Study looks at emotional yield of collectibles like art and wine

Many people love to collect items like art, stamps, wine, jewellery and musical instruments, and they tend to hold such items for a long timeframe. Collectors get enjoyment or a certain social status from owning such items. But are such items with positive emotional returns a good investment?

A new study examines this question by devising a novel method to estimate the ‘emotional yield’ of collectibles. The study based on 110 years of returns on collectibles for 13 asset classes including paintings, coins, rugs and classic cars finds that assets with positive emotional returns have lower equilibrium financial returns.

Implications for ESG investing

These findings, published in the Financial Analysts Journal, also carry implications for investment linked to environmental, social and governance (ESG).

“Our results suggest that ESG investing, in equilibrium, will feature nontrivial non-pecuniary benefits and so lower financial returns,” says the study.

“This is important because asset managers often market sustainable investments as offering superior risk-adjusted returns, which our evidence suggests is not the case,” the study adds.

The study is co-authored by Professor Elroy Dimson, Chair of the Centre for Endowment Asset Management (CEAM) at Cambridge Judge Business School; Professor Kuntara Pukthuanthong of the University of Missouri, and Blair Vorsatz, Portfolio Strategy Analyst at Dodge & Cox, San Francisco.

Says Elroy:

“We applied machine learning techniques to address challenges from non-synchronous trading, and utilise these estimates to examine how emotional yields affect equilibrium pricing – and we find evidence that assets with positive emotional returns have lower equilibrium financial returns.

“The collectibles market provides a very good setting to examine this equilibrium trade-off given that the assets are illiquid, the investment time horizon is long and the emotional benefits are important to holders of such assets.”

13 collectible categories ranging from coins to classic cars

The study constructs a database of collectibles comprising 30 distinct return series covering these 13 diversified collectibles categories: paintings, prints, photographs, drawings, sculptures, stamps, coins, furniture, rugs, jewellery, wine, classic cars and violins.

The study’s model then compares this diversified collectibles portfolio with “a portfolio of liquid securities that mimics the risk exposures of the collectibles portfolio” – and by doing so the researchers compute the non-financial return of collectibles, the emotional yield. They found a positive emotional yield for 24 of the 30 collectibles return series, with an annualised mean at a sizable 2.64%.

The greater number of series reflects that certain categories are broken down further, with the paintings category including such series as Old Masters, 19th century art, modern art, postwar art and contemporary art.