by Abraham Otoupal
There is a very compelling case to be made for constructing investment portfolios with the asset class generically termed: “Alternative Investments”. Some Alternative Investment allocations may sound familiar to you. They include real estate, fine art, hedge funds, and commodities (precious metals, as well as other agricultural products). Other Alternative Investments are less common, and include coins, stamps, books, jewelry, wine, antiques, memorabilia, horses, and of course, entertainment.
Many benefits can be realized from investing in Alternative Investments that are informed by macro-economic, demographic and social trends. Entertainment is particularly sensitive to such trends, but when leveraged effectively can provide positive returns.
Most prudent, high-net worth investors, Endowment Money Managers and Pension Funds have recently been increasing their asset allocation models to include 5 – 10% into the ‘Alternative Investment’ sector. Obviously, such investments coincide with risk tolerance, time horizon, due diligence and the future business cycle forecast.
Several analyses indicate a non-correlated investment strategy that offers diversification away from traditional investments; (stocks, bonds and mutual funds) – should be present in portfolios today. On average, the total risk of a portfolio declines as additional investments are added to the portfolio. For example, the addition of a third investment to a two-investment portfolio will dramatically reduce total risk by a substantial amount, especially when that investment is away from the
financial markets, and toward investments from the Alternative class.
One specific Alternative Investment option is film, both studio-produced, and independently (non-studio) produced. It is an attractive prospect when financial uncertainty mounts and volatility increases. The entrainment industry, widely recognized as a ‘recession proof’ business, has historically prospered even during periods of decreased discretionary income. This is a measurable trend. In 2009, for example, within a year of the global financial crisis, the Chair-CEO of the Motion Picture Association of America reported that first quarter, year over year, domestic box office revenue was up +18 percent, according to industry analysts.
Given film production’s historical tendency to generate positive returns compared to an era when stock market indices and benchmarks are increasingly volatile, an investment in film, both studio and independently-produced films becomes even more attractive.
A recent report produced by the IMF and a reputable research firm proposed – ‘We
are in a new ‘super-cycle’ driven by the industrialization and urbanization of
emerging markets, and global trade’. To put the term ‘super-cycle’ into context, it is defined as, “A period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanization and technological innovation, characterized by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world.” The rapid broad based rise in commodities prices of the last seven years – in agricultural, industrial and mining products certainly supports this estimate.
As emerging new economies expand, so does consumer discretionary and non-discretionary consumption grow. Film entertainment certainly falls into this category, as it is a low cost experience.
Risk can be difficult to diversify, but an investment mix with proper investment
diversification will perform considerably well in nasty stock market conditions. Effective risk management and forward thinking asset allocations are pre-requisites for buffering volatility and guarding against significant loss of capital. Real diversification is harder to achieve than it looks, however it is achievable when investigating non-traditional investments such as film.
Abraham Otoupal is a wealth manager and financial advisor in Seattle, Washington.