Alternative Assets

By Lisa Hooker
From the July 2012 issue of Columbus CEO
  • Tim Johnson
  • Tim Johnson

Collectors of pricey alternative investments are passionate about them. Whether fine art, antiques, rare wines, thoroughbred horses or vintage automobiles, these items are more likely to be found through Sotheby’s than eBay.

Many people refer to such assets as collectibles. Others grimace at the term.

“Collectibles really is a pejorative for investments of this type. As appraisers, we call them hard-to-value assets or nontraditional assets,” says Amelia Jeffers, president and auctioneer at Garth’s Auctioneers and Appraisers in Delaware.

Sometimes the motive to buy is financial. Other times, it’s more personal. “The primary reason we see collectibles is that clients have a personal passion. The purchase may or may not have been a profitable venture, but it may not matter to the client if it’s a piece they really wanted to acquire for their collection,” says R. Matthew Hamilton, chairman and CEO of Hamilton Capital Management and a Certified Financial Planner.

Today’s economic conditions also are piquing investor interest in such purchases.

“People are looking for alternatives. Because of its volatility, we’ve seen so much money pulled out of the traditional stock market. Arguably any time the economy has high liquidity, low interest rates and fear of inflation, it’s almost inevitable people will pursue alternative investments,” says Charles Stamey, managing director of sales for Manning & Napier.

So is that Picasso or bottle of 1787 Chateau Lafite from Thomas Jefferson’s collection a wise investment or simply an emotional buy? With education, a keen eye and patience, it is possible to turn a personal proclivity into a profitable venture, according to area financial advisors and alternative investment gurus.

The Right Way to Collect

Like any other commodity, the hard-to-value asset market is affected by supply and demand. The Internet has opened up the arena in an unprecedented way.

“It’s the access to the market that has changed,” Jeffers says. “Materials once available only through our catalog now are available to a worldwide audience.

Take the netsuke, a small ivory adornment used on Japanese kimonos. “We had a few Central Ohio collectors. A lot of two or three netsukes used to bring $300 for the best ones. Online with our worldwide audience, that lot now brings $10,000 to $11,000,” Jeffers says. “When the supply opened up to the entire world, demand went up.”

Hummel figurines, which collectors once amassed and waited for them to appreciate, haven’t fared as well. “You’d have to scour antique shops and estate sales for vintage ones. A lot of two or three would sell for $300 at auction. Now you find them on eBay and the price has plummeted. The actual supply hasn’t changed, but a greater supply is now available to most people,” Jeffers says.

It’s not uncommon for collectors to call an appraiser such as Garth’s before attending an auction. “We help them identify the best of the best and offer assistance as they build their collection,” Jeffers says.

Business has been good at Garth’s. Annual revenue is approaching $10 million, according to the company’s website. “Last year ranked in the top five best years of our company. We started seeing a stronger buying audience in the summer of 2011,” Jeffers says. Her husband, Richard “Jeff” Jeffers is CEO and principal auctioneer. Garth’s was founded in 1954, and the Jeffers bought the business in 1996.

Like stock market offerings, nothing in the collectible world is guaranteed to be a good investment. Remember the old adage, caveat emptor. “We recommend you buy quality, have an educated eye and learn all about the items. Buy from reputable sources. Be patient when buying and selling,” Jeffers says.

That approach paid off for a now-deceased West Virginia veteran. During the 1980s, he augmented his family’s retirement funds and life insurance by collecting handcrafted period furniture from Ohio, Pennsylvania and Virginia. “He’d study our catalog and those from other national auction houses and wait until the best of an item was available. He wasn’t real liquid, so he’d go the bank and get a loan. He’d bid aggressively to buy the piece, then he’d sell some lesser quality pieces to pay off the loan,” Jeffers says.

Now, the collector’s widow has asked Garth’s to sell the 15- to 20-piece collection. “We expect them to bring more than $150,000,” Jeffers says. “He did a great job. He approached it diligently and carefully with absolute care and patience. You must know what you’re buying.”

Quality is of utmost importance. “Things that are of quality sell,” Jeffers says. “An item’s condition is a big factor in determining its value, too. The sky’s the limit for a rare object in pristine condition.”

Don’t count on mediocre, mass-produced items or objects that become a fad or trend (think Beanie Babies) to appreciate.

Today, the Chinese market is red hot. “China just surpassed the United States in consumption of art, antiques and collectibles. They’re especially buying up their country’s cultural items from the past. They can afford to ‘buy their culture back’—and that’s the phrase they use—from Americans who bought items years ago and brought them here as part of their travels,” Jeffers says.

But don’t rush out and start buying any Chinese artifacts. “The value of a 20th century Chinese vase might be $100. The value of an 18th century Chinese vase can bring in more than $1 million. It takes a lot of homework to know the difference,” Jeffers says.

Alternative investment collectors fall into three categories. “Well-managed collectors are those that we advise and are usually building a private collection. Professional investors buy items at estate auctions or tag sales and then sell, or flip them, through us for a profit. They’re sometimes called pickers,” Jeffers says.

And then there’s the accidental investor. Jeffers cites the husband who purchased a bronze Buddha overseas for a few bucks years ago. His wife never liked it, and it was relegated to the basement. “She brought it to us and we sold it for $35,000,” Jeffers says.

Part of the Portfolio

Should the bronze Buddha and handcrafted antique cupboard be incorporated into financial portfolios? That depends.

“I wouldn’t rely on collectibles to meet the goals of my portfolio,” Hamilton says. “It’s an emotional buy. People don’t typically buy vintage cars with the idea of turning them over for a profit. Generally the buyer invests in the cars as a collector. He may rationalize it as an investment, but the chances of him parting with it at the right time at the right price are slim. There’s an emotional attachment.”

