prior to reading the contents of this document. Jurisdiction The information in this document may contain material which could be interpreted by the relevant authorities in the country in which you are based, or of which you are a resident, as a financial promotion or an offer to purchase a controlled investment. Accordingly, the information in this document is only intended to be viewed by persons who fall outside the scope of any law that seeks to regulate financial promotions in the country of your residence or in the country in which this document is being read. If you are uncertain about your position under the laws of the country of which you are a resident or in which this document is being read then you should seek clarification by obtaining legal advice from a lawyer practicing in the country of your residence or in the country in which this document is being read. You must confirm that you are eligible to read the information contained in this document pursuant to all applicable laws within your country of residence or the country in which the document is being read. There are certain legal and regulatory limitations that may apply to the information contained in this document and by reading it you are deemed to have read and understood this warning. In reading this document, you are expressly stating your belief that the information it contains falls outside the scope of any law that seeks to regulate financial promotions in the country in which you are reading the document or in which you are a resident and that by reading this document you will not contravene, or cause DGC to contravene, any such law. Information and Liability Although DGC has used its best efforts in preparing this document, we make no representations or warranties with respect to the accuracy or completeness of its contents. DGC specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. DGC have no fiduciary duty to you, the reader of this document, unless expressly agreed, and assume no responsibility to advise on, and makes no representation as to the appropriateness or possible consequences of, any action you may take with respect to any information contained herein. DGC shall not be held liable for any loss, loss of profit or any other damages, including but not limited to, special, incidental, consequential, or other damages. This document may contain certain information that is forward looking and, by its nature, such forward-looking information is subject to important risks and uncertainties. The words: anticipate expect may should estimate project outlook forecast or other similar words are used to identify such forward looking information. Those forward-looking statements herein made by DGC, if any, are given as of the date they are expressed herein and reflect DGCs beliefs and assumptions based on information available at the time the statements were

made (including, without limitation, that (i) the demand for essential commodities such as timber will continue to grow at a pace that is unlikely to be matched by growth in agricultural productivity, and (ii) investment demand for tangible assets such as agricultural commodities, farmland and timberland properties will continue to increase for the foreseeable future. Actual results or events may differ from those anticipated or predicted in these forward-looking statements, and the differences may be material. Factors which could cause actual results or events to differ materially from current expectations include, among other things: risks associated with the ownership and operation of agricultural property assets, including fluctuations in interest rates, rental rates and vacancy rates; general economic conditions; local real estate markets; supply and demand for agricultural properties; competition for available agricultural properties; weather; crop diseases; the price of grain and other agricultural commodities such as timber or feed-stock for biofuel production; changes in legislation and the regulatory environment; and international trade and global political conditions (for more information on risks, please see the Risk Factors section in the final pages of this document. Although it is believed that the expectations conveyed by the forward-looking information contained (if any) are reasonable based on information available at the date such statements were made, no assurance can be given as to future results or events and so readers are cautioned not to place undue reliance on any forward-looking information contained in this presentation (if any). All forward looking information, whether written or oral, are expressly qualified in their entirety by these cautionary statements. DGC undertakes no obligation to update or revise any forward-looking information, whether as a result of new information, future events or otherwise. Neither this document nor any of its contents constitute an offer, recommendation, or solicitation to any person to enter into any transaction or adopt any hedging, trading or investment strategy, nor does it constitute any prediction of likely future movements in rates or prices or any representation that any such future movements will either exceed or not exceed those shown in any text or illustration herein. No information provided in this document in relation to any product or investment should be construed as advice on the suitability or otherwise of that product or investment to any person, such suitability depending on all the circumstances of the person concerned. Nothing contained in this document constitutes financial, investment, legal, tax or any other advice nor is it to be relied on in making an investment or any other decision. You, the reader of this document, are to make your own independent judgment with respect to any matter contained herein and to seek your own independent professional advice where appropriate.

_________________________________________________________________________________

A report from DGC Asset Management designed to provide interested parties with an insight into the characteristics, benefits and risks associated with forestry and timber investments.
This report has been prepared by the Senior Management Team at DGC Asset Management and is designed to offer an introduction to forestry and timber as an asset class as well as its current potential as a property-based alternative investment. The report has been constructed utilising rigorous academic standards and references a wide range of research sources which are all quoted in the reference section. UK Investors should seek the advice of an authorised Independent Financial Advisor with experience of the asset class before committing to any investment. DGC work directly with both Investors and their Advisors, providing detailed information on the portfolio risks associated with Forestry Investment, particularly in emerging markets.

_________________________________________________________________________________

Contents
Executive Summary 1. An Introduction to Farmland 1.1 Capital growth 1.2 Income 1.3 The biological hedge 2. Supply and Demand 2.1 Demand 2.2 Supply 2.3 Legislation 2.4 Summary 3. Investment Characteristics 3.1 Capital preservation 3.2 Inflation hedging 3.3 Non-correlated performance 3.4 Income 3.5 A low risk asset class 3.6 Portfolio diversification 3.7 Simplicity and security 3.8 Superior investment returns 3.9 Tax incentives 4. Investment Performance 4.1 United Kingdom 4.2 United States 4.3 Emerging markets 5. Barriers to Entry 5.1 Cost of entry 5.2 Management expertise 5.3 Summary 6. Investment Opportunities 6.1 Direct forestry investments 6.2 Listed funds 6.3 Private funds 6.4 Timber stocks 6. Forestry Risk Analysis 6.1 General investment risk 6.2 Commodity prices 6.3 General agricultural risk 6.4 Geographic risk 6.5 Liquidity 6.6 Regulatory risk 6.7 Inflation / Deflation 6.8 Currency risk 6.9 Counterparty risk 6.10 Asset specific risk 8. Summary

_________________________________________________________________________________

Executive Summary
The global financial crisis that began on January 3rd 2007 with the Chapter 11 Bankruptcy filing of Ownit Mortgage Solutions owing Merrill Lynch around $93 million, has since claimed a number of high-profile casualties including the economies of Iceland, Ireland and Greece, and continues to this day with on-going uncertainty over the future of major Eurozone economies including Spain and Italy and even the United States. Under currently prevailing market conditions, many Investors are actively reducing their exposure to equities, and seeking alternative assets to boost returns without dramatically altering their overall risk profile. The current environment for investors can be categorised by: 1. 2. 3. 4. Economic uncertainty (poor visibility). Price volatility in mainstream assets. Concerns over inflation. Poor returns on cash deposits.

