Investing in passions

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The fundamental aim of investing is to gather returns. While investors typically look at fixed income and equities to diversify risks and gain higher yields, alternative investments such as wine, art and classic cars also attract many.

Investors tend to prefer these assets because their intrinsic value cannot be eroded by inflation fluctuations. Others look at them as a means to diversify or to fulfil a personal passion.

However, many have warned that while these forms of investments – often referred to as collectibles – may provide enjoyment to some as a means to diversify, they can also be risky for those who are not avid followers of trends in the field. While it can be satisfying to show off your collected treasures today, you need to assess whether their value will appreciate in time.

Collectibles include fine wines, artwork, comic books, jewellery and classic cars among other things. While there is a bigger market for things like wines and art, other collectibles are also a part of this sector.

Graph 1 shows the distribution of investments of passion worldwide in 2014, by region.

In the Middle East and Africa, 13.2 per cent of these investments were allocated to art, more than three percentage points below the global figure of 16.9 per cent.

“The most dramatic trend over the past decade has been the emergence of the (former) third world consumer,” says Philip Staveley, partner at Amphora Portfolio Management Wine Investment. “As emerging economies develop and produce millionaires and billionaires, these newly rich aspire towards western luxury products, whether this be Rolex watches, Lamborghinis, or indeed, fine wine,” he says. Analysts have said that this starts as a lifestyle but individuals then look at these collectibles as a form of investment.

Investing in art

According to a report from Deloitte on art and finance, buyers worldwide are increasingly acquiring collectibles from an investment viewpoint, which will most likely increase the need and demand for professional and wealth management services relating to the management and planning, preservation, leverage and enhancement of these assets.

The report sees the combination of art and wealth management as an area with the strongest interest, boosted by a rapid rise in the value of art and the increasing accumulation of collectible wealth. However, it points out that the art investment fund market is still a niche sector and although a few models have emerged, it is still too soon to talk about a fully-fledged market.

According to the report, the art investment market is worth about $1.3bn (£846m). Art investment funds are typically structured like hedge funds and pool investor capital to buy and sell art and are managed by a professional fund manager. These are also marketed extensively to high net worth individuals. The strategy of these funds is to deliver returns through the appreciation and ultimate sale of the asset. Sometimes the artwork is stored in an independent warehouse or can be loaned to a museum for display.

The Mei Moses Fine Art index, a benchmark established to reflect art market trends, reported a negative performance between 2012 and 2013.

The majority of art funds are based in China but since 2013, China’s art investment boom has slowed down with an estimated $169m (£110m) raised in 2013, compared with $529m (£344m) in 2012. This is due to stricter government regulation of shadow-banking. In 2014, a total of 72 estimated funds and art investment trusts were in operation globally, and 55 of these were in China.

The Deloitte report on Art & Finance points to a slowdown in the growth of art funds in recent years. According to a survey conducted by Deloitte, only 8 per cent of wealth managers are currently offering advice on art investment funds, down from

26 per cent in 2012. The survey also shows 67 per cent of collectors see art investment funds as a diversification tool and a way of gaining broader exposure to the art market, while 61 per cent said art funds could offer professional management with strong investment discipline and a focus on value.

Investing in wine

Classified as a ‘wasting asset’ under the UK tax rules, investment in fine wine does not attract any capital gains tax (CGT). A wasting asset is one with an expected life of less than 50 years. This is also a reason to look at fine wine as an investment.

According to The Wine Investment Fund (TWIF), an asset-backed investment that invests only in wines from the Bordeaux region, prices of fine wine stabilised in August this year. The Liv-ex Fine Wine 100 index, which represents the price movement of 100 of the most sought-after fine wines shows performance has been on the decline since 2011. A monthly index, it is calculated using the Liv-ex Mid Price for each component wine.

Graph 2 shows the performance of Liv-ex Fine Wine 100 index from 2011 to 2015. Analysts at TWIF believe fine wine prices can shrug off the travails of the world economy and China in particular. A report from London-based research group Wine Intelligence found that the global sales of fine wine are no longer as skewed to Asia as they were.

According to the report, the USA was now the most attractive wine market, followed by Germany, Japan and the UK, with China slipping to sixth place. The countries are ranked using a combination of economic and wine market measures such as ease of doing business and sophistication of the supply chain.

“With lower volatility and low correlation to other asset classes (such as equities, gold, oil), wine offers investors risk-reducing portfolio diversification,” says Andrew Della Casa, director of TWIF. “When the investment is made through a properly constituted vehicle managed by a professional manager with a clearly defined investment philosophy and demonstrable track record, the investor benefits from the manager’s accountability and has the added advantage that the risk within the asset class is reduced though their subscription being pooled in a large, well-diversified portfolio,” he adds.

Analysts have pointed out that if the investment vehicle is established as an enterprise investment scheme (EIS), investors can benefit from a further

30 per cent income tax relief and carry back provision. “No CGT, no IHT and CGT deferral on top of the returns generated by the wine investment, which gives the investor attractive downside protection,” Mr Della Casa says.

One of the reasons for the growing popularity of these investments is higher returns if invested through a well-established professional manager. “The most reliable data for the past 30 years or so comes from the Liv-ex indices, which suggest that returns in excess of 10 per cent per annum have been achieved,” says Mr Staveley. “Other statistics going back as far as 100 years suggest that fine wine investments have comfortably outperformed bonds, fine art and rare stamps, although we should treat data going back that far with caution.”

Risks

These investments come with a lot of risk and many analysts have warned of fraudulent investment firms posing as investors in collectibles. It is important to carry out due diligence before deciding to invest in any of these funds. A number of other risks such as market and liquidity pose a challenge to this sector.

“The biggest risk is possibly liquidity risk,” says Mr Della Casa. “This may, however, be mitigated against. We do this by defining our own universe of investment grade wine, restricting ourselves to only the wines of Bordeaux because only these have sufficiently liquid secondary markets to be considered genuinely investment grade.”

Investment in collectibles is also impacted by market risk. Mr Staveley warns that since the secondary market for fine wine is sterling denominated, exchange rates play a part. “For a US dollar investor, when sterling strengthened in mid-2014 to $1.70, the market became commensurately more expensive. Similarly when it weakened in April to $1.46, the market became relatively cheap.”

While the collectibles market looks attractive from the outside, investing can come with a lot of challenges. It is important for private investors to take advice when looking to plunge into these assets.

An expensive fine wine, the first edition of a Batman comic or a rare Picasso might be very attractive to hold but it is important to know when it is right to sell.

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