Fine wine and rare stamps have been used to pass on wealth for many, many generations. Janet Yellen, who cautiously keeps interest rates down at the US Federal Reserve, owns a formidable collection of stamps. Friedrich Engels, who co-wrote The Communist Manifesto with Karl Marx, had personal assets that included 924 bottles of claret, 588 bottles of port and, of course, 156 bottles of champagne, as is only fitting for the original champagne socialist.
The wines were an investment, says Alastair Owens, professor of historical geography at Queen Mary University of London, who has analysed all of Engels' personal assets at death. This is indicated by the sheer volume of wine he owned and the fact that it was kept in the cellars of Twigg and Brett wine merchants in Dublin, rather than in Engels' own personal wine cellar. Besides, he actually preferred to drink beer.
Well-to-do families have almost 10% of their entire wealth locked up in luxury collectibles, including art, wine, stamps, antiques, diamonds and cars, according to a 2012 Barclays survey. Collectibles can be touched and moved. They're characterised by limited supply, and their value is dependent on whether or not people want to own them. When equity markets are sluggish and volatile, and bond markets offer poor value, investors tend to turn to alternative investment opportunities. Some investors argue that collectibles can be used to diversify portfolios and protect against inflation.
Christophe Spaenjers, assistant professor of finance at HEC Paris, has compiled a price index that goes all the way back to 1900 comparing the prices of collectibles with the prices of stocks and bonds.
WINE STAKE
A typical customer at the London-based wine merchant Berry Bros & Rudd used to buy two cases of wine in order to help fund their own drinking in ten years' time, says fine wine sales manager Matthew Tipping, because those two cases would eventually mature and gain in value. In the 1960s and 1970s this was considered savvy purchasing as opposed to investing. From the 1990s onwards, people began to buy wine specifically for the reason of making money. The internet has brought about a much greater price transparency.
Investors should buy wine by the case and 'in bond', recommends Tipping, who advises clients on fine wine purchases. In bond means the wine is stored in a bonded warehouse, so investors don't have to pay UK VAT or duty on it unless they decide to drink it. Wine is considered a 'wasting asset' by HMRC and thus escapes capital gains tax.
But wine normally plays a minor role in wine investors' portfolios, says Tipping. Wine investments are usually held for about eight to ten years, as sales commissions are higher than those on stocks and shares. He explains: "Merchants charge about 10% when you sell, and you need to make up that difference before you move into profit."
Lee Goggin, co-founder of findawealthmanager.com, also has some words of caution: "In a specialist market such as fine wine, merchants and brokers have the whip hand, so they will charge accordingly. Everything is negotiable, but the commission will dent any profit you hope to realise."
The Liv-ex Fine Wine index, which measures fine wine merchants ' activity, is the industry benchmark. It shows that one of the top performers over one year was the Mouton Rothschild 2000 vintage; it has increased in value by 9.4% over the year to date. In January 2015 a case of 12 bottles was worth £12,500. That case is now valued at £13,676.
But overall, bordeaux wines have flattened in value. Meanwhile, burgundies, champagnes, Italian wines and new world wines – those produced outside Europe – are fetching better prices in comparison as buyers aim to diversify, says Miranda Cichy at Liv-ex.
She adds that about 60% of all buyers are based within the UK and Europe, while 40% are spread across the rest of the world, including 25% in Hong Kong.
TASTE OF THE EAST
It is important to consider who the wine drinkers are, because they ultimately drive the market. Demand in Asia Pacific led to price growth from 2000 to a peak in 2010, before demand dropped off. Chinese buyers have been buying less wine since, and prices overall have stagnated as a result.
Part of the drop is attributed to the recent clampdown on gift-giving in China. But fine wine's loss has been rare stamps' gain. It's hard to smooth your business transactions by sliding a case of Chateau Lafite across the table. Stamps and coins are much less conspicuous, says Keith Heddle, managing director of investments at stamp, coin and antique dealer Stanley Gibbons.
Well-to-do families have almost 10% of their wealth locked up in luxury collectibles
Currently, stamp and coin auctions are breaking price records in Hong Kong. Islamic collectibles too are in demand, as regional powers in the Emirates vie for prominence. Sheikhs from Abu Dhabi and Bahrain are trying to outbid each other in a race to build museums with the biggest collections of Islamic coins, stamps and art.
In China, stamp collecting was banned under Chairman Mao for being a 'hobby of the bourgeoisie'. But since the ban was lifted in the 1980s, Chinese collectors have been rediscovering their postal heritage. Ironically, a Chairman Mao-era stamp from 1986 declaring 'The Whole Country is Red' is now highly desirable. This stamp was meant to show Greater China in all its glory, but closer inspection reveals that Taiwan was left white by accident. It was hurriedly recalled – the designer was threatened with execution – but some stamps escaped the recall. They now trade for £90,000-£100,000.
Many people, particularly in the west, see stamp-collecting as geeky. It's considered a hobby for fuddy-duddies. Nevertheless, there 's a $10bn market in the US for stamp collectibles, Heddle says.
