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There are so many choices when it comes to alternative investments, sometimes it is just a simple personal decision based on your investment passions. Art, classic cars, philately ( stamp collections ), numismatics ( coin collections ) wine investment ( at least f it does n’t work out, you can always drink it ! ) are just some of the choices. Here are three for you to peruse
EMERGING MARKETS AND HEDGE FUNDS
EMERGING MARKETS AND HEDGE FUNDS
If you are interested in building up your wealth over the medium to long term one of the best strategies you can employ is to put the vast majority of your capital into relatively safe investments (such as property and a pension)
and a smaller amount into riskier but potentially more rewarding vehicles. If the higher risk, higher return investments do well they will substantially lift your overall worth. If they do less well they won’t have any material affect on your standard of living. The question is, of course, how to maximise the potential gain from these higher risk investments without exposing yourself to undue loss? In recent years two possible means of doing this have attracted a great deal of publicity and cash. The first is investing in emerging markets; the second is investing in hedge funds. One is to be recommended, and the other isn’t, as I am about to explain.
Did you know that the Russian stock market grew by a staggering 89.56% in 2005? Or that the Egyptian stock market grew by a no less impressive 57.98% a year over the five years up to 2006 ? Performance records in the emerging markets of Eastern Europe, Asia, the Middle East and South America have been nothing short of spectacular. Furthermore, an impressive number of companies in these emerging markets are rapidly turning themselves from regional success stories into huge multi-national conglomerates. As the UK’s Investors Chronicle recently reported: ‘If you are looking for decent, relatively cheap, relatively safe stocks you no longer have to limit your choice…the world is quite literally your oyster.’
Does it make sense, however, for a small, cautious, private investor to put his or her hard earned cash into this sector? For those who have already built up assets closer to home the answer could well be ‘yes’. We live in a global economy, stock markets historically outperform all other forms of investment and one of the golden rules of making money is diversification. So, now could well be a very good time to start dipping your toe in rather more exotic foreign waters.
Why do emerging markets offer such good potential? I have already mentioned globalisation and its effect should not be underestimated. The developed world depends for its own expansion on products and services purchased from the emerging economies. Growing political stability, developing equity markets and rapidly rising commodity prices all add to the attraction. It should also be noted that many companies are now listed not only on their local exchanges but also in London and New York.
What are the pitfalls? It is generally said that dips in the world’s major stock markets spell long-term bad news for emerging market stocks. This may have been true in the past, but is much less relevant nowadays. Many of the hotter markets, which suffered bad falls last May, have already bounced back. Anyway, it is a great mistake to lump all emerging markets together. Each one needs to be considered on its strengths and weaknesses, just as individual stocks do. There is huge difference between, say, Thailand and Brazil in the same way that there is a huge difference between, say, Delta and Ryanair.
How can you buy a little piece of the emerging market action? If you are willing to do the research you could invest directly. A good source of information is Boston Consulting’s RDE 100 list. The initials ‘RDE’ stand for ‘Rapidly Developing Economies’ and the list comprises 100 firms from developing economies that are leading the pack when it comes to globalising their businesses. The list is to be found at http://www.bcg.com. Some are already global players including heavyweight names such as Mexico’s CEMEX (one of the world’s largest cement makers); Hong Kong’s Johnson Motors (which has 40% of the global market for small electric motors); and Brazil’s Embraco (which has 25% of the global market for compressors). Others already enjoy national or regional dominance and are now poised for global growth. They include India’s Tata Motors; Turkey’s consumer goods firm, Vestel; and Egypt’s Orascom Telecom. Sixty of the firms on the list are, by the way, publicly quoted. If you would prefer less direct involvement there are plenty of managed funds to pick from. The top performer for the last five years has been Credit Suisse European Frontiers, which is currently showing a 292% gain.
A 292% gain over five years is just the sort of performance hedge fund managers have set out to achieve for their investors and many have achieved it – and better. Why, then, am I not promoting them as a good home for your cash? As the name suggests, a hedge fund is designed to strip out those risks which the fund’s manager can’t control - whether they relate to currencies, equities or geopolitical factors. Funds adopt different types of tactics to achieve their desired goal. These include macro funds which look to profit from changes in the global economy; long/short equity funds which invest in derivatives such as options and futures; and arbitrage funds which aim to make a profit by buying one asset when it looks cheap and another when it looks expensive. All funds aim to make positive returns – net of fees – regardless of the direction of the markets. When the concept was first dreamed up, it made some sort of sense, and some funds justified the huge charges being made – management fees of 2% plus a 20% performance bonus above a certain watermark are not an uncommon. As funds have proliferated (there are currently over 8,000 worldwide), though, it has become harder and harder for managers to achieve their objectives. My feeling that hedge funds have, largely speaking, had their day is confirmed by the way in which they are being sold on a mass scale to private investors. These investment vehicles were really designed for institutions not individuals. When searching for something to spice up your portfolio of assets there are a lot of better places – not least the emerging economies – where you could look.
