In one week’s time, Sotheby’s will host an auction that is being billed as “the most important archival sale of stamps ever to take place”. The auction is being conducted to provide financial support for the establishment of a new London home for the permanent collections of the British Postal Museum & Archive (BPMA). On the face of it, the 191 lots up for auction – which Sotheby’s estimates will fetch over £5m in aggregate – should help to create an enduring focal point for philatelists across the UK and beyond. However, concerns have been raised over the basis of the valuations, and whether the sheer magnitude of the sale, rather than reinforcing the case for stamps as a viable alternative investment, might actually undermine it (see news story).
Whatever plays out at the Sotheby’s auction, a non-correlated asset class that has outperformed a basket of commodities and indices over the long run certainly warrants more than a cursory glance, particularly if the performance of the GB Rarities index is anything to go by. The index, which is compiled by Aim-traded collectibles specialist Stanley Gibbons (SGI), covers a representative sample of the 30 most readily traded rare stamps in the UK. Over the past 15 years the index has grown by 333 per cent, representing an average annual compound return of 10.27 per cent. And, despite economic turmoil over the past five years, the index still recorded an 84 per cent gain (the FTSE 100 and the gold price were up by 12.4 per cent and 31.3 per cent respectively over the same period).
Understandably, most investors would grab a return like that with both hands, but is it genuinely attainable? Well, in most instances that usually rests on the degree of price transparency and liquidity within a given market. If you’re contemplating a foray into investment-grade stamps you need to remember that the trade is unregulated, so even if you believe that the philatelic market passes muster in terms of liquidity and price transparency, there are still caveats to take on board.
Price predictability at the top end
As with other alternative investments, it is strongly recommended that you approach a reputable dealer before you start to build a collection. But that doesn’t mean that you won’t have to do a bit of leg-work yourself, particularly with regard to the pricing of assets. A common pitfall is that quoted prices are often based on estimates or list prices, rather than recent cash sales. Therefore, many collectors simply choose to maintain their own estimates by monitoring the prices of collections that come up for sale at the major auction houses, and within the galaxy of publications aimed at the industry and collectors, so it is certainly possible to formulate a meaningful price spread under your own steam. Failing that, you could always give Stanley Gibbons a call.
The London-based company’s catalogue pricing system is recognised as the industry standard, but investors should remember that the prices quoted within its catalogues do not necessarily reflect the price that you would achieve on the open market – only that which Stanley Gibbons believes it can attain. That’s partly because Stanley Gibbons, by its own admission, needs to factor in ancillary business costs above and beyond the inherent value of the stamp itself. However, it’s clearly in the interests of the company to make sure that the price is pitched at an equitable level: too high and buyers would invariably look elsewhere; too low and it hinders the ability to restock inventories. Unlike some private investors, it is generally acknowledged that expert dealers such as Stanley Gibbons take full account of the general conditions of their stamps when compiling their catalogue estimates – a crucial determinant in the pricing process.
Hedge funds look for alternatives
Certainly, the company is uniquely placed to call on historic price data, given that its first catalogue was published in 1865, just 25 years after the release of postage stamps to the general public in the UK. Overall, it would be fair to say that the differential between the prices listed in the Stanley Gibbons catalogue and those attainable on the open market will tend to coalesce in line with the relative scarcity and value of a stamp. In other words, despite the fact that there are fewer trades, there is generally more price predictability at the top end of the market – it’s a bit like fine wine in that regard.
It’s worth mentioning that rare investment-grade stamps are not correlated with other asset classes. Supply is finite and unlike, say, gold, demand is not subject to external factors such as interest rates and the relative value of the greenback. These facts, along with the aggregate growth rates of investment-grade stamps, is now attracting the attentions of hedge fund and wealth managers. To this end, Stanley Gibbons is in the final stages of putting together a five-year, closed-ended investment vehicle that is being pitched at City institutions (minimum investment £250,000) that have hitherto expressed an interest in gaining exposure to the rare stamp market, but only within a regulated framework. If this venture proves successful, the gradual acceptance of stamps as an alternative investment option by the financial sector would invariably help support valuations over the long term.
