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November 12, 2009 4:30 pm
Books, coins and stamps are often viewed as collectables that belong in a cupboard or on a shelf, stored away for good.
But Bernard Duffy, the managing director of Emotional Assets Management & Research (EAMR) makes these assets work as an investment.
He believes that collectables or “emotional assets,” can serve as an alternative investment vehicle in a time of economic uncertainty.
“When wealthy individuals become concerned over the possibility of inflation, they rotate into more tangible assets,” Mr Duffy said.
The investment advisory boutique launched its first fund yesterday, giving investors the opportunity to include collectables as part of a more diversified portfolio.
The launch of the Emotional Assets Fund comes at a time when investors continue to explore low-risk, alternative asset classes.
As a five-year, closed-ended scheme, it will invest 60 per cent of its gross assets in funds invested in emotional assets such as photography, art, diamonds and violins. Another 40 per cent will go into direct emotional asset holdings like vintage watches, rare manuscripts and ceramics.
The minimum investment in the fund is £100,000, with a target growth rate of 15 per cent per year.
In the wake of the recent recession, investors have shifted en masse into fixed income, including corporate bonds and cash. But Mr Duffy believes that surging gold prices also indicate a loss of confidence in paper assets. The price of gold is currently hovering above $1,000.
He also expects the Bank of England’s quantitative easing program to kick in sometime next year, causing inflation to rise, and making 2010 a good year for tangible and vintage investments.
The historical performance of emotional assets also point to a possible rise the price of collectables. Mr Duffy said wealthy investors tend to put money into art as a hedge against inflationary fears. He expects the same pattern to occur in the next few years.
Although tangible assets tend to be highly correlated with inflation, they also tend to be negatively correlated with deflation, making collectables even more attractive.
However, as with any investment, there are several drawbacks. “We don’t suggest putting all of your money into emotional assets either,” said Dr Rachel Campbell, risk consultant at EAMR.
“Investors should put a small percentage into emotional assets, along with stocks and bonds for a diversified portfolio that minimizes risk.”
The dealer market has also raised concern over whether emotional assets, particularly art pieces, are properly appraised.
“Because of the dealer market, there is a problem of transparency, because the dealer could purposely ask for a higher price,” Mr Duffy said.
However, he added that the fund is managed by experts who know every piece of work available in the market and constantly track prices at auctions.
“Investors must remember to invest in what other people collect, not in what other people invest in,” Mr Duffy said.
Dr James Hyman, art and photography adviser for EAMR, said the problem of transparency can be fixed with auctions, if the seller knows when to buy.
“The judgment may be to buy now, because the seller knows where to sell it or someone who wants to buy.”
Price rises will also depend on the number of bidders. Investors have traditionally held onto their pieces when the market is slow.
But for Mr Duffy, the emotional asset market remains an area of opportunity going forward.
“Most fund managers over-promise and under-deliver. With emotional assets, there are no synthetic assets or fancy structures. The next phase of growth will be driven by real money going into tangible assets.”
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