A few decades ago, the reputation of the collectible postage stamps industry took something of a knock, when some highly-publicised incidents in which investors lost money left a whiff of the pyramid scam hanging over the world’s stamp-trading tables.
Recently, though, philately has been emerging as a more serious business. This is certainly true for Stanley Gibbons, which was founded 155 years ago, and which has managed to retain a royal warrant throughout its many modern-era ups and downs, changes of ownership and management debacles.
Like many other alternative investment classes, postage stamps sometimes do well during downturns, like the current one, as investors look to unconventional ways of making money when traditional investment strategies fail to deliver.
Some very high net worth Chinese investors in particular have shown a great appetite for acquiring collectibles generally and stamps in particular during the recent period of relative austerity in China. Stamp industry experts see this embracing of a wider range of global asset classes as part of an effort on these investors’ part to protect and conserve their wealth, while also allaying concerns about keeping too many eggs in the single basket of the PRC’s economic, tax and regulatory system.
Such attitudes have certainly helped Stanley Gibbons, which claims that almost 70% of its revenue now comes from investment clients, as opposed to over-the-counter first day cover sales to traditional collectors.
It is possible, of course, that the interest Chinese investors are showing in postage stamps is just another indication of the shift in economic power that is currently under way, from West to East. But there is also evidence that there is a genuine appetite in Asia for what a recent article on the website of the Paul Fraser Collectibles newsletter’s website referred to as an effort by “the expanding middle classes” in China and elsewhere in Asia “to seek to buy back their history”.
“It is thought China now has 18 million philatelists”, even though collecting stamps was banned in the country by Chairman Mao until his death in 1976, the article noted.
“Stamp collecting and philately has become hugely popular in Asia, and China especially, as investors who are part of the expanding middle classes seek to buy back their history.”
The hyper-wealthy Chinese are also said to be fond of the most expensive, crème de la crème 19th/early 20th century rare British stamps too.
No surprise, then, that Gibbons recently opened a Hong Kong office for its investment division, to look after its Asian clients.
For us at MBMG, this increasingly professional, investment-oriented focus is helping to assuage some of our reservations about philatelic investing, which as mentioned, are rooted in the re-saleability of the stamps.
Historically, Gibbons’ mark-ups between buy-in and sell-on prices were an average of 100%, that is, a bid/offer spread of 50%.
However, this isn’t quite as offensive as it sounds on first read.
This is due to the fact that stamps fall, somewhat messily, between the stools of investing and retailing.
Spreads in investment markets, of course, typically might vary between a few percent down to a mere handful of basis points (hundredths of a percentage point).
In retailing, meanwhile, the traditional “keystone” mark-up is double the wholesale price of the goods, though retail mark-ups vary enormously between, say, designer-label goods sold in pricey boutiques and discounted, non-branded merchandise marketed online.
In all forms of traditional retailing though, the shopkeeper takes all of the risk of not being able to sell the goods at the price paid for them, which is why auctions, where auction houses don’t incur the cost or risk of owning stock, have tended to be the most cost-effective way to sell valuable collections of stamps and similar “investments of passion”. (Auction commissions, paid by both the vendor and purchaser, may still account for around 35% of the gross sale price, though, leaving another option, which is to negotiate with the auction house or to transact sales through private treaty arrangements.)
Ultimately, the unpredictability of the returns remains the main impediment to serious investors considering investing in stamps, and to the industry’s acceptance as an investment class. For, as we all know by now, every efficient market must have a clearly marked exit door, not just an entrance.
Keith Heddle of Gibbons recently explained to me that his company is now evolving from a retail model to a wealth management business, in which thinner retail margins no longer necessitate the underlying value of the asset to double before you can break even.
As a result, Gibbons’ margins are now below 40% and falling, as investment volumes increase.
This reduction in spread clearly needs to go much further, but it is the first sign that steps are beginning to be taken on the long journey to achieving sufficiently continuous pricing, that may deliver the levels of liquidity and transparency that render collectible stamps acceptable for inclusion within investment markets.
Stamps will never trade like equities, bonds or financial assets. After all, rarity or even uniqueness is what gives stamps their value – and by definition, it also reduces liquidity and transparency while increasing costs.
What is more, the lack of transparency and liquidity is still too pronounced for stamps to merit serious consideration in mainstream portfolios. At best, the decision to buy stamps is always going to be one of personal preference and taste, rather than of risk-reward metrics or forecast returns on investment.
However, as stamps move ever closer to satisfying the essential requirements of investment asset, they should join, if not supplant, antiques, cars, wine and other collectibles as a valuable status asset of choice for extremely high-net-worth clients.
And as they do, those of us who provide impartial advice to such clients must ensure that we fully understand the financial metrics of this unconventional but increasingly popular asset class.
Paul Gambles is managing partner of Bangkok’s MBMG Group, and a HNW adviser.