Consequently, Investors are seeking alternative investment assets that display the following characteristics: 1. 2. 3. 4. 5. Tangible assets that retain capital value. Simple, secure investments involving direct ownership of underlying tangible assets. Assets that generate tax-efficient income to replace lost risk-free income. Low or zero correlation to financial markets. Capital growth supported by solid fundamental trends.

Well-managed forestry investments display all of these characteristics, making this unique asset class a popular tool amongst Institutional Investors with which to diversify and optimise investment portfolios, reduce overall risk, generate income & growth, and in many cases improve tax efficiency. Billions of institutional investment dollars are being allocated to forestry assets by a number of large Institutional Investors which have acquired commercial timber properties including; the Harvard University Endowment Fund, the Yale University Endowment Fund, the Danish National Pension Scheme, the Massachusetts Pension Reserves Investment Management Board, the European Investment Bank, the Ilmarinen Mutual Pension Insurance Company and the Dutch APB Pension Fund amongst many others.

_________________________________________________________________________________

1. Forestry Investment Basics

At the most basic level, forestry investments involve the acquisition of properties suitable for the cultivation of commercial timber species such as Teak, Pine, Spruce or fast-growing hardwood and softwood alternatives including Bamboo and Eucalyptus. Trees are established as saplings, usually under controlled conditions in a nursery, and expertly managed over time with the aim of producing commercially viable timber stands and associated products such as biomass for sale on the open market. For any investor, specific expertise is required during the acquisition and due diligence process, not only in order to identify properties suitable for investment, but also to identify and mitigate any potential risks or development opportunities that may exist within the commercial lifetime of a specific property. Timber presents a two-fold opportunity for growth. Unlike other commodities such as gold, trees grow in size as well as value per unit. This growth can be realised through harvesting, or stored onthe-stump when demand or prices are depressed. Forestry investments are also underwritten by the capital value of underlying land assets, which appreciate over time adding further weight to the appeal of the asset class as a safe-haven investment.

_________________________________________________________________________________

1.1 Capital Growth

Once identified and acquired, it may be possible to add substantial capital value to underdeveloped timber properties through development of on-site infrastructure to allow for future harvesting. This can include fencing to protect timber stands from destructive wildlife, road and access improvements to accommodate heavy harvesting machinery, and amendments to planning and licensing restrictions to allow future felling. Underlying agricultural land assets also appreciate over time. In fact, farmland as a pure investment has outperformed the majority of traditional assets classes consistently over extended measures of time. According to the Knight Frank Farmland Index, UK farmland values have appreciated by 204% in the past 10 years. Capital growth will also occur in the value of timber. Indeed, global timber prices have increased by 6% annually for over 100 years (Binkley, Clark S.; Vincent, Jeffrey R., Department of Forestry, Michigan State University). According to the IPD Forestry Index, timber prices in the UK have risen by an annual average of 4.5% per year for 18 years (IPD UK Forestry Index). It is worth noting that growth in timber prices can be volatile and therefore timber price appreciation should be stripped out of forestry investment profit forecasts. In reality, timber prices ebb and flow in line with short-term demand weighed against current availability of good quality timber. In any subdued economic climate fewer houses are built and consumption of timber falls, so too therefore do timber prices.

6%
Average annual price growth in timber assets over 100 years

4.5%
Average annual timber price growth in the UK over 18 years

204%
Rise in UK farmland values over 10 years

_________________________________________________________________________________

1.2 Income
In order to realise capital returns, trees are harvested at various stages during a forest lifecycle. Income streams comprise revenues from wood fibre sales when smaller, weaker trees are removed to allow larger commercially viable trees to grow a process known as thinning but the majority of income is realised during the harvest rotation as larger trees are felled at the appropriate time for sale as commercial timber or upstream timber products such as milled planks or poles. Additional income can be garnered through intercropping with short-cycle row-crops, either for food markets or potentially renewable energy crops such as energy grasses or green oil-producing crops. In order to maximise the potential upside from any forestry investment, a clear and wellresearched business plan is essential in order to identify income opportunities as well as any potential risks which can then be managed and mitigated. In many cases, additional income can be generated through selling cuttings and saplings to neighbouring plantation operators or subsistence farmers, and other by-products such as early shoots and saplings can be sold into food or biomass energy markets. In many regions, including the United Kingdom, income from the sale of timber is free of income tax, and capital growth in timber values is also free of capital gains tax. When certain conditions are met, forestry investments can also be used as a tool to mitigate inheritance tax. Investors should seek independent and authorised advice with regard to taxation in their own jurisdiction.

_________________________________________________________________________________

1.3 Biological Hedge

Whilst successful forestry investments rely on both the biological growth of trees, as well as future appreciation in the value of timber products, it is the biological process which generates the majority of return. A study by Professor John Caulfield of the University of Georgia found that biological growth actually accounts for more than 60 per cent of total financial returns from forestry investments; appreciation of timber prices 33 per cent; and land price appreciation accounts for just 6 per cent of total return. As the biological process cannot be interrupted by external factors such as economic crises, forestry investments offer stable long-term growth throughout any set of economic conditions. Put simply, if well-managed trees are simply left to grow over time, they continue to grow in size and value, and effective planning allows Investors to minimise market risk by choosing an appropriate time to harvest. This combination of biological and capital growth ensures that well planned and executed timber investments offer stable, consistent long-term portfolio growth that does not share any correlation with the performance of traditional investment assets such as equities. This makes forestry investments particularly attractive as a tool for portfolio diversification.

Proportion of Returns from Investment in Forestry Assets

Biological Growth Timber Price Appreciation Land Price Appreciation

Source: Professor John Caulfield, School of Forest Resources, University of Georgia.

