Spanish fraud rocks UK stamp investors

The Sunday Times May 21, 2006

Spanish fraud rocks UK stamp investors
By Jessica Bown

Investors in British stamp funds were left reeling earlier this month
when 350,000 Spanish philatelists lost up to €5 billion (£3.4 billion)
after buying stamp schemes through dealers Afinsa and Forum Filatelico.

The firms’ offices were raided and sealed by police investigating
allegations of fraud, money laundering, tax evasion and embezzlement.
Investors, who had been told their returns were guaranteed, were left
angry and confused.

It was then British investors’ turn to worry as shares in Stanley
Gibbons, a London-based stamp cataloguing company, slumped 12%.

The firm runs investment schemes that buy rare stamps to provide a
return for investors. These could suffer if there is any knock-on effect
on the British market, although there is as yet no sign that the Spanish
crisis has hit worldwide stamp prices.

Andrew Claridge, a partner at stamp specialist Grosvenor Philatelic
Auctions, said: “The problems in Spain have had no real impact on the
market here as far as I can see.”

Last October, Stanley Gibbons launched a guaranteed investment product
that promises investors a return of 5% to 7% a year over a three, five
or ten-year term.

The investment schemes involved in the Spanish fraud also carried
guarantees which were not backed by the value of the underlying stamps
because dealers had purchased relatively modern stamps and ramped up
their values before selling them to investors.

There is no suggestion that Stanley Gibbons has been involved in such
practices, but sceptics fear that, if the stamp market does fall at some
point, the company would struggle to meet its obligation to investors.

Chris Harman, president of the Royal Philatelic Society, said: “The
market has been very buoyant, but prices will drop at some point. We’ve
seen it so many times before.”

In the 1970s, for example, investors flooded the stamp market, sending
prices soaring to up to eight times their previous levels. Soon after,
however, experienced collectors banked their profits and prices crashed
back.

This year, as then, lofty prices are being paid for very rare stamps at
auction. In one recent example, a rare Canada Black stamp was sold at
Sotheby’s in New York for $220,000 (£116,000).

Thousands of people have therefore bought into the market as an
alternative to shares or property.

Claridge said: “The market is much more active now than it was a few
years ago. It has been bolstered by collectors, ranging from those
investing in a very junior way to those prepared to pay tens of
thousands of pounds for rare specimens.”

The boom is all the more worrying because investments of this kind are
not regulated by the Financial Services Authority, meaning investors
cannot complain to the Financial Ombudsman Service or make a claim to
the Financial Services Compensation Scheme if they lose their money.

Stanley Gibbons points out, however, that it is making monthly
provisions to cover any potential shortfall.

The firm also runs a five-year worldwide rare-stamp investment fund that
carries no guarantees, although that closed to new investors on Friday.

Launched in November last year, it required a minimum investment of
£20,000 and has attracted interest from overseas, as well as domestic,
investors — despite charges of 5% upfront and 1.5% a year.

However, Stanley Gibbons admits it has only limited knowledge about the
stamp market outside the UK and Commonwealth.

Richard Purkis of Stanley Gibbons said: “We’re only really qualified to
speak about the markets in Britain and the Commonwealth because that’s
where our expertise lies.”

The launch of the rare-stamps fund could further increase the risks for
investors in the guaranteed contracts because prices could slump when it
is liquidated in five years’ time.

Harman said: “It is good that the Stanley Gibbons schemes are
concentrated on rarer stamps. However, the main warning I would give is
that stamps are pretty illiquid because collectors generally hold on to
their stamps for 10 or 20 years.

“The market is also relatively small — in Britain we estimate that it is
worth about £200m to £250m. This means that people are often trying to
buy the same stamps, which can create an artificial bubble.”

Pension advisers believe that Stanley Gibbons has launched the
guaranteed and rare-stamp schemes in a bid to cash in on the
self-invested personal pension market.

Interest in investing in stamps surged when the government indicated
that physical stamp collections would be able to be included in Sipps
last year.

Such assets were later vetoed as part of Gordon Brown’s turnround on
esoteric investments. But stamp funds do qualify for inclusion —
although pundits warn against ploughing too much money into such a
specialist asset class.

Tom McPhail of Hargreaves Lansdown, an adviser, said: “I wouldn’t
encourage someone to invest in this type of fund unless they were
reasonably familiar with that market, and even then it should generally
only be a minority holding — perhaps 10% of your overall portfolio, if
you were feeling reckless.”

Claridge argues that investors should only buy stamps when they are sure
they understand the market.

He said: “You should always go for the very best stamps you can afford.”