The question of liquidity
Assuming you manage to accumulate a saleable collection, the chances of you being able to cash in on that double-digit annualised growth rate are probably better than you might imagine. Estimates vary, but it is thought that there are currently around 200m active stamp collectors internationally – that equates to one-in-35 people across the globe.
Of course, the number of collectors who undertake the pursuit purely from an investment angle is much lower, but the number of ready buyers in the UK and across the globe is proportionately higher for stamps than it is for other classes of alternative assets, with the exception of rare coins. While it’s true that the overall number of collectors in the UK has been in decline since the 1980s, the number of ‘serious’ collectors is on the up, according to the Royal Philatelic Society. Again, it is important to stress the distinction between stamp collecting from an investment angle and that of a pastime driven purely by a personal interest in philately. The fall-away in stamp collecting among young people in the UK has been linked to the rise of electronic communications, particularly with regard to the ubiquity of e-mail, which has reduced the overall volume of letter traffic. Even given the encroachment of the digital age, it’s revealing to note that stamps are the fourth most commonly traded items on eBay. The Royal Mail has come under criticism for increasing the frequency and print-runs of commemorative/one-off issues, as new issues can often take up to 30 years to appreciate beyond face value.
Activity has picked up appreciably in the emerging markets economies, particularly in Asia, which now accounts for nearly a fifth of Stanley Gibbons’ revenues. To exploit this trend, the company opened branches in Hong Kong and Singapore earlier this year. Stamp collecting was actually banned by Chairman Mao during the Cultural Revolution, but there has been resurgence in demand since the turn of the millennium, as China’s Communist Party has positively encouraged the general populace to take up the practice, partly due to the fact that there is a dearth of investment options in China to match the rise in disposable incomes.
Establishing provenance a must
Prices and liquidity aside, it is certainly advisable to seek expert advice because in some cases the sheer number of variants within a particular series of stamps provides a daunting challenge in itself. And that’s saying nothing of the influence on valuations linked to a stamp’s perforations, paper quality, margins and postmarks. Every stamp, regardless of its value, can be graded in terms of its quality by assigning standardised philatelic jargon. The terms that dealers use to grade stamps – in ascending order – are Poor, Fair, Good, Very Good, Fine, Very Fine and Extremely Fine. Richard Ashton, Sotheby’s Worldwide Philatelic Consultant, said: “Stamps should always be in the finest possible condition. Whether they are mint or used, the quality of the colour, the size of the margins or perforations and the condition of the gum – all these factors play an important role in determining value.”
As you can imagine, establishing the provenance of your investment is of paramount importance; forgeries made their way on to the market within 25 years of the 1840 issue of the Penny Black in the UK, and identifying bogus specimens is a particularly challenging – and highly specialised – branch of philately. It therefore makes sense to establish a relationship with an independent philatelic expert (there’s no shortage), who doesn’t have a vested commercial interest, while mercantile bodies such as the Philatelic Traders Society (established in 1929) offer useful points of contact. With over 400 dealers in the UK signed up to the society’s code of ethics, you will at least have recourse to the society in the event of a problem with a transaction carried out with one of its members, although that is probably unlikely anyway given that (with the exception of Stanley Gibbons) most UK dealers tend to sell exclusively to collectors, as opposed to investors.
■ From purely an investment angle for stamps; read fine wine. You will be able to attain an adequate degree of price transparency and market liquidity, but only at the top end of the market. While stamp collecting as a pastime might be in decline, there is good reason to suggest that investment interest from individuals and institutions is on the rise. Above all, seek expert advice – preferably from several quarters. But keep in mind that a miniscule proportion of all the stamps ever issued are now considered investment grade. Many inexperienced investors in search of an inflationary hedge were left holding largely worthless collections following an influx of opportunistic dealers during the 1980s. Now there is widespread appreciation of the fact that the market in investment grade stamps is actually quite narrow with a prohibitively high entry point – but it’s actually the better for it.