_________________________________________________________________________________

2. Supply and Demand

Close to 1.2 billion hectares of forest are managed primarily for the production of timber and nonwood forest products globally. An additional 949 million hectares (24%) are designated for multiple uses in most cases including the production of timber and non-wood forest products. The area designated primarily for productive purposes has decreased by more than 50 million hectares since 1990 as forests have been designated for other purposes. The area designated for multiple uses has increased by 10 million hectares in the same period (Global Forest Resources Assessment, 2010, UN FAO). At the global level, reported wood removals in 2010 amounted to 3.4 billion cubic metres annually, similar to the volume recorded for 1990 and equivalent to 0.7% of the total growing stock. Considering that informally and illegally removed wood, especially wood-fuel, is not usually recorded, the actual amount of wood removals is undoubtedly higher. At the global level, wood-fuel accounted for about half of the removed wood.

Global Timber Production and Demand to Various Dates (million cubic metres)
2500

2000

1500 Timber Production 1000 Timber Demand

500

0 China 2015 India 2020 Europe 2020 Global 2050

Source: Hancock Timber Resource Group | Chinese Government | World Wildlife Fund | Pricewaterhouse Coopers

_________________________________________________________________________________

2.1 Demand
In total, the global timber market is estimated to be worth over $600 billion per annum (van der Lugt & Lobovikov, 2009 UN FAO 2009). The primary drivers underpinning consumption of forest products are economic growth, personal income, and population growth. In the long term, demand is therefore expected to rise as these basic fundamental trends continue their upward trend. China and India are the clearest examples of both population and economic growth. The Chinese government predicts total demand for wood fibre will reach 350 million cubic metres by 2015. With domestic output forecast at just 200 million cubic metres creating a supply gap of 150 million cubic metres or 42% that will need to be met by imports. Consulting group the Wood Markets Group stated in May 2011 that they estimate demand for wood products in China to be growing by about 9 - 10% per year and forecast this to continue to at least 2015, (WOOD MARKETS, The China Book). The report went on to say that Chinese industry forecasts actually estimate a growth rate more like 10 - 15% per year to 2015, so the import gap could be up to double what is currently forecast. In India, the World Wildlife Fund (WWF) has stated that the country is likely to face a severe shortage in the supply of timber required to meet both domestic and international demand. It is estimated that the demand for timber is likely to grow from 58 million cubic metres in 2005 to 153 million cubic meters in 2020. At the same time, the supply of wood is projected to increase from 29 million cubic metres in 2000 to just 60 million cubic metres

150 million
Shortfall in timber production in China by 2015 in cubic metres

260 million
Shortfall in timber for energy in Europe by 2020 in cubic metres
by 2020. This creates a supply gap of 93 million cubic metres (or 60% of total demand) by 2020. As a result, India will have to depend heavily on imports to meet growing demand. Elsewhere in the world, the European Union is expected to need as much as 420 million cubic metres of woody biomass each year for its energy needs by 2020. This will lead to a deficit in production of around 200 - 260 cubic metres or 50% of demand (PricewaterhouseCoopers). The U.S. has a very strong tradition of wood use, directly reflecting the historical availability of wood. Total log consumption is projected to increase by about 22% from 19.6 billion cubic feet in 2002 to 23.9 billion cubic feet in 2030. Softwood timber is expected to comprise 16% of this increase. Little or no increase in exports manufactured from domestically produced logs is anticipated over the 2002-30 period, however imports are projected to increase substantially by some 40% (off a small base) to nearly 7 billion cubic feet.

_________________________________________________________________________________

2.2 Supply
The United States is the largest supplier of forest products in the world, providing nearly half of the global supply of wood fibre with the vast majority being consumed domestically. In 2005 the US was the largest producer of softwood lumber in the world, followed by Canada, Germany, Russia, and Sweden. The US was also the largest producer of hardwood lumber, oriented strand board and wood pulp in the world in 2005. According to the UN Food and Agriculture Organisation, around 30% of global timber demand is currently met by illegal logging and it is widely recognised that a further 40% is currently met from unsustainable sources. Illegal logging causes a loss of revenue and taxes in many countries, and estimates of global market losses range from US$10 billion to US$15 billion per year. The illicit trade in timber is undertaken by sophisticated organisations on an industrial scale, and involves large companies as well as criminal networks (Schloenhardt A., 2008 Australian Government | (Boer, Ramsay & Rothwell 1998: 48, 99). A report from the WWF based on an investigation of the EU timber markets concluded that 20% of wood imported into the European Union in 2006 came from illegal or suspected illegal sources, with Russia, Indonesia and China being the main sources (Illegal wood for the European market, 2008, WWF). According to the report, illegal logging also pushes wood prices down worldwide by 7% to 16%. This economic loss for legitimately operating companies is compounded by the damage both to the image of wood as a sustainable raw material and to the responsible forestry sector.

30%
Amount of global timber supply sourced from illegal logging

2.2 million
Hectares of tropical rainforest lost annually in Southeast Asia
It has been estimated that over 2.2 million hectares of tropical rainforests are lost in Southeast Asia alone each year to deforestation. The AsiaPacific region is said to have the highest annual deforestation rate in the world (1.2%); higher than Latin America (0.8%) and Africa (0.7%) (Boer, Ramsay & Rothwell 1998: 48, 99). To put deforestation which accounts for up to 40% of global timber markets into perspective, an area of natural forest the size of over 36 football fields is lost to deforestation every minute of every day. Whilst illegal logging for commercial purposes is responsible for a large proportion of global deforestation, by far the biggest factor driving the loss of natural forests is agriculture and our need to produce food. Farmers destroy woodlands to provide more room for crops or livestock. In a process known as slash-andburn, subsistence farmers will clear a few acres to feed their families by cutting down trees and burning them. Nature also contributes to deforestation with the increase in natural disasters such as flooding and wildfires.. (Vos, F. et al., Annual Disaster Statistical Review 2009, CRED).

_________________________________________________________________________________

2.3 Legislation
International standards to protect and preserve forests such as the Programme for the Endorsement of Forest Certification (PEFC) and the Forest Stewardship Council (FSC), both independent, non-governmental, not-forprofit organisations established to promote the responsible management of forests globally, provides a recognised set of standards and mark of approval that allows legislators and consumers to recognise products and manufacturing processes that use only responsibly sourced natural resources. According to the United Nations Food and Agriculture Organization (FAO), "A major condition for the adoption of sustainable forest management is a demand for products that are produced sustainably and consumer willingness to pay for the higher costs entailed(State of World Forests, 2009, FAO). The Global Forest Resources Assessment conducted by the FAO in 2010 found that significant progress has been made in developing forest policies, laws and national forest programmes. Of the 156 countries that have a specific forest law, 44% reported that their current forest law has been enacted or amended since 2005. Almost 75% of global forests are covered by a national forest programme, i.e. a participatory process for the development and implementation of forest-related policies and international commitments at the national level. Such policies protect natural forests and inhibit the supply of timber from existing natural resources; creating a further disparity between supply and demand and in turn offering further future price support for timber as an asset class.