Before you invest, PLEASE seek professional independent advice.
ROCK MEMORABILIA
It may only be rock and roll, but investors love it. During the last few days of May, whilst stock markets all around the world were suffering from a mild attack of the jitters, two international auction houses, Christies and Bonhams, achieved (no pun intended) record prices for some of the choicest rock and pop memorabilia ever offered. There can be no doubt that buying a shirt that once belonged to John Lennon or a concert programme signed and inscribed by Elvis Presley to Elton John’s mother is infinitely riskier than investing in stocks and shares. Nevertheless, the market’s appetite for any item directly connected to the biggest names in music entertainment of the last fifty years appears to be insatiable. Making it a good option for anyone with a little cash to spare and a desire to earn above average returns.
Rock and pop memorabilia meet all the requirements for a sensible alternative investment. That is to say: the scarcity value of the objects in question is assured; demand is strong; prices have been rising steadily; and there are plenty of ways to buy and sell. Add to this the fact that there are a surprising number of serious collectors willing to spend €100,000 or more for top items and you will understand why investors have been diversifying into everything from Michael Jackson’s sequined gloves to Eric Clapton’s Brownie guitar (you know, the 1956 Fender Strat he played when he was in Derek and the Dominos .. Layla et al).
Interestingly, the first auction of rock memorabilia was in 1970 as a fundraiser for anti-war politicians and it raised a mere $15,000. Bargains abounded. Roger Daltrey gave a jacket he had worn at the Isle of Wight Festival and it fetched just $330; Joni Mitchell donated all the handwritten lyrics for her debut album Blue and they made just $90. Prices remained relatively low for the following decade but in 1981 Sotheby’s decided to launch a regular sale. That year they sold Paul McCartney’s childhood piano for $16,920 - not much when you consider that the piano John Lennon used to write ‘Imagine’ made $2.1 million in 1991. Or that in 1996 a Canadian businessman paid a staggering $2.3 million for Lennon’s psychedelic 1965 Phantom V Rolls Royce.
As almost every item of rock or pop memorabilia is unique it is hard to know quite how much prices have increased. Still, it is possible to make some comparisons. In 2000 a pair of John Lennon’s orange tinted sunglasses sold at auction for £7,800. In 2005 a nearly identical pair made £63,250. That’s a gain of over 800% in just five years. Handwritten lyrics by John Lennon made £31,000 at auction in 1996. In 2005 a similar sheet of lyrics went for £690,000. That’s a gain of over 2,200% in less than a decade.
Not that you need to invest such large sums. There are plenty of worthwhile options from a few hundred euros and above. Recently I spotted an Isle of White Festival poster from 1969 for €150, a pair of Elton John’s platform boots for €400, and a Buddy Holly signed souvenir programme of his group’s only tour of the UK for €1,000.
Items of value divide into various categories including Gold and Platinum records, acetates (vinyl records), awards, instruments, documents, clothing, autographs, photographs, promotional material (such as back stage passes), recordings, and personal property. In general, something connected to an artist’s career will be worth more than a personal item. In every category items will be valued according to a whole set of different criteria and before you invest a penny you should familiarise yourself with what makes one thing worth more than another. Here are a few tips:
- Gold and Platinum record awards were given out by the Recording Industry Association of America from 1958 onwards. As framed awards were given not just to the artists but to everyone involved in the production process there are tens of thousands of awards in existence. The most valuable will always be those given to artists for their best known work and early awards which are rarer and were framed by a white linen matte.
- Signed musical instruments are only of real value if the artist actually used them for any length of time. The value increases if the instrument was used to perform or compose a famous song and if photographic evidence exists. Also, you need to consider the intrinsic value of the instrument. A 1959 Gibson Les Paul guitar could make €100,000 at auction even if it had never been owned by someone famous.
- Lyrics have achieved some of the best prices at auction. Working lyrics will always be worth more than lyrics handwritten by the artist after a song became famous (which many artists will do for family, friends and fans). Least valuable are signed copies of printed lyrics.
-Legal documents – such as contracts – may or may not be valuable depending on who the artist is and what the contract concerned. Note that many people are fooled into believing that they have found a copy of The Who’s original Woodstock contract when, in fact, they have a facsimile from their 1970 album The Who Live At Leeds.
-Autographs are widely collected and, as a result, widely forged.
-The most desirable costumes and clothes are those worn by the most famous artists on stage at well known events, in music videos for hit songs or during publicity photo shoots. Not very long ago the denim vest worn by Madonna in a promotional shoot went for $25,000.
