With government bonds across the developed world on negative yields and equity markets enduring a turbulent first half of 2016, it is no wonder that investors are searching for alternative asset classes.
According to Deloitte, confidence among CFOs at the biggest UK companies is even lower than in 2008, which is about as low as the bar can be set from recent memory.
Beyond the political landscape, there has been growing scepticism about whether central banks will continue to have the firepower to meet the challenges caused by residual instabilities in the financial markets, prompting veteran investors such as George Soros and Stanley Druckenmiller to warn that 2016 could be worse than 2009 for the financial sector. Both Soros and Druckenmiller have recently increased their holdings in defensive assets.
Stamps, coins and other rare collectibles can, just like gold, offer considerable downside protection for your portfolio.
Over the past 25 years the top 250 rare British stamps have offered a fantastically low correlation with other assets during times of financial stress, which is why, in addition to their attractive 10-year compound growth rate of 10.27 per cent, we recommend that a considered investment in a range of stamps can be one way of providing much-needed stability to a portfolio. Rare stamps will always be rare. They are part of history and more of the same cannot be printed; therefore they will continue to be desirable.
The traditional mantra has been that a broad, well-balanced portfolio of equities and bonds is sufficient to weather any storm, but as we saw in 2009, the correlation of most asset classes can “go to one” in a crisis, leaving no safe port and resulting in disastrous fire sales. The problem is that simply holding a variety of assets does not necessarily offer true diversification, especially when the various assets are actually susceptible to a risk factor that could affect them all.
A financial environment dominated by macro risks and central bank policies could make prices for risky assets fall across the board as well as leading to rising interest rates. In this scen-ario, as Gade Jepsen, CIO of Danske Bank, says, “you would have five risk classes that would do poorly at the same time”.
To get real diversification you need to invest in asset classes that do not correlate with your other assets. At the height of the financial crisis the GB30 Rarities index of the top 30 British investment-grade stamps actually rose 38.6 per cent, with the larger GB250 index also offering strong downside protection with gains of 32 per cent. Stamps have pro-ven their worth as an uncorrel-ated investment over the long term, avoiding wild downward swings during times of severe market stress.
Another attraction of stamps and other heritage assets is their extremely low volatility. Even for the buy-and-hold, long-term investor market volatility can be extremely stressful. For the shorter-term investor volatility can be crippling, forcing a fund manager to close out healthy
positions to rebalance a portfolio or to meet margin requirements.
As highly illiquid investments, stamps and coins are not asset classes investors choose to liquidate in a hurry, which removes one major area of volatility risk. In an analysis of the period 2006 to 2016 Knight Frank Research found that the FTSE 100 was almost three times as volatile as coins and about 40 per cent more volatile than stamps, proving their continued stability even during times of stress.
In a world of increasing uncertainty the value of heritage assets like stamps and coins could not be clearer. It may be 175 years since the world’s first postage stamp, the Penny Black, was introduced, and the role of stamps may have changed somewhat in the meantime, but it is more obvious than ever that these rare, uncorrelated assets can still punch well above their weight as preservers of wealth.