30%
Global timber supply originating from illegal logging

11.5%
Average timber price falls as a result of illegal logging

$15 billion
Estimated annual losses due to illegal logging

_________________________________________________________________________________

2.4 Summary
In summary, demand for timber is increasing exponentially as the population of the developing world expands, demanding more timber for construction, paper products and biomass fuels. Furthermore, increasing wealth in developing economies leads to an increase in consumption per capita of natural resources as infrastructure including housing is developed and modernised to western standards. In the face of this demand there lies a global forest productivity system unable to keep up in its current form. A considerable proportion of global timber supplies originate from illegal logging and deforestation, which has led to the destruction of huge swathes of natural forests and a real depletion of natural resources traditionally used to meet demand. Consumer awareness of both the social and environmental impact of production and manufacturing processes has led to the development of international legislation and standards to prevent deforestation, creating a burgeoning demand for sustainably sourced timber that can only be met through expansion of plantation timber. It could well be argued then that the best opportunities for Investors might be considered to be in sustainably managed timber properties in locations capable of supplying emerging markets in Asia, Africa and Latin America where demand for resources will be greatest.

_________________________________________________________________________________

3. Investment Characteristics
Forestry Investments are used by Investors and Financial Planners as a tool to diversify and optimise investment portfolios, preserve capital value, hedge inflation, generate income and in many cases, improve tax efficiency. Whilst certainly not suitable for all types of investors, and not without its own risks, forestry as an asset class has been shown to generate superior returns in a low-risk environment, allowing Investors and Financial Planners to acquire real growth assets that are unlikely to depreciate and for which demand remains on an exponentially upward curve.

3.1 Preservation of Capital

Tangible, physical assets that retain value in all market conditions are becoming increasingly important for all types of Investors, from Pension Funds and University Endowments to private individuals seeking shelter from volatility in traditional investment markets. Timber can lose value, but biological tree growth tends to offset any depreciation in timber prices, and a number of credible academic and professional studies have shown that cash held in timber assets is unlikely to depreciate. It should also be noted that timber value can be stored on-the-stump during times of depressed demand, with Investors choosing instead to harvest when demand and prices recover. In the current investment environment, capital preservation is taking precedence over short-term high return investment strategies based on the trading of financial instruments such as equities, bonds or options/futures contracts.

3.2 An Inflation Hedge

The land appreciation and biological growth components of timber hedge inflation in the long-term, but due to short-term volatility in timber prices, standing timber values do not, in the short term, hedge inflation (Washburn, CL. & Binkley CS., Do Forest Assets Hedge Inflation? 1993, University of British Colombia). According to the Campbell Group, an international Timberland Investment Advisor; properties managed by the firm in the 23 years from 1987 to 2010 hedged inflation on a total return basis, more effectively than any other asset class, with the exception of 90-day United States Treasury securities and the Goldman Sachs Commodity Index. In conclusion, it appears that timber hedges inflation over the longer term, although in lower inflation periods the strength of the relationship may not be as strong.

_________________________________________________________________________________

3.3 Low Financial Market Correlation

Forestry has a low correlation with traditional investment assets, meaning that when assets such as equities lose or gain capital value, this does not necessarily drive timber or land values in either direction. Interestingly, recent research has compared returns from the National Council of Real Estate Fiduciaries (NCREIF) Timberland Index with a range of other assets and found that forestry has a very low correlation with real estate, corporate bonds, large and small-cap equities and in one instance, actually showed a negative correlation with commercial real estate. The Sharpe Ratio is a measure of risk which represents the reward-to-variability-ratio of investments as a number. The ratio takes into account return on investment, and the variability in that return over a period, with higher ratios indicating a lower risk investment. Higher numbers mean lower volatility and the Sharpe Ratio for forestry was 0.83 between 1987 and 2010. This compares extremely favourably with the Standard and Poors 500 Index (S&P500) at 0.30, commercial real estate at 0.35, small-cap U.S. equities at 0.33 and non-US developed market equities at 0.01.

3.4 Income Generation

Many investment assets regarded as an inflation hedge such as precious metals do not produce income, only speculative capital growth. Forestry investments on the other hand generate intermittent income from harvesting trees at various stages in the forest life-cycle during thinning of the forest prior to harvesting. These smaller trees also generate revenue, usually sold for paper production or biomass. This is especially attractive to Investors seeking to replace lost risk-free income during periods of low interest rates.

3.6 Portfolio Diversification

As the returns from timber investments are dependent for the most part on the biological growth of trees rather than the dynamics of financial markets, forestry has been used as a tool to diversify investment portfolios by University Endowment Funds, Pension Funds, Hedge Funds, Sovereign Wealth Funds, Family Offices, and Ultra & High-Net-Worth Individuals. Any forestry investment should not be considered as a standalone transaction, but as part of a well-diversified portfolio of traditional and alternative investment assets.

3.5 A Low Risk Asset

There are various risks associated with any investment asset class or opportunity. Often risk is defined as the historical volatility associated with an investment's return. Forestry investments are not without risks, and asset-specific risks are addressed in section 6 of this document. This section however deals with risk expressed as volatility.

3.7 Simplicity and Transparency

Land and properties can be independently valued accurately using a discounted cash flow valuation model. Holding freehold or leasehold title, or holding assets via a Trustee provides total security of tenure for Investors. Whilst assessing timber properties does require a specific skill-set, the physical nature of property transactions makes them easier to assess and define than more opaque paperbased investments.

