Wednesday, June 26, 2013

Of Alternate Assets and Other Investment Exotica

INVESTMENT EXOTICA Today, Gold and real estate have become virtual essentials in every man’s asset creation. So much so, that these two asset classes could perhaps turn out to be the biggest bubbles over time. We all presume that we will be the smart fellow, and will bail out before the others. However, mass following, inflation and the action of governments (constant bail outs and subsidies by printing more money) ensures that these assets keep inflating in value. It is very likely that lack of faith in sovereign, inflationary pressures and crowd behaviour could keep these asset classes on the high for times to come. Let us take gold. A metal, with no intrinsic use or value, has become a synonym for wealth due to purely emotional or sentimental reasons. And in the frenzy of speculative hoarding, it has virtually become a self fulfilling prophecy. If we take the pure extraction cost, it is well under US $ 800 per ounce. However, it has become a store of value and is driven by factors like the strength of the dollar, the degree of likelihood of an alternative to the dollar as a ‘safe haven’, Indian and Chinese household fetish for the yellow metal and the speculative forces of hedge funds and commodity funds. The other thing that draws Indians to gold is history and tradition. Apart from Gold and real estate, there are various asset classes which get clubbed under ‘alternative’ assets. These include commodities, currencies, ‘art’, ‘antiques’ and every other exotic item that the world collects. Most of them derive value only because more than one person has a fascination for it. Take for instance, stamp or coin collecting. Since this is a passion with quite a few people, there is some value because someone is willing to pay a price for acquiring it. The one thing to note is that these ‘alternate’ assets do not follow any predictive valuation model. It is perception and a function of demand, supply and hype. Typically, in good years, when there is a lot of money flowing around, the demand for ‘exotic’ assets goes up. In poor years, there is a likelihood of some holders wanting to exit. You cannot value these assets except look for references and prices at auctions of similar items. These asset classes are for the ‘rich’. People who have so much money, that they already own considerable quantum of traditional assets like property, shares etc., It would be foolish if someone were to directly get in to this asset class without having put money in to the safer and liquid asset classes. When good times roll, many of the exotics will be packaged together under the umbrella of “Portfolio Management Schemes”. There was an ‘Art” fund that was launched in 2006, which collected more than Rs.100 crores. It was supposed be a fund focused on buying, holding and selling paintings (of the art kind). It had a three year lock in period. Alas, most of the people who went in lost money. The problem is that art is a dicey investment. A new artist will command value only after twenty plus years! Established artists or old masters command fancy prices. So, unless you are passionate about it, investing in art makes absolutely no sense. Exotic investments are for those people who cannot complete a total count of their wealth at any given point of time! The key factor is that allocation in to these exotic assets should be in consonance with your total wealth as well as the appetite for risk. If one is worried about prices and liquidity of what lies in the wealth basket, obviously these asset classes are not for you. Exotic assets may fetch returns over long holding periods. Often, they give returns only when handed over from one generation to the next. That is the patience one should have, if you want to enter. Liquidity comes from a limited circle of investors with similar appetite. Another thing to note in these exotic asset classes is that if one wants to buy, happy times are not the best ones. In an environment where everyone is prosperous, these asset classes tend to show a lot of demand and prices remain high. In a weak economic environment, if one has the money, these asset classes can be picked up at lower prices. With bankers struggling to find new ideas for packaging and selling to the rich, we will see more and more investment ‘packages’ on offer. Understand the risk in the asset. And understand yourself. Are you willing to bear the risk? Is there liquidity? Who can I sell it to? Ask as many questions as possible and then take the plunge.

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