Bond schemes or Bond cars?
For the ultra-wealthy, the path of pursuing traditional investments is well-trodden. From stocks and shares, to bonds and real estate, there is no shortage of ways and means to play the market.
In the fallout from the financial crisis, however, volatile markets and record-low interest rates have forced the super-rich to look further afield to alternative investments which do not track financial market indices.
For decades, wealthy investors disillusioned with floundering financial markets have dabbled in the business of luxury investments, usually of the more commoditised variety: gold, jewellery, gemstones and coins. However, over the past twenty years or so, the needs and wants of high net worth individuals have matured significantly. In the beginning, only an elite minority lusted after a way to diversify their portfolio with assets that can be driven, seen, loved.
This minority chose to invest their capital in ‘passion assets’, or as Coutts has romantically branded them - 'objects of desire'. Fine wine. Classic cars. Vintage watches. Artwork. The rarest jewellery, antiques and stamps. Typically high value, fragile and inflexible, these assets are not for the faint-hearted. They generally have limited historical risk and return data, and are so subjectively valued that they are often impossible to price until auctioned. The potential risks relating to valuation have been flagged by our insurance team in the upcoming Thwaytes v Sotheby's judgement in our annual insurance review, in which a lack of careful due diligence into the provenance of a Caravaggio painting may prove to be fatal to obtaining a reliable valuation. They are illiquid; they have especially high unit costs, and are distinct in terms of their performance. By traditional business standards, this is a financial minefield. However, this exclusive brand of assets offers something more, something that Richard Taffler from Warwick Business School terms “value expressiveness”. He says “passion assets are perceived as making powerful statements about the personal values, characteristics and expertise of their owners and how they want to be seen”. These goods go beyond three dimensions; mere ownership carries connotations of prestige, prominence, and power.
Over time, this group of passion investors - motivated by hedonism as much as capitalism - has ballooned. In fact, the luxury collectibles market has swelled so rapidly that Coutts has created a ‘passion investor index’, to chart the performance of these so-called ‘objects of desire’. The financial performance that Coutts discovered has been nothing short of staggering. Over the past decade, many of these highly-desirable collectibles have significantly outstripped the investment returns of credible global stock indices. For instance, since 2005 the value of Coutts’ classic car index has risen by an incredible 250%. A unique but very real example - a Ferrari GTO valued at around £7m in 2004 was sold privately in October 2013 for a reported £33.4m. Coutts reports that vintage watches too - primarily from prestigious brands such as Patek Philippe and Rolex - have displayed extraordinary growth, increasing in value by approximately 175% just in the last decade. If this wasn’t enough, HMRC has classified motor vehicles and watches as ‘wasting assets’, deemed to have a lifespan of no more than fifty years. As a result, they are generally not subject to capital gains tax, which currently sits at an unsavoury 28%. Unsurprisingly, this has stimulated even stronger international demand for passion assets, spearheaded by ultra-high-net-worth individuals from Russia, China and the Middle East. With such huge profit potential, many investors are not just diversifying with passion assets, but in some cases placing them at the very heart of their investment strategies.
For many, this is a knee-jerk reaction. After all, the marketplace for passion assets remains a very treacherous place for the uninitiated. The uniqueness of collectibles also brings two unavoidable, but widely overlooked, costs. Firstly, there is the paramount need for extensive and reliable due diligence. With fraud and counterfeiting so commonplace in the collectibles market, even the relatively experienced run the risk of being duped by sham deals, high quality fakes, or forged provenance. Secondly, by their very nature, most collectibles are vulnerable to accidental damage. It is prudent, therefore, to ensure that passion assets are adequately insured to guarantee full coverage in the event of an unfortunate accident. Particularly for the most unique or illiquid assets, it is of paramount importance that passion assets are independently valued by a suitable panel of assessors on a regular basis. This, of course, means that the lawyerly advice would be to spare no expense, take all precautions, limit your risk exposure and safeguard your investment. But where’s the fun in that?
Stuart Harris