_________________________________________________________________________________

3.8 Superior Investment Performance

Forestry investments have outperformed traditional assets for years. In the United Kingdom, direct forestry investments have delivered total annual returns of over 12% per year for the past 5 years, and over 10% per year over ten years (IPD UK Forestry Index). Investment performance in emerging markets is harder to define, although many Timber Investment Management Organisations (TIMOs) and emerging market forestry funds have published audited annual returns of more than 20%, mostly due to a combination of ideal growing conditions, lower property prices, cheaper labour and low-cost supply chain infrastructure (Binkley, C. S. and Earhart, J. E., 2005, A Global Emerging Markets Forestry Investment Strategy). The investment performance of forestry is enhanced when trees grow faster; skilled forest management ensures quality timber production; and demand for timber increases, therefore fastgrowing species in emerging markets offer superior upside potential for investors.

3.9 Tax Efficiency

Depending on the location of the property, forestry investments carry certain tax advantages for Investors. In the United Kingdom, revenues from timber sales is free of income tax, appreciation in the value of timber is free of capital gains tax, and after two years of ownership, forestry investments are free of inheritance tax. Any investors considering adding timber investment to their portfolio should consult with a duly recognised and authorised tax specialist who may be able to advice on the tax implications of any forestry investment for the investing clients.

_________________________________________________________________________________

4. Investment Performance to 2012

Forestry Investments have outperformed the majority of traditional assets for many years, whilst also being less volatile and suffering fewer losses along the way, and there are a number of long-standing measures allowing Investors to gauge the performance of forestry investments in various countries around the world. In this section we look to the performance of forestry investments across key regions; a process designed to identify superior value and investment potential.

4.1 United Kingdom

In the United Kingdom, the performance of direct forestry investments is measured by the International Property Databank which produces the IPD Forestry Index. The IPD UK Forestry Index is calculated from a sample of private sector coniferous plantations of predominantly Sitka Spruce in mainland Britain and in 2010 returned 20%. UK forestry has delivered 10.4% per year average over 10 years and bearing in mind that the majority of forestry income is free of both income tax and capital gains tax, a 10.4 per cent annual is the equivalent of a 20.8 per cent annual return for a 50 per cent taxpayer; and 14.6 per cent per annum for a 40 per cent taxpayer. This index also gives some insight into the short-term volatility associate with timber prices. According to IPD, timber prices in the United Kingdom haver risen by an average of 4.5% per year for 10 years, but over an extended period of 18 years, prices have fallen by an annual average of -0.5%. This goes some way to demonstrating that it is biological growth, rather than capital growth that drives total returns from forestry investment properties, and that rising timber prices should not be relied upon as the main driver of profit when assessing the present value of timber properties. Whilst potentially volatile in the short term, timber prices are cyclical, affording Investors the opportunity to refrain from harvesting during periods of depressed prices, choosing instead to harvest when prices recover. Annualised Rates % 1 year Forestry Total Return Timber Price Change Equities Gilts Commercial Property 20.0 38.5 14.5 9.1 15.1 3 Years 12.6 1.5 1.4 7.7 -2.5 5 Years 17.7 12.7 5.1 5.9 1.1 10 Years 10.4 4.5 3.7 5.9 6.8 18 Years 6.3 -0.5 8.2 7.7 9.2

IPD UK Forestry Index

_________________________________________________________________________________

4.2 United States

In the United States, the National Council of Real Estate Investment Fiduciaries (NCREIF) produce the NCREIF Timberland Returns Index, a broad measure of the investment return realised from a basket of commercial timber producing properties acquired in the private market for investment purposes, mostly by institutional investors including pension funds. At the time of writing (December 2011), the NCREIF Timberland Returns Index indicated that timber properties in the United States generated an average return of 13.18% per year between 1987 and 2010. The best year was 1992 which produced a return of 34.25%, and the worst year was 2001 which generated a loss of -5.16%. In total, only 3 years out of 24 delivered a loss. Timber investments in the United States benefit from access to the highest demand timber market on the planet, although when a poor economic outlook and tight credit conditions reduce the number of properties being built, timber prices tend to fall which has an adverse effect on timber investment performance. Those investors able to wait out poor timber prices will continue to capture value as their trees will continue to grow in size, offsetting any potential downside from falling timber prices.

NCREIF Timberland Index Annual Returns 1987 2011 (Q3)

40% 35% 30% 25% 20% 15% 10% 5% 0% 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 -5% -10% Annual Return Average Return

Source: National Council for Real Estate Investment Fiduciaries (NCREIF) Timberland Returns Index December 2011

_________________________________________________________________________________

4.3 Emerging Markets

The most profitable locations for forestry investments tend to be in emerging markets. Primarily because the tropical climate in parts of Asia, Latin America and Africa represent ideal growing conditions, allowing trees to grow faster and generate superior returns. It is also worth considering that it is the economies of these emerging markets that will constitute the majority of future demand for timber products as described previously in this document, and that the cost of land, labour and other operational overheads tend to be lower than in developed economies. Measuring the investment performance of forestry investments in emerging markets is less clear. With fewer reliable sources of information, Investors must rely more on anecdotal evidence supplied by Institutional Investors and Timber Investment Management Organisations (TIMOs) which operate in a particular region. According to Institutional Investment Advisor, International Forestry Investment Advisors who operate the Global Emerging Market Forestry Fund, LP in conjunction with the Global Environment Fund, core timberland investments in emerging markets generate a raw return of between 8% and 11%, however adding value through supply chain investment, risk-reduction and good management boosts investment performance to between 15% and 20% IRR on a cash-in cash-out basis (Binkley, C.S. & Earhart, J.E., 2005, IFIA).

_________________________________________________________________________________

5. Barriers to Entry
For smaller Investors there are considerable barriers preventing direct investment into commercial forest properties. Investable properties are large estates often covering hundreds or even thousands of hectares, requiring significant investment capital to acquire and develop. Money aside, commercial forestry operations are complex undertakings requiring specific skills and infrastructure, both physical and commercial, to operate effectively. The ability to manage trees efficiently, maximise timber yield, minimise downside risk and ultimately market the end product are all essential factors in delivering successful forestry investments.

5.1 Cost of Entry

Timber properties vary in comparative value per hectare price depending on a multitude of factors including location, infrastructure and the age and quality of the timber stand. Although commercially viable opportunities tend to be at least 50 hectares in size, often covering thousands of hectares or even kilometres, smaller properties do sometimes become available, although the cost of undertaking sufficient due diligence might become prohibitive for smaller transactions.

