Cheaper ways to invest in hard assets
It's a familiar dilemma. As an investor you might like the diversification benefits and inflation-hedge properties of tangible investments such as coins, stamps, timber, art, diamonds and gold, but don't want the hassle and costs of acquiring and storing them.
Purists see the ownership of the physical item as essential. But if you don't share this view there are shares, funds and other schemes that allow investors to profit from longer-term price movements in such items without taking physical ownership.
With gold bullion, the advent of exchange traded funds (ETFs) that track bullion prices have made owning physical gold by proxy an easy matter. Bullion ETFs are backed by ownership of the appropriate amount of physical metal in a bank vault.
Indeed, the flow of physical gold to back up gold bullion ETF demand was one of the factors behind the surge in the gold price in 2009.
In the case of the Gold Bullion Securities gold ETF, the one most commonly traded in the UK, each share represents one tenth of an ounce of physical gold.
Rare coins are an active collector's market, but the choice and expertise needed, as well as the need to buy through dealers or auctioneers and pay hefty transaction costs, can be off-putting.
The coin portfolio is advised by leading London-based coin dealers Noble Investments (UK). Net asset value (NAV) is around 12.2p a share, but the shares currently stand at 8p.
Given the high quality of the portfolio and the still buoyant demand for top-quality coins, the shares look an interesting investment for those wishing to get some exposure to the coin market. The fund has backing from several major investing institutions.
Some tangible asset experts believe diamonds will be in even shorter supply than gold in the future. The credit crunch meant that prices have weakened sharply in the last year or so, but now appear to be on the mend.
It is possible to access the diamond market through the AIM-listed Diamond Circle Capital fund. The fund buys high-grade polished diamonds, including coloured stones and large white diamonds, with an average purchase price in the £3 million to £5 million range.
The fund, at the time of writing, was 90% invested and stood at a discount of around 25% to NAV. Shares are priced in dollars, but can be purchased through a UK broker. Its performance has hardly sparkled since launch, largely for reasons outside its control.
But it represents a relatively easy way to take advantage of long-term growth in diamond prices and burgeoning demand for hard assets from emerging markets.
Collective investment in forestry is a long-standing concept, spurred by tax incentives and high entry costs. Typically, a pool of money is raised from investors and used to purchase a range of forest properties.
These are managed over the life of the scheme, which is usually 10 years, and the proceeds from the sale of the assets are divided up.
But initial charges can be hefty. One scheme a few years ago had charges including commission to intermediaries, professional fees and marketing costs, that amounted to 6% of the money raised.
Projected returns from schemes such as this are not guaranteed, may not be based on realistic assumptions and are unregulated.
Listed forestry real estate investment trusts (REITs) and timber funds are a possible way in. Most are quoted on the US stockmarkets so the easiest way to get exposure to the performance of these and similar shares is via the iShares Global Timber & Forestry ETF.
Another option is the Phaunos Timber Fund. This is a closed-ended investment company based in Guernsey and listed on AIM, but the shares are priced in US dollars.
They currently sell at approximately the value of the fund's $350 million (£216 million) of balance-sheet cash, with the value of its investments made to date in a diversified portfolio of forestry projects - $221 million in total - effectively thrown in for nothing. Investments include projects in Uruguay, Brazil, eastern Europe, China, East Africa and the US.
But returns from forestry assets depend largely on timber prices. Those prices have dropped sharply in recent months as a result of the economic downturn and may take some time to recover.
In addition, since timber and timber funds are priced in US dollars there is the currency aspect to consider.
Rare stamps have been a popular investment. Stanley Gibbons, the leading dealer, offers guaranteed-return contracts based around rare stamp portfolios. These offer a guaranteed minimum return based on simple interest for a fixed term.
The contracts are backed by stamp portfolios. At the end of the term the holder can either: take the guaranteed minimum return; sell the stamps independently and pocket any profits; sell at auction through Gibbons' auction house at zero commission; sell the items back to Gibbons at 75% of catalogue value; keep them; or roll the contract over for another term.
There is flexibility in that the contracts offer a range of options at the end of the period, although the cash has to be locked up for the term of the contract. In effect, buyers are getting an interest payment with a call option over the stamps that comprise the portfolio.
Stanley Gibbons also claims that there has been no five-year period in the past five decades during which stamp prices have declined.
It is worth bearing in mind that, as the main publisher of stamp-price catalogues and the dealer with the most stock, Gibbons exerts a fair degree of control over the market and the direction of prices.
ART & WINE
Art and wine have long been favoured by City bankers as a home for bonus cheques, so returns have become tied more closely to the stockmarket. The art market, which has a history of volatile cycles, was hit hard across the board by the credit crunch.
Prices now appear to have begun recovering. Buying after a sharp cyclical downturn can be a good way to generate decent returns from art. But many collective investment routes have prohibitively high minimum investment levels and most are closed to new investors.
A collective investment in wine can be an alternative to a "cellar plan" with a bona fide wine merchant. Care needs to be taken to ensure that the fund only invests in high-grade chateaux, typically the top 30 or 40 in Bordeaux.
The Wine Investment Fund is a good example. This fund has returned an average 13% a year over the past five years to August 2009 (when the most recent tranche matured), despite the setback in prices seen between October 2008 and early 2009.
It remains to be seen whether or not this period was one of exceptional returns and whether the performance can be repeated.
The fund raises money tranche by tranche in order to invest in successive vintages. The minimum investment level is £10,000. Fees are high, however, with a 5% subscription fee, 1.5% annual management charge, and a 20% performance fee paid on maturity.
There is no liability to capital gains tax as the fund invests in a "wasting asset".
This article was originally published in Money Observer - Moneywise's sister publication - in March 2010
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
Alternative Investment Market
AIM is the London Stock Exchange’s international market for smaller companies. Since its launch in 1995, 2,200 companies have raised almost £24 billion listing on AIM. The market has a more flexible regulatory system than the main market and can offer tax advantages to investors but its constituents are a riskier investment than bigger companies listed on the main market.