“You need a solid foundation for your financial plan, then you can allocate a certain percentage of it to more speculative investments. Investors cannot expect to build a solid financial plan on collectibles, though. They’re speculative, volatile and require a lot of expertise and considerable upfront capital,” says Mark Coffey, a Certified Financial Planner and senior financial advisor at Summit Financial Strategies.

“Collectibles are not income-producing investments, which is a key goal for most people,” Stamey says. “They’re also non-liquid assets. They’re worth only what someone will pay for it at a point in time. You must find a buyer and then you must sell, in a lot of cases, the asset in its entirety. You can’t sell half of a painting.”

Alternative investments cannot be included within an Individual Retirement Account. “An IRA’s assets must be able to be liquidated to meet the minimum distribution requirements,” says Sue Bottiggi, Columbus market executive for PNC Wealth Management.

Investors should be comfortable with their liquidity position and income before entering this market. “It’s not about the percentage of assets, but rather how much liquidity can you tie up. That’s a huge variable client to client,” says Kathy Houck, senior vice president of Huntington Wealth Advisors.

“Be careful that you have adequate means to support your regular expenses and lifestyle before you invest in illiquid assets,” Bottiggi advises.

“There’s no doubt people have done well in collectibles, but they’re not the same as a traditional investment that is traded every day with a ready market,” Stamey says.

“Cash flow is associated with most investments, so you can create an economic value based on the cash flow. That value can go up and down based on the market price. With cars, art or wine collections, there’s no cash flow,” Hamilton says.

The sole determinant of return then becomes the price. “That’s driven by a lot of factors. Who’s in the market at that moment? Are we in a recession or not? If we are, for example, a buyer may not pay as much. So much of this market is esoteric,” Hamilton says.

“The higher the price, the longer the time it could take to sell it,” Houck says.

Horses are among the few items in this asset class that can be easily valued through stud fees and sperm bank demand. Vintage or specialty cars also have a strong secondary market.

“If the object is a true extraordinary asset, you normally can find someone with the necessary expertise to do a valuation,” Houck says.

Be aware that when such assets are sold, Uncle Sam will expect a hefty cut. “Collectibles have a 28 percent tax rate on the value of the gain, which is more than the long-term federal capital gains tax of 15 percent,” Coffey says.

Coins and Heavy Metals

Coin collecting has always been a popular pastime, but coin investing gained local notoriety after a scandal at the Ohio Bureau of Workers’ Compensation. Toledo-area coin dealer Tom Noe was found guilty on 29 criminal counts in 2006 in the investment scandal dubbed “Coingate.” Noe is serving an 18-year sentence for the theft of millions of dollars from two $25 million rare-coin funds he managed for the BWC.

The BWC may not be buying coins nowadays, but many private investors are. Whether in the form of coins, bouillon or part of commodity investment funds, gold and other precious metals are different from other collectibles because they can be purchased on the open market.

“I think wealthy clients were in the gold market earlier, because commodities help to balance a portfolio. You’re hearing about gold now because it’s becoming a more common strategy and the price has skyrocketed,” Houck says.

“Gold is viewed as an inflation hedge or as a hedge against any kind of financial disaster. Currently, the fear of inflation around the world is a legitimate worry and gold tends to be a good hedge against it,” Stamey says. “The problem, though, is that gold doesn’t generate income.”

“With our clients, we recommend gold only after they’ve established a solid investment foundation. It’s one part of the bigger pie of asset allocations,” Coffey says.

Safekeeping

Because they are physical assets, collectibles usually require extra care and handling. Take into account the cost of insurance and any special storage considerations before investing.

“Where and how to hold the item is always an issue. Most homeowner policies don’t cover these types of items, so you need a rider or specialty insurance. They add cost,” Coffey says.

“Always make sure the insurance is adequate and properly reflects the true state of the item and how it will be used. For example, if you intend to drive a classic car, tell your agent that,” Houck says.

Security is a consideration, too. “Some clients self-insure. They’ll buy a safe for the home or install a storage facility with safety controls,” Coffey says.

Installing appropriate environmental monitors such as temperature, lighting and humidity controls can be very costly. Off-site storage, depending on what’s required for a particular collection, also may be expensive.

Before purchasing any high-value asset, ensure the piece is authentic and the seller is accurately representing it. Reputable dealers and appraisers can help buyers avoid falling victim to fraud.

Collectors often take photos of the items in their collection, but that may not be enough to prove ownership. “Experts suggest taking photos of the back of a piece of art or of the underside of a drawer. They often have distinguishing marks there,” Coffey says.

Passing Assets On

Financial advisors take specialty investments into account when working with estate planning. Smart collectors have a plan for their pieces.

“When we work with clients who have collectibles in their estate, we remind them that they may be valuable to them, but other family members may not share their passion. We suggest that they make a list of what object goes to who and why. Each heir should also be given instructions on how to sell the piece for the highest price. It makes use of the person’s contacts in the industry,” Coffey says.

“If the heirs don’t share their passion, they’ll probably sell the collection for cash. How do they feel about that? It can be a difficult family discussion, so is it best to donate the collection to a museum? Make such decisions early enough that you’re not faced with them at an emotional time,” Bottiggi says. “When left unspecified, though, the bank has contacts that can help the heirs dispose of the collection.”

Provide specifics about such assets in any estate plan. “Remember that heirs can deny the asset. We’d look to the estate documents for subsequent clauses on how to distribute, sell or donate the pieces,” Houck says.

Such instructions can help achieve the collector’s initial goal of making a profit on these unique investments—even if he or she isn’t around to benefit.

Lisa Hooker is a freelance writer.

 Reprinted from the July 2012 issue of Columbus C.E.O. Copyright © Columbus C.E.O.