5.2 Expertise
As mentioned previously in this document, professional forestry management requires a particular skill-set, and successfully developing, managing and marketing wood products from timber properties requires years of experience and a wellestablished commercial network. Any investor approaching forestry as an asset class, either directly or via a structured investment vehicle, should ensure that the management team are suitably qualified and experienced, and in the case of assets in emerging markets, it is essential for a forestry business to have an experienced local partner to help with the culture of doing business, as well as often complex legal and business issues that arise during the life-cycle of forest assets.

5.3 Competition
As forestry investments are particularly attractive to Institutional Investors and Ultra-High-Net-Worth Individuals, competition for the best investment opportunities is fierce. The market for forestry properties in the United Kingdom is only worth some 50 million per year, and 4 investment funds and hundreds of Individuals all compete for the same properties. This can lead to emotional bidding which skews short-term pricing. The same can be said for the best properties in most markets. In emerging markets, there are ample opportunities to invest but again, institutional investors with liquid cash will always enjoy first access to the best assets. The ability to operate at scale, making large acquisitions and enjoying excellent economies of scale in operations improves forest profitability.

_________________________________________________________________________________

6. Investment Opportunities
A range of opportunities for smaller Investors exist within the forestry sector, from publicly quoted forestry investment funds to private funds and direct investments in timber properties. DGC Asset Management provide Investors with research and due diligence, measuring a broad range of direct forestry investments against a base set of criteria to filter those opportunities structured to provide superior returns whilst managing downside risk. Since 2007, the senior management team at DGC have assessed forestry investment opportunities in the United Kingdom, Australia, Latin America and Asia. For more information on available investment opportunities, please contact the Management Team at DGC Asset Management.

6.1 Direct Forestry Investments

By far the most effective way to capture financial returns driven by the biological growth of trees, compounded by capital growth in the value of timber and land, is to acquire a suitable, commercial timber producing property, which is in turn managed buy a proven forestry professional. Whilst standalone investment opportunities are expensive and complex transactions, a range of opportunities exist for Investors to acquire small, managed plots within larger, commercial forestry operations. Forestry investment companies often segregate a small section of their property assets and sell them to Investors in order to raise capital for the on-going development and operation of the property as a whole. Quite simply, Investors profit from the sale of timber grown on their plot. Whilst some excellent schemes do exist, Investors should remain vigilant as a number of operations have sprung up recently in order to capitalise on Investor appetite for non-correlated assets by purchasing forest properties at market value and re-selling with huge profit margins. DGC have assessed a number of such schemes and found that whilst a few represent good value for money having been designed to raise capital for project development, there are also schemes structured simply to make a profit at the point of sale, often with the entire forest being sold to Investors and the Vendor retaining no stake in the property at all. This creates a serious counterparty risk as the Vendor makes all of their profit from invested capital, leaving no incentive to continue to manage the assets when investment income dries up in the future (which inevitably it always does periodically). Whilst this does raise somewhat of a red flag, transparency in accounting and the use of independent Trustees to control the flow of project capital throughout the lifetime of the investment can go some way to minimising such counterparty risk. Having assessed and investigated schemes in Central America, South America, Asia, Europe the United Kingdom and the United States, DGC has developed a feasibility model to assess the investment potential, value and risk associated with managed-plot forestry investment schemes. For more information about DGCs due diligence process, or to speak to a member of the Management Team about currently approved opportunities, please contact your Advisor at DGC Asset Management.

_________________________________________________________________________________

6.2 Listed Forestry Investment Funds

Listed forestry investment vehicles trade on a range of exchanges around the world. Such funds provide liquidity as Investors may trade in and out of their holdings in relatively short order. The main issue with any listed vehicle is that the market capitalisation, share price or unit price can fall well below the value of underlying assets. In many cases, property funds including forestry funds, farmland funds and commercial property funds can trade at substantial discounts to net asset value and experience volatility no different to that of any equity-based investment. As one of the most attractive characteristics of forestry is the lack of correlation to traditional investments. Listed vehicles trade illiquidity for volatility, and do not perhaps deliver the raw benefits of timber as an asset class to shareholders.

6.4 TIMOs
Timber Investment Management Organisations or TIMOs, are Investment Advisors that help large Investors to Invest in Forestry. Minimum investment levels tend to be at least $5 million, and Investors must sign a minimum participation agreement to lock in capital for an extended period of time. These opportunities are not relevant for smaller Investors. Some of the larger TIMOs include Hancock Timber Resource Group, Timbervest, Plum Creek Timber Company, Rayonier inc., Potlatch Corporation. According to the Hancock Timber Resource Group website, the company, which was founded in 1985, had $9 billion in timber assets under management at the end of 2010, and had holdings in United States, Canada, Australia, New Zealand and Brazil.

6.3 Private Forestry Funds

Many Investment Managers have launched their own forestry investment funds. Most tend to invest in their country of operation, and all have different investment requirements and parameters within which they invest. Private forestry investment funds allow Investors to spread a small amount of capital across a range of different properties, effectively diversifying risk and widening opportunity for profit. Such funds can be expensive to establish and incur on-going fund management fees which can, in some cases, detract from overall returns; although once sufficient scale is achieved then fees become more reasonable. Unlisted private forestry investment funds are often only open to Institutional Investors or certified High Net Worth Individuals with high minimum investment requirements.

6.5 Investing in Timber Business Stocks

Most Investors are familiar with investing in traditional stock markets, and many attempt to capture growth in the forestry sector by purchasing shares in businesses related to the sector. Indeed there are a number of equity investment funds with a forestry theme, although investing in a paper manufacturer or sawmill will not offer the Investor any exposure to the specific investment characteristics of timber. Whist equity investments may capture sector-wide growth driven by demand for wood-products; this is not considered to be a route into direct forestry investment per se. It is certainly worth remembering that forestry as an asset class is considered by many investors to be attractive mostly due to the largest proportional share of capital growth being attributed to biological growth, allowing investors to decouple portfolio performance from equity markets.