He emphasises that collecting is different from investing. Drawing on a wine analogy, he says collecting stamps is like drinking a bottle of wine with a meal of pasta: it's a pleasure but not an investment. He adds: "To invest in wine you need the right chateau and the right vintage, authenticated and held for a certain amount of time. It's no different with rare stamps or coins." So don't rush to buy the Queen 's 90th birthday commemorative pieces as an investment, because they are not going to make you any money.
Collectors buy to horde, but investors buy to hold, and ultimately to sell and make a return. "The only way you make money is by buying rare, heritage collectibles that have been authenticated and are in the best condition possible," says Heddle. Their illiquidity can be part of their appeal, because "you can't panic buy or panic sell rare stamps and coins". Stamps tend to attract investors who already have a fairly balanced portfolio and are sitting on extra cash, he adds.
A potential investor needs to have a perspective of at least five years and be seeking capital appreciation, as there's no yield. The average value of a stamp-based investment portfolio from Stanley Gibbons is £37,000. Such a portfolio might take around three to six months to sell.
Investors will physically own the stamps they buy, but in 98% of cases, Stanley Gibbons will store and insure them. That way, says Heddle, clients don't have to ask themselves: "My stamp portfolio, which one of my villas was that kept in again?"
Unsurprisingly, the world's first adhesive stamp, the Penny Black [pictured], is a classic investment stamp. It was introduced in 1840 to further the unification of the British Empire. Of the 68 million Penny Blacks that were issued, a few million have survived to this day.
Their prices can range from £400 for a single Penny Black in bad condition to more than £12,500 for a mint-condition, well-cut stamp with its original gum. In top condition, a Penny Black has been shown to yield 11-12% compound annual growth over the past 12 years, says Heddle.
DIVERSITY DELIVERS
Some stamps are valued for their accidental features. For instance, the Roses stamp is missing its 13p value, even though it was issued in 1976, when printing technology was well advanced. Only three of these faulty stamps exist. Two are in the Queen's private collection – the world's largest.
As always, the best portfolios are the most diverse. Stanley Gibbons encourages its clients to build portfolios that combine UK, Commonwealth and Chinese stamps, two or three coins and a first edition book.
The classic investment portfolio coin is the Alexander the Great 'stater'. This gold coin dates from 340 BC, and is the size of a thumbnail. The goddesses Athena and Nike grace its faces. Alexander the Great used it to pay his soldiers, and because the coin is made from gold, it's fairly durable. However, it’s not rare – staters are still being discovered scattered around the battlefields of Asia – and you can own one as part of your portfolio. In top condition, a stater is worth around £6,000.
The best portfolios are the most diverse: combine stamps of different origins, coins and books
DON’T BANK ON GAINS
Ben Palmer, manager at Cavendish Philatelic Auctions, is less optimistic about the investment prospects for rare stamps. He emphasises that a stamp's authenticity needs to be verified and argues that there is no guarantee a Penny Black or other UK stamp will yield high returns, especially given the shift in demand to Asia Pacific.
Another consideration is that most stamp collectors developed their interest in childhood, whereas children in the west do just about everything but collect stamps today, so the pool of collectors is likely to shrink, damaging investment prospects.
Historically, returns from collectibles have been negatively correlated with inflation, says Spaenjers. Yet some collectibles can do well in periods of high inflation. In the 1970s returns were high on stamps and diamonds, which are the best candidates for hedging against inflation, according to Spaenjers, because they are easier to buy and store than art or wine.
Generally, he would not recommend investors buy collectibles purely for returns unless they already have a diversified portfolio of assets, in which case alternative assets may provide diversification and a long-term perspective – and of course offer investors the pleasure of owning a rarity.
HASSLE-FREE FUNDS AND PORTFOLIO PACKAGES
Wine investors can put their money into a fund such as the Wine Investment Fund. This has a term of five years and requires a minimum investment of £10,000. There is also a 1.5% management fee and a 5% subscription fee.
The fund returned 1.6% over the past month and 2.2% over the past year. However, the performance of fine wine investment funds has declined over the past five years as demand in China has waned. As a result, one of the biggest funds, the Fine Wine Investment Fund, is in the process of closing down.
For those with no expertise in stamps who would like to hold a diversified portfolio, Stanley Gibbons offers ready-made portfolios starting at £15,000. The company doesn't charge for holding a portfolio, so there are no management, valuation, storage or insurance charges to pay. Instead, it takes 20% of the profit after five years. Investors get 80% of the profit on top of their initial investment sum.
For periods of less than five years a sliding scale is used to determine the profit split: after one year the split is 70/30 (SG/investor), after two years it moves to 50/50 and then after three to five years it's 30/70.
Rare UK stamps and ancient coins form the backbone of this particular sample portfolio. Chinese stamps have been added to tap into increasing demand in Asia, but their prices can sometimes be more volatile. This portfolio was valued at £43,025 in 2010, and £70,750 in 2014, an increase of 64.4%.
MAY THE MARKET BE WITH YOU
Collectibles are not always of the traditional kind. Since Star Wars hit our screens in 1977, it has grown into a global phenomenon. Today, many of the earliest and rarest action figures and objects from the movies have become valuable collectibles. In December 2015 Sotheby's held an online Star Wars collectibles auction at which items were sold for as much as $32,500. May the force be with you…
For investment products and ideas, go to iii.co.uk
