Passion Investments and a Luxury Index

At the end of February I posted on a Financial Times article on passion investments (click HERE to read the AW post).  Within the post was the mention of an upcoming release of the Knight Frank Luxury Investment Index, and I had stated I would post when the index was released.

The index and report has some interesting data on luxury items and collecting.  According to the survey results, fine art, watches, fine wine, jewelry and classic cars are the 5 most popular passion investments of high net worth individuals.  Most, if not all of these types of collections should be appraisers.

The Knight Frank Luxury Investment Index reports

We put together the Knight Frank Luxury Investment Index based on the weighted performance of existing indices for nine classes of collectable asset: fine art; Chinese ceramics; classic cars; coins; furniture; jewellery; stamps; watches; and fine wine.

Over the 10 years to the end of Q3 2012, the index grew by 175%, considerably better than the 54% rise in the UK’s FTSE 100 index of leading shares over the same period, even taking into account the value of any dividends paid.

Equities did perform better in the shorter term, rallying 10% year-on-year against a 6% rise for the index. However, where investments of  passion really seem to show their value is when mainstream investments are most vulnerable.

Over the past five years, which have included the collapse of Lehman’s and the ensuing credit crunch and economic slowdown, the index returned solid growth of 64%. During the same period the value of equities fell 6%.

Looking at the constituent parts of the Luxury Investment Index, all but one asset type increased in value over 10 years (see table above), with the Historic Automobile Group International (HAGI) classic car index up by a staggering 395%.

Dietrich Hatlapa, HAGI founder and author of Better Than Gold: investing in Historic Cars, says a relatively small pool of truly investment grade cars, plus growing global demand, has helped to push up prices.

Unlike some other investments of passion, cars can also act as a ticket to a particular lifestyle, says Mr Hatlapa. “Buyers from overseas will often leave their cars where they were bought and then fly back to drive them at rallies and events.”

Our new index brings a scientific approach to the art of passion investment, providing vital data on the performance of the most popular assets the luxury index Also more than tripling in value were the Stanley Gibbons coin index (248%) and its GB30 stamps index (216%), while a composite index of the most collectable art genres produced by Art Market Research only just missed out at 199%.

But performance doesn’t always go hand-in-hand with popularity. In our Attitudes Survey, stamps and coins were the least collected items by HNWIs. Watches polled second only to art, but showed a comparatively lowly 10-year rise in value of just 76%. The disparity shows the often blurred dividing line between investments and passion. While many HNWI watch collectors may believe, or at least hope, that their acquisitions will be a good investment, the reality may disappoint.

“The actual number of watches that will increase in value is somewhat limited and largely restricted to vintage watches and some modern models by Rolex and Patek Philippe,” says Paul Maudsley, head of the watch department at auctioneer Bonhams.

“Paying £150,000 retail for a new watch is ratherlike buying a luxury car. Its value will fall as soon as it leaves the showroom and, with the exception of a Patek Philippe, is unlikely to ever be as high again.”

Caveat Emptor

Although the returns may look attractive, Greg Davies, Head of Behavioural Finance at Barclays Wealth and Investment Management, says potential investors need to look beyond the headlines before diving into investments of passion.

“People often think these types of investments are more transparent and less complicated than traditional investments. In reality, they are generally less regulated, and can be illiquid, expensive to trade and sometimes actually more difficult to understand unless you have a high level of expertise or inside knowledge,” he says. Art is a classic example, he adds. “The huge diversity of the market, the fact that no two original works of art are the same, changes in taste and fashion and the lack of repeat sales mean even the most rigorously constructed index can only provide a small, and curated, glimpse of the market.”

Fittingly, fine wine can be one of the more liquid and transparent investments of passion, according to Dr Davies. That statement is backed up by Andrew della Casa, Director of The Wine Investment Fund. “Every day a case of each of the wines we include in our fund is sold somewhere around the world,” he says. “This ensures that there is always a bid/offer spread and it is easy to sell at any time.”

Although the Liv-ex 100 Index dropped 19% in the 12 months to September 2012, this was mainly due to the performance of one wine. “The biggest constituent in the index – and its biggest faller – was Chateau Lafite. It was the brand of choice for Chinese buyers and they and other buyers drove prices up, creating a bubble. Now they have broadened their palates, the market has over-corrected and we see this as a good buying opportunity,” says Mr della Casa.

The knight frank Luxury Investment Index will be updated regularly. For the latest results, go to knightfrank.com/wealthreport

Source: Knight Frank Wealth Report