_________________________________________________________________________________

6. Risks
Whilst the investment performance of forestry investments has historically been less volatile than traditional assets like equities, it is important for Investors to recognise that direct forestry investments, like all investments, carry risks that are specific to the asset class. Statistics cannot wholly express these risks. As such, in addition to quantitative risk analysis one should also assess risk qualitatively. Any investor considering direct forestry investments as part of a balanced and diversified investment portfolio should make efforts to ensure that they are familiar with the risks involved in forestry investments. Risks involved in owning forest properties can be separated into two broad categories: Endogenous Risks Those risks having an internal origin relating to specific timber species, on-site management and site location. Exogenous Risks Those risks having an external origin such as timber prices, extreme climatic events and international trade policies. Whilst risks cannot be eliminated, both endogenous and exogenous risks can be managed and mitigated through proper planning and execution. DGC Asset Management Ltd is most able to add value to Clients through the application of a screening process during asset selection. DGC differentiates itself from the conventional by the quality of its risk awareness and risk management processes. The DGC selection and due diligence process is designed to filter open market opportunities and present best in class products and services to Clients.

_________________________________________________________________________________

7.1 General Investment Risk

As with any investment asset, the value of timber may fall as well as rise, as may the land values associated with timber properties. Whilst timber prices (and land values) are supported by supply and demand, and the long-term view of both sides of that equation indicate that timber prices are well-supported, should timber prices and/or land values fall significantly then the performance of forestry investment may suffer in the short term. Wellconsidered harvest timing of course dissipates a certain amount of general investment risk, allowing investors to retain control of when revenue is captured. It is also worth considering that growth in the size of trees can completely offset any potential drop in timber prices. There is a risk whenever we part with capital, DGC Asset Management add value by identifying risks as well as opportunities to allow our Clients to invest with confidence.

7.3 General Agricultural Risk

Commercial timber growing operations are agricultural businesses. As such, Investors in forestry are to some extent exposed to the same set of risks as Farmers or Foresters. Events that could bear impact on the success or failure of a timber investment could include, but are not necessarily limited to; freak weather conditions, such as floods, droughts, undesirable rainfall, hail, frost or uncharacteristic cold spells; weeds, pests and diseases; fire, and the possibility of generally worsening conditions associated with climate change. Any of these factors individually or in combination, may have adverse consequences on incomes and/or values. It is worth noting that permanent crops such as timber are extremely resilient to adverse weather. Whilst a stiff storm could easily destroy a wheat crop, a timber stand would fare much better, often with little or no permanent damage.

7.2 Commodity Prices

Commodity trading markets are famed for their volatility, and forestry investments are exposed to commodity prices in various ways. Obviously the price of timber features in dictating returns from forestry investments, but also the cost of fuel, labour and other commodity based inputs may also have a bearing on the cost of generating income from timberlands, effectively squeezing the profit margin of a property as the cost of production rises. If fuel and/or labour prices were to make logging prohibitively expensive, then harvesting trees for sale as timber may become cost-inefficient, and returns may not recover until timber prices once again exceed the cost of production. Timber prices in the United Kingdom have increased by 4.5 per cent per annum for the past 10 years.

7.4 Geographic Risk

The climates most conducive to optimal timber growth are often to be found in the developing world where both legal and logistical infrastructure may not be as developed as in 'the West'. Whilst emerging market investments do by definition carry a greater risk, the timber industries of some major Latin American and Asian producers are actually extremely well developed and transparent, allowing Investors to defend title and avoid poor reliability within the judicial system. As a foreign Investor, especially an Investor in the productive agricultural assets of another country, caution should be exercised to ensure that the legal structure of ownership does not expose the Investor to any restrictions or penalties in terms of income or taxation or indeed disposal.

_________________________________________________________________________________

7.5 Liquidity Risk

Direct forestry investments are relatively illiquid under certain market conditions. Commercial woodlands tend to be large estates, often spanning hundreds or even thousands of hectares, and buyers for these kinds of properties may take some time to source, and negotiations and due diligence including surveys, valuations and cash-flow analysis may take months to complete. Investors seeking exposure to timber assets that require immediate liquidity may be better placed purchasing shares in another type of investment vehicle such as a Timber Investment Management Organisation (TIMO) or Real Estate Investment Trust (REIT), which can be traded on a public exchange. Investors must remember though that forestry is a long term investment.

7.7 Inflation / Deflation Risk

Inflation or deflation, or possibly both, will occur over the duration of your investment. If the returns on your investment are lower than the rate of inflation this would result in a reduction in the spending power of the funds realised upon the sale of your investment relative to the spending power you might otherwise have achieved had you simply held cash. Forestry investments have been shown to share a strong correlation with inflation, which makes the asset class particularly attractive to those individuals who expect to see extended periods of high inflation due to quantitative easing (money printing) population expansion and resource scarcity, all of which have historically driven inflation up. In periods of deflation it is likely that commodity prices, including timber, may fall.

7.6 Regulatory Risk

In line with geographic risk already discussed on this page, forestry income may be impacted by changes in the regulatory environment of a particular region. New legislation may adversely affect income through price control, export restrictions or the imposition of duties. Governments may also impose more stringent environmental regulations upon the forestry sector thus increasing compliance costs with possible negative consequences for timber investment profitability. Whilst local legislative governance may favour local operators and investors, international legislation is being developed to ensure long-term sustainability in the forestry sector. Independent analysis of legal risks in various countries should be outsourced to a local lawyer with experience in land and property transactions in the country or origin that can assist with any regional or property specific issues that may arise.

8.8 Currency Risk

Forestry investments may be subject to currency risk, especially if the forestry assets and operations are in a different global location to that of the Investor. It is likely that the forestry products will be sold at source in the domestic currency, unless the operation is exporting, in which case trade is likely to be denominated in USD$. An Investor purchasing a timberland property in Australia would generate income in AUD$, which would require converting to GBP Sterling before repatriation to the UK. If the value of the AUD$ were to fall, the Investor could end up with diminishing returns in real terms. Among the factors that may affect currency values are trade balances, the level of short-term interest rates and other fiscal or monetary policy factors, differences in the relative values of similar assets in different currencies, long-term opportunities for investment, capital appreciation and political developments.

_________________________________________________________________________________

7.8 Fire Risk

Fire can damage or in extreme circumstances destroy large areas of a forest. In addition to maintaining appropriate insurances, Forest Managers should carry out a number of activities to minimise the risk from a fire breaking out or from the damage arising from such a fire, including: Selecting a suitable plantation location away from known fire risks such as main roads etc. Planning, installing and carrying out regular inspection and maintenance of firebreaks in accordance with good forestry practices during the initial establishment of a Plantation. Maintaining a fleet of four wheel drive vehicles with varying levels of fire fighting capacity in close proximity to the Plantations. Maintaining access to a water supply to ensure availability for fire fighting purposes.

