Tuning up the assets, from jewelry, art and wine to classic cars and quirky collectables.
The appeal of alternative investments has grown since the 2008 global financial crisis. But while jewellery, art, wine, classic cars and even quirkier collectables lure investors through love – as well as money – how do such investments perform in the long term?
When a simple coin with a twisting vine and image of a pagoda landed in British pockets in 2009 it had a face value of 50 pence. Just five years later its worth has soared to more than £20 and Brits are eagerly sorting through their loose change.
It’s little stories like these that excite passionate collectors keen to make a healthy return.
Investing for passion and purpose is increasing, according to a recent report by Capgemini and RBC Wealth Management. Along with a growing focus on investing to “effect positive change in a financially sustainable way”, high net worth individuals (HNWIs), at least, are increasingly allocating some of their investment funds into quirky collections.
On a global scale, an analysis by Knight Frank shows jewellery is the most widely collected object. Wine, watches and cars also rank highly in terms of their desirability to investors.
Often “it starts out as a hobby at first then it morphs into something else,” explains Tamara Grischy, head of auctions at Australia’s premium wine marketer, Langton’s fine wine auctions.
“There’s not a massive amount of Australian wines that deliver big increases and returns on your investment,” she says.
“But it is pretty low risk because in the end you can crack it open and drink it. If it all goes pear-shaped at least you have got something to enjoy.”
Nearly two thirds of collectors worldwide buy for personal pleasure, according to The Wealth Report 2014 by Knight Frank. But a further 22 per cent are banking on capital growth or, at the very least, steady values.
On the face of it, the returns certainly look promising.
Knight Frank began its Luxury Investment Index last year in response to what it says is a greater desire for alternative investments following the credit crunch. The index recorded 175 per cent capital growth in the 10 years to the end of the third quarter in 2012.
Knight Frank also reports the weighted index outperformed the majority of more mainstream asset classes over a 10-year period, and in the year to the end of the third quarter in 2013, the index grew a further 8 per cent.
There was, however, a wide variation across the index. Classic cars, for example, jumped in value 28 per cent in the 12-month period while coins increased 10 per cent.
In Australia, self-managed super funds (SMSFs) are allowed to hold art, jewellery, wine and other collectables including exotic cars and racehorses, despite a recommendation in 2010 by the Cooper Review to ban such items. Following an uproar by businesses in the art and coin market, Cooper’s recommendation was tossed out in favour of stricter rules around insurance for the items, personal use and storage.
Most notably, collectable items held in super funds in Australia cannot be used by the holder of the super fund, removing much of the pleasure of investing in collectables. If an individual buys art as an investment for an SMSF, they cannot hang it on their own walls.
The 1954 Mercedes Silver Arrow, driven by racing immmortal
Juan Manuel Fangio, was sold in 2013 for US$31 million.
Simon Swanson, managing director of investment advisory firm ClearView, says the tight rules have dampened the desire for DIY super funds to hold collectables.
“Interest has certainly come off in the last few years because of the regulatory changes. That has actually been felt all the way down to the art dealers,” he says.
The proportion of collectables held in SMSFs certainly remains low. Artwork, metal, jewels and other collectables comprise around 1 per cent of the assets held in SMSFs, figures from the Australian Taxation Office reveal.
The Australian Chamber Orchestra's
Stradivariusviolin is now worth US$2.75 million.
Total global sales of art and antiques, however, grew 8 per cent in 2013 to reach €47.4bn (A$68.9 billion), nipping at the heels of the 2006 record for total market value. In discussing these figures, the author of the European Fine Art Foundation’s most recent annual report, Dr Clare McAndrew, noted: “A significant part of the uplift of the market was due to higher priced works, rather than simply more works sold.”
The number of transactions made in 2013 was 36.5 million, well down on the 2007 peak of 50 million.
A risk in investing in collectables is getting swept up in the success of the high-profile sales and indexes such as the Knight Frank Luxury Investment Index, which provide only a snapshot of slices of the overall collectors’ market.
Take the art market, for example. Data on how the sector is tracking is usually based on auction results, but this accounts for only half (and possibly less) of the market, say some observers. At least 50 per cent of fine art is sold behind closed doors. And for every high-priced, well-publicised sale, there are many more that fly under the radar.
Valuing markets such as art is tricky and subject to biases. That was the view of respected researchers Arthur Korteweg, Roman Kräussl and Patrick Verwijmeren, who in a study last year pronounced that “the returns of fine art have been significantly overestimated, and the risk, underestimated”.
The trio, from Stanford Graduate School of Business, Luxembourg School of Finance and Erasmus School of Economics, commented: “The true annual return of art as an asset class over 1972 to 2010 was closer to 6.5 per cent, instead of the 10 per cent that the [index of fine art sales] shows.”
The three also noted that the risk associated with art investment was significantly higher than previous estimates. They concluded that buying art would not “substantially improve the risk-return profile of a portfolio diversified among traditional asset classes, such as stocks and bonds.”
ClearView’s Swanson points out that there is also an issue of liquidity. “If you expect to sell them quickly you may have some issues,” he says.
Justin McLaughlin, the chief investment officer at ClearView, adds that there is also the problem of not being able to divide off a collectable to sell a small part.
“It is a bit like having an investment property,” he says.
“You can’t sell off the porch and you can’t sell off the kitchen. You really have got to sell it or not sell it. If you buy small collectables there is a difference but with bigger collectables, you have to recognise at some point that if they are sold you have to sell the whole thing.”
There may be some extra challenges looming for SMSF holders, says Swanson.
"It's vital investors have collections independently valued rather than rely on the word of companies That may have vested interests."
