Children’s Toy or Grown-Ups’ Gamble? LEGO Sets as an Alternative Investment

Abstract

In this article, LEGO sets are studied as a potential alternative asset class. An exhaustive sample of 10,588 sets is utilised to generate inferences regarding long-term LEGO performance, its diversification benefits, and return determinants. Over 1966-2018, LEGO value-weighted index accounted for survivorship bias enjoys 1.20% inflation-adjusted return per annum, well below 5.54% for equities. However, the defensive properties of LEGO are considerable, as including 5-25% of LEGO in a diversified portfolio is beneficial in terms of Sharpe ratio and certainty equivalent metrics for investors with varying levels of risk aversion. LEGO secondary market is relatively internationalised, with investors from 95 countries engaging in 90,000 transactions over a 6-month period, comprising total trading volume of $7.5 million. Larger economies, countries with higher per capita incomes and less income inequality are shown to trade LEGO more actively. There is evidence of LEGO investors deriving non-pecuniary utility from holding sets that is separable from their risk-return profile. LEGO is not exposed to any of the Fama-French factors, however, set-specific size and value effects are also well-pronounced on the LEGO market, with smaller sets and sets with lower price-to-piece ratio exhibiting higher yields. Older sets are also enjoying higher returns, demonstrating a liquidity effect.