7.9 Counterparty Risk

The average Investor is unlikely to have the knowledge and/or experience to identify, assess, acquire, manage and dispose of timber investment properties. It is mostly then going to be the case that the Investor must use a Forest Manager capable of working autonomously to manage the property for efficient economic benefit. The majority of risk involved in forestry investments can be diminished substantially through proper site and species selection, a process requiring detailed knowledge of forest topography, and operational knowledge to avoid landslide and erosion-prone areas. Insufficient infrastructure, expensive access and long distances may also determine the feasibility of a timber investment so exposure to a poor Forestry Manager is likely to bear considerable risk upon the future success of a forestry investment. Expert knowledge is also required to develop on-going forest management techniques that maximise growth, minimise losses and operate with general economic efficiency. For further consultation on the risks associated with forestry investments, contact the management Team at DGC Asset Management for a no obligation consultation.

In reality, very few commercial timber plantations are lost to forest fires as they are managed, secure and usually located some way from the general populace. The vast majority of forest fires spread very quickly through natural forests and tend to be manmade events that ignite in close proximity to roadsides.

_________________________________________________________________________________

7.

Summary
Investors should consider carefully whether they are able to sit out periods of poor demand and low prices, and whether they are able to fund on-going property maintenance throughout the life-cycle of a property. DGC Asset Management will continue to assess and deliver forestry investment opportunities throughout 2012, and will continue to raise capital for the two approved projects currently in the company portfolio. For more information of forestry investments, or to speak to DGC about the current selection of approved forestry investment opportunities, please contact the management team.

Whilst certainly an asset class that displays characteristics many Investors find particularly appealing in the current climate, timber is not as simple and straightforward as many would initially believe, and the market is now awash with forestry investment projects aimed at smaller investors, many of which simply do not stack up in any financial sense of the phrase. Forestry is a complex business, and investors ability to capture superior returns is dependent on a myriad of factors, both related to an individual property as well as the timber market and general economy as a whole. Those looking to hedge inflation, preserve capital, and capture financial returns driven by biological growth that cannot be interrupted by extraneous economic events, might consider forestry investments as part of a welldiversified and balanced portfolio of investments. The most profitable opportunities lie in emerging markets where the often ideal growing climate combines with proximity to high-demand markets in developing economies. Professional management and risk mitigation can boost returns into a range that beats all other assets hands down. A range of opportunities exist for smaller Investors to participate in forestry investments, although Investors should utilise the advice and experience of a professional familiar with the asset class and capable of providing independent due diligence and assessment including asset valuations. A number of risks should be considered outside of those risks specific to agricultural properties, including illiquidity and the effect of commodity price on both timber sales revenues and operating (harvesting) costs.

David Garner Partner DGC Asset Management Ltd

_________________________________________________________________________________

References
RISI, China Wood Products Markets Study. http://www.risiinfo.com/risi-store/do/product/detail/china-wood-products-marketsstudy.html;jsessionid=57C694C27AD0E67AF16464F3D94DF0D7.tomcat_patty USDA, Forest Service Research and Development, Projections of the U.S. timber supply and demand situation to 2050. http://128.104.77.228/documnts/pdf2000/hayne00a.pdf Wood markets, 2011, Russell Taylor, Pricewaterhouse Coopers Global Paper & Forest Industry Conference, Global Lumber Supply Dynamics & North America Outlook. http://www.pwc.com/gx/en/forest-paper-packaging/events/24th-fppconference/assets/Market-Outlook-Russ-Taylor.pdf Pricewaterhouse Coopers, Sustainable Forest Finance Toolkit.http://www.pwc.co.uk/eng/issues/forest_finance_home.html#ns_source=site_search World Wildlife Fund, 2008, Illegal wood for the European market. http://www.illegallogging.info/uploads/WWFeuropeanmarketwood1.pdf Peter J. Ince, U.S. Forest Service, Forest Products Laboratory, GLOBAL SUSTAINABLE TIMBER SUPPLY AND DEMAND. http://www.illegal-logging.info/uploads/fpl2010ince001.pdf Andreas Schloenhardt, 2008, Australian Institute of Criminology, The illegal trade in timber and timber products in the Asia Pacific region. http://www.illegal-logging.info/uploads/AusinsituteofcriminologyonILinAsiaPacific.pdf United nations Food and Agriculture Organistation, 2010, Global Forest Resources Assessment 2010. http://www.fao.org/forestry/fra/fra2010/en/ Jose Rodriguez et. al., 2008, Centre for Research on the Epidemiology of Disasters, Annual Disaster Statistical Review 2008. http://www.cred.be/sites/default/files/ADSR_2008.pdf Wikipedia, Deforestation. http://en.wikipedia.org/wiki/Deforestation#Control The Campbell Group, Timber as an Inflation Hedge. https://www.campbellgroup.com/timberland/primer/inflation-hedge.aspx Washburn, C. L. & Binkley, C. S., International Forestry Investment Advisors, LLC, Do Forest Assets Hedge Inflation? http://www.ifiallc.com/PDFs/forestassets.pdf Earhart, J. E. & Binkley, C. S., International Forestry Investment Advisors, LLC, A Global Emerging markets Investment Strategy. http://www.ifiallc.com/PDFs/EmergingMarkets.pdf Clark S. Binkley, Ph.D. Chief Investment Officer Hancock Timber Resource Group, The Role of Technology in Meeting the Worlds Need for Wood. www.marcuswallenberg-prize.org/proceedings/dokument/Id_106.ppt David Stein Davidsson, 2008, University of Iceland Department of Economics, Timber Investments. http://skemman.is/is/stream/get/1946/3398/10577/1/David_Steinn_Davidsson_fixed.pdf National Council for Real Estate Investment Fiduciaries, Timberland Returns Index. http://www.ncreif.org/timberlandreturns.aspx IPD UK Forestry Returns Index. http://www1.ipd.com/Pages/DNNPage.aspx?DestUrl=http%3a%2f%2fwww.ipd.com%2fsharepoint.aspx%3fTabId%3d1012

_________________________________________________________________________________