Collectibles Join The Mainstream – Is Your Asset Manager Prepared?

I have long been an advocate of collectibles as investments – despite the fact that many investors dismiss the idea. If you remember, though, alternative assets in general …

I have long been an advocate of collectibles as investments – despite the fact that many investors dismiss the idea. If you remember, though, alternative assets in general were once scoffed at by the majority of these same investors as well.

Then came the boom of 2005-2007, which saw global alternative assets under management (AUM) almost double from $2.9 trillion to $5.7 trillion. Suddenly, everyone was keen to have a slice of the action.

Collectibles found their way into the most prestigious of portfolios, bringing much needed diversification, and returns that few other options could compete with.

However, to many this appeared to be a flash in the pan, with the global economic crisis initially stalling the sector’s strong growth.

Across the board, investments were struggling and those alternatives seemed an unnecessary distraction from saving traditional assets from further losses.

But the alternative asset class has remained resilient, and is now stronger than ever.

According to a report by McKinsey & Co, the year-end funds in global alternatives climbed to a record high of $6.5 trillion in 2011, “having grown at a five-year rate of over seven times that of traditional asset classes”.

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We’ve yet to see the figures for 2012, but as McKinsey & Co puts it, “the recent surge in alternative investments is only the beginning of a new wave of growth”. The report states that institutional investors expect to increase their allocations of almost all forms of alternatives to an average of 25% by the end of 2013 – up from 23% in 2011.

It won’t be long before others follow. The Wall Street Journal’s Market Watch states that “Merrill Lynch’s clients have invested about $45bn across all alternative investments.”

HNWIs investing in collectibles

It appears that collectibles are finally going mainstream.
Of all alternative investments, 20% of investors cite collectibles as the most popular variety, as discovered by a fourth-quarter 2012 study by Millionaire Corner. The respondents were those with a net worth between $1m and $4.8m (not including primary residence).

In 2012, the Paul Fraser Collectibles website saw a 21.5% increase in traffic, demonstrating a rise in investor interest in collectibles. Much of this came from the BRIC nations, with a huge 128.3% increase from Brazil alone and a 24.4% increase from China.

And while alternative investments as a whole are favoured by the younger, more bullish investors – 21% of those surveyed aged under 45 invest in risky hedge funds, compared to just 3% overall – collectibles are favoured by the older, more seasoned high net worth individuals. Millionaire Corner’s study showed that collectibles were most popular with baby boomers aged between 55 and 65, those who are less likely to take unnecessary risks.

Asset managers lack collectibles knowledge

But there is one thing stopping alternative assets becoming fully accepted by traditional investors.

The McKinsey & Co report demonstrates that, in Europe and the US, just 36% of traditional asset managers consider themselves well positioned to “win” in alternatives.

The collectibles business demands good knowledge and a tailor-made service. If these traditional managers are to make a serious attempt at making strong returns, they will need to know their market better than the hungry collectors they are competing with.
This statistic, combined with institutional investors giving traditional asset managers a low ranking when it comes to understanding clients’ needs, shows an obvious weak spot.

These are people who spend hours poring over old catalogues, ensuring that when they buy or sell an item, they are going to get the very best price. They stay ahead of the trends by being constantly immersed in the market, waiting for the optimum time to strike.

As more investors turn towards collectibles, traditional asset managers could find themselves in a position where the dealers they once scoffed at are now their most valuable tool.



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