What is Our Alternative?

Many investment professionals (myself included) consider core investments to be cash equivalents (US Treasury Bills or money market funds), bonds and common stocks.  In simple terms, the combination of these asset classes will impact the daily or monthly variation in the value of the investment portfolio.

On occasion, a client, or a financial services marketer will ask me if we invest in “alternative investments.”  Since there is no industry wide consensus on what constitutes an alternative investment, I usually ask what they are.  Frequently, I receive a response that an alternative investment is either gold, real estate, or commodities.  Then I answer, yes, we invest in alternatives.

My colleague, Marisa Lenhard, CFA, CFP®, recently wrote a blog about the sale of the painting The Scream and noted that it sold for a record $120 million.  That blog started a dialogue amongst us investment professionals at Sigma and the initial impression was that someone gravely overpaid for this painting.  As we continued our discussion, though, it quickly became evident that we really had no way of determining if the buyer really did overpay.  How can one really assess the value of a painting?  Is it pure emotion?

Marisa noted that the Mona Lisa attracts great crowds to the Louvre in Paris and suggested that the number of visitors that visit this museum, and pay the price of admission, may go simply to see this single painting.  Could the buyer of The Scream be a curator for a museum?  Could the purchase price make perfect sense if it draws hoards of admission paying visitors who are curious to see what a $120 million painting looks like?

The conversation concluded with several of us wondering if art could become a more mainstream component of a large investment portfolio, occupying a role as an alternative investment.  We are not yet ready to make that leap, but the issue is up for further discussion.

We welcome all questions or comments.

Robert M. Bilkie, CFA