“Our view of the future [is] these kinds of illiquid assets are going to be extremely problematic with self-styled superannuation,” he says.
“The regulators are putting a lot more premium on liquidity and therefore they will make the valuation allowance for these assets a lot more rigid than they have in the past.”
Other areas in danger of sudden regulatory changes and changes in value due to industry shifts include more obscure assets such as taxi and water licences, and the new kid on the block, virtual currencies such as Bitcoin.
“There’s no such thing as a passive investment. You have always got to be aware of the environment,” says Swanson.
Capgemini’s wealth report reveals how varying tastes among people across the world influence the demand and prices for collectables. In China, for example, newly wealthy people from the provinces favour cultural art “pieces synonymous with Chinese history”, while in Brazil there has been a rapid growth in the art market, underpinned by the many international galleries setting up shop in the South American nation.
In art, less than 2 per cent of new artists are said to have their works appreciate and the reasons why they do are often less about sheer talent and more to do with the competitions they enter, their ability to charm gallery owners and an artist’s own skills at self-promoting.
Furniture is another case in point. Overall, Knight Frank says the sector lost ground over the past 10 years. Although key 20th-century pieces are rising in value, a desire for more modern pieces and a move towards smaller houses have meant there’s less demand for once-valuable traditional English and French furniture.
In the instance of the Kew Gardens coin, as the commemorative 50 pence is known, the key driver for soaring prices was the low number produced – just 210,000 were minted to mark the 250th anniversary of the UK’s Royal Botanic Gardens. Other commemorative coins, such as a 2010 Girl Guiding celebration, were cast in their millions.
But for every story of success, there are plenty of tales of woe, which is why investing in collectables is a much higher risk proposition.
“These are real niche markets, you need to really understand what you are doing,” says Swanson.
“I know [someone] who had an Austin-Healey. It took him two years to sell it. He took a big haircut on it just because at the time the demand for that particular car was very low.”
Last year, thousands of investors were left hanging when Western Australia’s Rare Coin Company collapsed. The business had reportedly promised annual returns of up to 16 per cent for those investing in the rare money market. Many paid the company a fee to hold their investments.
While the majority of investors have been able to retrieve their coins, the liquidators expressed concern that individuals would not be able to sell their collections for the values the trading firm had placed on the coins in annual statements sent to investors, especially if all were trying to sell at once, essentially flooding the market.
Some investors had used all their savings to purchase coins, others had sunk all of their superannuation into them.
ClearView’s McLaughlin says it’s vital investors have their collections independently valued on a regular basis rather than rely on the word of companies who may have vested interests.
Investors need to also understand how long they will have to hold and at what cost. Take wine, for example. Most wine has to be held for five to 10 years to reasonably appreciate, says Grischy. And as it must be kept at the right temperature and humidity, that can mean paying for professional storage.
“You need to consider the costs around that and make sure that it is insured properly,” she says.
“Then when you look at selling it, what are the selling costs?”
As to whether investors should purchase collectables at all, Swanson has a strong view.
“I would keep it outside your investment portfolio,” he says.
“It is something you are doing for the fun of it, so to speak. Be prepared to hold for a longer period of time and make sure you do your research on what you are buying. Really do your research.”
Putting money where your heart is…
Whatever your passion, there is a likely a way of investing in it. Even if that passion happens to be centuries-old instruments.
Take the Australian Chamber Orchestra (ACO), which has recently purchased an extremely rare violin made in 1714 by Joseph Guarneri filius Andreae.
The ACO made the US$1.35 million purchase through the Australian Chamber Orchestra Instrument Fund.
The fund invests in rare stringed instruments and is an unlisted Australian unit trust, available to wholesale investors. Its investment objective is to secure long-term capital gains, with total fund volumes of up to A$10 million.
“While it is not unusual for musicians to receive rare and valuable instruments on loan, ordinarily they are lent by wealthy individuals or philanthropic organisations, which retain ownership,” says Jessica Block, director of the fund and deputy general manager of the ACO.
“In this case, the instruments remain under the stewardship and control of the orchestra, and in the ownership of the fund.”
The Guarneri is the ACO’s second purchase for the fund. The ACO says the violin has already appreciated in value, with a valuation in May of US$1.6 million.
The fund’s first acquisition was Australia’s only Stradivarius violin, bought by the ACO in 2011 for US$1.75 million, and revalued at US$2.75 million in May this year.
The fund launched in 2011 with an initial unit price of A$1. That was revalued at A$1.15 last July and earlier this year climbed to A$1.20.
Four pairs of ruby slippers were made for The Wizard of Oz.
The muted pink with burgundy sequins picked up the light
to pop red on the screen.
Four pairs of ruby slippers were made for The Wizard of Oz.
The muted pink with burgundy sequins picked up the light
to pop red on the screen
It started with a desire to preserve an important slice of history and ended up netting close to US$30 million.
When Singin’ in the Rain’s Debbie Reynolds put her collection of Hollywood memorabilia up to auction over the last four years there was a breathtaking array of well-known pieces, including the sequined ruby slippers from The Wizard of Oz and a Charlie Chaplin bowler hat.
Much of it Reynolds had bought from MGM’s 1970 prop and costume auction. But some of it – including five tuxedos that were gifts from “Rat Packers” Frank Sinatra, Dean Martin, Sammy Davis Jr, Peter Lawford and Joey Bishop – Reynolds had picked up for nothing.
She had hoped to retain the collection for the general public and have it housed in a museum. However, when construction of the museum fell through, Reynolds decided to sell the lot.
It was a decision that was said to have broken the former Hollywood star’s heart. But her bank balance certainly benefited.
This article is from the August 2014 issue of INTHEBLACK.