As with any alternative investment you should only buy objects that you will enjoy owning whether the value goes up or down. You should always buy from reputable auction houses and dealers – Christies, Sotheby’s and Bonhams all hold regular sales and other specialists worth contacting are Cooper Owen (http://www.cooperowen.com ), It’s Only Rock and Roll (http://www.itsonlyrocknroll.com ) and Julien’s Auctions (http://www.juliensauctions.com ). There are lots of books on the subject, but my favourite is the lavishly illustrated ‘Christie’s Rock and Pop Memorabilia’.
I must confess to being passionately interested in this area. Not only am I part of a little six piece band - music is also in the blood - but I have various items myself including one of the only twenty five Lee denim jackets made for the Jerry Lee Lewis biopic ‘Great Balls of Fire’. Recently, it was valued at $5,000. The jacket was actually a present nearly ten years ago but that jacket represents an ever increasing asset and needless to say, it’s framed.
GOLD
If the so-called ‘gold bugs’, investors who believe passionately in the long-term value of buying gold, are right, then this could be a good time to add a little glitter to your portfolio. Over the last five years up to 2006, the price of gold has more than doubled from US$250 to US$660 a troy ounce and it is still nowhere near its all time 1980 high of US$850 a troy ounce. Since then because of the current economic climate, gold prices reached over $1130 per troy ounze in November 2009
There are three sound reasons to believe that prices will continue to soar.
Firstly, the growing economies of Asia and the Middle East have resulted in a huge surge in demand – especially for gold jewellery. For proof one need look no further than global gold jewellery sales, which increased by 19% last year.
Secondly, a rising number of private investors all over the world have been putting some or all of their savings into gold as a hedge against economic or political instability and, in some cases, war. When investors feel the future is uncertain (as many appear to at the moment) demand for gold always surges. This is doubtless in no small part due to the fact that the price of gold tends to move in the opposite direction to virtually all other conventional asset classes – making it ideal when investors wish to diversify.
Thirdly, the mining industry can’t keep up with demand. Last year’s figures show that in excess of 4,000 tonnes of gold were purchased, but only 2,500 tonnes were mined. What’s more, production is falling by an average of 4% a year and it will take the industry anything up to ten years to increase supply by the required volume. In the past, when demand outstripped supply, the shortfall was met by many of the world’s central banks. No longer. Countries, which had been disposing of their gold reserves, have slowed down sales or even stopped selling altogether. Some central banks, notably those of Russia, Iran and China, are actually believed to be buying bullion.
Although I believe that gold prices are likely to carry on moving upward, I would only suggest buying if you already have a range of other investments including shares, bonds and property. Furthermore, I would strongly advise against buying gold coins or gold bars. The idea of owning a little ‘hoard’ of gold may seem attractive. However, gold in all its forms is expensive to ship, store and insure. Instead I would recommend investing in one of the various gold mutual funds. These offer a cost-effective, convenient and potentially more lucrative way to benefit from any increase in gold’s value.
A good example of what a mutual gold fund has to offer is the top-performing Merrill Lynch Gold & General Fund which has produced an average annualised gain of 33.9% over the past five years and which is up around 1000% since its launch in 1988. The bulk of the UK£855 million fund is invested in gold mining shares. Obviously, gold mining shares rise in line with the value of gold. Your risk is diversified and you can leave it up to the fund manager to choose the best opportunities. There are plenty of funds to choose from and you can pick a fund that matches your own objectives. One fund might aim to track the price of gold, for instance, another to track one of the various market indices such as the FTSE mining index.
Speaking of the FTSE mining index, which outperformed the FTSE all-share index in 2005, if you have plenty of capital at your disposal an alternative option would be to buy a portfolio of individual mining company shares. On the upside this will give you greater control and involvement. On the downside you will have to decide which of the hundreds of different mining company shares to buy.
There is one further possibility worth considering. Invest your money in one of the exchange-traded funds (ETFs) for gold. An ETF is listed on the stock market and allows you full exposure to the price of gold, without actually having to take delivery of the bullion. The fund buys and holds the gold, while the investor holds ETF shares. The world’s biggest ETF is Exchange Traded Gold (marketed under different names) which holds 431 tonnes of the yellow metal. This is more than the Bank of England’s reserves.
Incidentally, if you are planning to invest in gold it is worth noting that it can be held in self-administered pension schemes (SSAPs or Self Directed Trusts for company owners, directors and senior executives), which could mean some tasty tax savings depending on your circumstances.
One of the most senior industry experts in the world, Robert McEwen of U.S. Gold, was recently reported as predicting that gold prices may reach US$2,000 an ounce by 2010. If he is right, you could be kicking yourself for not getting into the market whilst prices are still relatively low.
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