Monday 3 November, 2008

In this weekend’s column I talk about one of the most interesting economic papers I’ve read in recent years. It takes a quantitative look at longish term returns (and risks) from buying a wide basket of what are called emotional assets or alternative assets to the rest of us.

The paper looks at everything from art to my personal favourite, maps – and the results are fascinating. As promised in this blog I’ve included some of the more detailed conclusions and analysis of the paper called Emotional Assets, written by Campbell, Koedijk and de Roon of Tilburg University.

One of the most interesting aspects of the study is the work on correlation – between alternative or emotional assets and wider equity/bond markets and between emotional assets themselves.

The first big conclusion is that by and large that buying alternative, emotional assets will provide diversification against ordinary equity assets. The more interesting revelation though is the correlation between certain emotional assets – if you think you’re buying diversification by buying a collection of stamps, maps and rare books, think again.

The much more interesting analysis though is of returns – how have these investments stacked up over the last thirty years?

The results are in the box below, alongside risk analysis (standard deviation).

Data for art is available until the end of December 2007, and for clocks and watches and atlases until September 2007. Data for coins are only available until the end of 2005 and the final 5 and 6 years are missing for violins and diamonds respectively.

Subsequent analysis has also been done looking at the relationship between returns and inflation – again there seems to be a general correlation between higher returns and higher inflation, a relationship that doesn’t bode well for the next few months !

My personal bottom line – I think there’s nasty bump coming in nearly all these markets as collections are suddenly subjected to firesales. If multi-millionaires houses are being thrust on to the market, what’s to stop their stamp or antique collections?

But, in true contrarian and adventurous style, I think this distress could mark some real opportunity. I sense that Bernard Duffy’s approach – a fund of fund in the space – will work next year as investors look to invest in assets that are less volatile and do offer the potential for blended returns over the long term. I also think you’ll be able to pick up stocks like Avarae Global Coins on the cheap – I’d start buying if the shares ever dipped close to 5p.

I also think there’s more pain on the way for Stanley Gibbons and stamps. I love stamps and my father was a huge collector but I sense that enthusiasm late in the asset bubble was too intense and that Stanley Gibbons marketed very aggressively to growth investors, all of whom are now suffering big losses.

At many a growth investor roadshow I’d see a Stanley Gibbons stand selling the idea of absolute, non-correlated returns – true at the time but I’m not so sure that it’ll hold true moving forward.

David Stevenson is also one of the Four Wise Monkeys at the online TV investment programme www.4wm.co.uk.

adventurous@ft.com