Eye on Wall Street: Markets move sideways in November

Last month proved to be quiet compared to the big October rebound in equities. The S&P 500 gained 0.3 percent and is up 3 percent year-to-date, or YTD. Foreign equities lost a bit of ground mainly due to a strong U.S. dollar, which was up 3 percent on FX markets.

U.S. interest rates climbed anywhere from 5 to 20 basis points, or bps, across the yield curve. Investors expect the Federal Reserve to hike rates on Dec. 16. The two-year Treasury jumped the most; it was up 20 bps to yield 0.93 percent at month end. The Barclays Aggregate Bond Index lost 0.3 percent.

Commodities continued to take it on the chin. Oil fell over 10 percent and finished under $42 a barrel. Gold had its worst month since 2007, declining 6.8 percent to $1,065 an ounce. The Bloomberg Commodity Index lost 7.3 percent and is down 22.3 percent YTD.

We’ll have much more about the economic and financial market outlook next month when we review 2015 and peer ahead to 2016.

Antiques Road Show

My wife and I have been watching this PBS mainstay for years. From time to time you’ll hear us yelling at the TV, “How much? Sell it! Hit the bid! Don’t keep it at that inflated price!”

My pet peeve is when someone reports buying something for say $1,000 20 years ago and it’s now worth $2,000. The appraiser often comments, “not a bad return.” Actually, using the Rule of 72 (i.e. divide 72 by the growth rate to estimate how many years before an investment would double) the annual rate of return would be 3.6 percent — not particularly attractive.

Really though, how have collectibles faired as investments? A recent comment by an analyst at ISI Evergreen got me thinking. He said:

“Coin prices are dropping again and antique furniture prices are some 18 percent below the 2006 peak. Auction prices of classic restored automobiles are down 11 percent from their 2007 peak. Silver set prices are slipping lower as silver prices fall. High-end art prices, however, are starting to rebound from robust overseas demand. But most collectible prices are down from the 2007 peak.”

More analytically, a recent article in the Financial Analysts Journal takes a look at collectibles, noting that by some estimates the average high net worth individual has almost 10 percent of their wealth in artworks, antiques, jewelry, fine wines and other luxuries.

The authors quote the annual returns from 1900 to 2012 for stocks (9.4 percent) and bonds (5.5 percent) compared to art (6.4 percent), stamps (6.9 percent) and violins (6.5 percent). However, they caution that these numbers exclude transaction costs.

Dealer markups and fees for collectibles can be high. For example, auction houses typically charge a “premium” to the buyer and a “commission” to the seller, which together can be 25 percent of the asset’s price! So you better have a long holding period in mind before taking the plunge.

Furthermore, collectibles are very illiquid and often require insurance and storage fees. There is the danger of forgery and fraud, not to mention fads and bubbles. The standard indices also underestimate the true volatility of collectible prices. The actual return volatility is probably closer to that of equities.

The authors note that diversification within collectibles is important. Yet for a variety of reasons (the difficulty of day-to-day pricing for example) they can find few examples of successful collectible mutual funds.

Bottom line? The authors conclude that the, “after-cost, risk adjusted financial returns are low, which can be seen as an indication that the ‘psychic return’ on holding unique and aesthetically pleasing objects must be substantial indeed.”

My advice? As an investment, collectibles leave much to be desired. From that perspective it is probably better to get your satisfaction vicariously by tuning into the Antiques Road Show. I’ll bring the popcorn!

Jeff Pantages, CFA, is the chief investment officer for Alaska Permanent Capital Management, a $3.5 billion investment management and advisory firm located Anchorage.

Updated: 
12/16/2015 - 12:54pm