Pleasing to the eye and fun to collect, but are they good investments? Perhaps it is wise to take a good look at your objectives first: financial return or pleasure of ownership
Jon Hunt, the founder of Foxton’s, is reported to have bought a Ferrari GTO 250 for £15.7 million and to have sold it three years later for £20.2 million. Substitute the Ferrari for a Van Gogh, Patek Philippe watch or Stradivarius and there are similar eye watering stories.
In 2011, the collections of the top 14 art collectors were estimated by Forbes to be more than 75 billion US Dollars. The top three artists by sales in the first half of 2014 were Andy Warhol ($590 million), Picasso ($560 million) and Gerhard Richter ($170 million).
Interestingly in this ‘collectables’ sector headlines are made by good performance and poor performance is less well documented. The structure of the market is such that most transactions are never known, although indices like the Mei Moses® Fine Art Index (http://www.artasanasset.com/main/), The Historic Automobile Group Index (http://www.historicautomobilegroup.com/) and the Liv-ex Fine Wine 500 Index (https://www.liv-ex.com/home.do) do appear to provide some transparency and an indication of risk and return characteristics. The Economist has also created it’s own composite ‘Valuables Index’ showing a performance slightly above UK equities and short dated gilts.
At first glance, investing in beautiful assets has an appeal: financial return as well as pride of ownership. But, as an Economist article of August 2013 points out …
… valuables have high transaction cost and need to be insured, stored and maintained. Funds charge hedge-fund-like fees. Illiquidity is another problem. Offloading something like a 1957 Ferrari is not easy, and most funds lock in investors’ money for at least five years. Those wine funds that do allow quick redemptions invest in the most traded grapes, like Bordeaux.
The article was called Fruits of passion – Investing in luxury items can yield high returns. The risks are commensurate.
Very valuable items that can give personal pleasure are in practice illiquid and non-fungible (rare or of limited supply). Their value can also suddenly bomb out due to the sudden and often unexplainable unpopularity of their creator.
It would seem that to try and make money out of a passion for collecting some of your favourite things sits at the high end of the risk spectrum and something that should be done for pleasure rather than financial gain.
It’s important to remember that good investing should be dispassionate and logical at all times.
Back to that article in The Economist …
At least investors can derive more enjoyment from owning valuables than they can from a framed share certificate. Art can be admired, and vintage cars can be driven—albeit carefully.