A Royal take on Portfolio Theory

"Diversifying risk means holding foreign assets too"

She became our Queen in 1952 and in this time has built a sizeable portfolio of assets and investments. Unfortunately, a number of these assets come with the job and cannot be bought and sold to obtain the best value of portfolio. Not that the Queen really needs to be watching the pennies! Her portfolio mainly includes diamonds, artwork, property, and of course the Crown Jewels. However, seeing at there's not much room for comparison on the jewels themselves, we may need to focus on the gold instead!


Markowitz developed the idea of Portfolio Theory in 1952 (anyone noticing a pattern in these dates?!), suggesting that investors should aim to reduce risk through diversification and holding a range of different investments. Investors should consider the potential returns, risks and standard deviation, and the correlation of a prospective portfolio. Markowitz says that a strong portfolio should contain investments that are not correlated with each other, therefore if one industry faces a fall, the other investments would not be affected by this and still bring in high returns. However, if you believe that an industry is going to continue doing well, why would you invest your money elsewhere?


The sterling price of gold has more than doubled in real terms, therefore excluding the effects of inflation, since the Queen came to the throne. Whilst this shows the benefits of a long term investment, the price of gold has been decreasing in the past five years, therefore suggesting this is not advisable for short term investors. At least not to invest in currently. In contrast, the diamonds have not fared as well and, if anything have suffered the effects of inflation over the same period of time. Personally, I find this surprising. Surely gold and diamonds would follow similar patterns to each other and would be highly correlated?


The key investment within the Royal Portfolio is the collection of artwork which has been gathered over the years. Over the past century this has been one of the best performing assets, bringing in 3% a year above inflation. I'm sure with the extensive collection held within the Royal family, and the extra 3% each year, this will amount to a pretty sizeable return! According to Christophe Spaejers, finance professor at HEC Paris, the price of artwork in London has risen more than 500 fold in nominal terms since 1952, or 20 fold after the affects of inflation.This could be due in part to various artists gaining higher profiles and interest, therefore increasing the value of their pieces of art. Alternatively, it could be argued that those with a keen interest in art are highly educated and subsequently have a high amount to spend on the desired artworks, thus pushing the prices up. The Telegraph also states that has a very low correlation to equity markets, therefore investing in art is an ideal way diversify and give a good overall investment porfolio.


Another crucial investment held is that of the various properties the Queen holds throughout Britain, which have also proven to be good investments over the years. Many of the properties and estates are older buildings and are likely to be graded, adding to their ever growing value. Needless to say, the added detail of them being owned at one point by Royalty will add the their pretty sizeable price tag! Over the years, the older properties, bought or inherited at the beginning of her reign, are estimated to have increased in value 127 fold. Quite whether this is solely due to the general trend of increased house prices, or whether the link to the Royals has something to do with this, I'm not convinced. However, the Queen doesn't show any signs of moving out of Buckingham Palace anytime soon, so her vast collection of properties are likely to bring in even higher returns.

One thing that does need to be noted about the Queen's investment portfolio, in particular the properties, is that it is far too concentrated in the UK. Therefore, should the Queen wish to strengthen her investment portfolio, my advice would be to look into foreign assets and holding more international investments.

Is Markowitz right with Portfolio Theory, is it better to diversify risk and hold a range of investments, or is it better to focus on one industry that is performing well?