With traditional asset classes performing erratically over the past five years, John Evans investigates the boom in treasure-asset investing
A growing number of the rich and successful have been deciding that life’s little luxuries, like works of art and even yachts and private jets, can also make useful investments.
The onset of the great banking crisis of 2007/08 and poor returns on conventional investments are among factors which have spurred the wealthy to turn to what private bankers describe as “investments of passion” and which now total virtually 10 per cent of their overall investment portfolios.
Sometimes also called “treasure assets”, these alternative investments have proven a valuable safety-valve among the wealthy seeking not only to diversify portfolios against financial upheaval, but also to enjoy the fruits of their fortunes.
The rich have always collected art. However, the appetite for treasure assets among high-net-worth individuals (HNWIs), those with investible net worth of £1 million upwards, really gained pace as the new super-rich started to emerge when the economic giants of Asia created significant personal wealth at the end of the 1990s, say experts.
Wealthy individuals hold an average of 9.6 per cent of their total net worth in treasure assets
Currently, wealthy individuals hold an average of 9.6 per cent of their total net worth in treasure assets although, in some countries, this share is as high as 18 per cent, according to Barclays, after studying the growing trend towards treasure assets.
Capgemini, a consultancy which has closely followed trends in collectibles, notes: “The value of many categories of investments of passion rose as HNWIs made acquisitions for the aesthetic and emotional appeal, as well as the potential to return value.
“Collectibles, such as art, which are deemed to have a low or negative correlation with mainstream financial investments, continued to have portfolio-diversification appeal.”
Treasure assets can effectively be anything that the rich decide to favour. Luxury collectibles, such as expensive automobiles, boats and private jets, have proved the primary targets among HNWIs overall. These luxury items have been running about 30 per cent of overall investments of passion among HNWIs globally, Capgemini estimates.
They have been particularly appealing to those in the wealthier counties among the emerging economies, witnessed by surging sales of Mercedes and Bentleys, as well as other marques, in China.
Art has been accounting for 22 per cent of investments of passion overall, but that share has historically proved higher among European HNWIs (27 per cent) and highest among Latin American HNWIs (28 per cent), says Capgemini. It is also most likely to be seen as a form of financial investment, with many wealth advisers saying they believe their high-net-worth clients invest in art primarily for its potential to gain value.
Jewellery, gems and watches have been running at about 22 per cent of all investments of passion. Record prices for diamonds at international auctions signal the growing trend among the world’s HNWIs to see large diamonds as a safe and high-growth investment alternative.
Fine wine, antiques, coins and memorabilia account for 15 per cent of all investments. Here, rising gold prices helped to buoy demand for rare coins. Sports memorabilia is also in fashion and, at the extreme end, accounts for the investment by the super-rich from Russia, the Middle East and Asia in English soccer clubs.
A survey found that wealthy individuals in London had the highest proportion of treasure assets by a significant amount, owning on average 9.3 per cent of their total wealth in these categories.
The Barclays study showed that more than half of individuals (56 per cent) indicated they have held fine art pictures and paintings in the past five years, and 32 per cent say that they have owned fine art tapestry and rugs, which is the highest of any UK region.
Looking to the future, more respondents in London want to invest in classic automobiles (21 per cent), precious metals (22 per cent), and fine art tapestry and rugs (33 per cent) than anywhere else in the country, suggesting a desire to diversify their treasure collections.
Those advising the rich do stress to clients that, when it comes to owning treasure assets, it can be difficult to liquidate the investment when required. It is easier to get out of stocks and shares quickly rather than, say, selling the family yacht.
Mohammad Syed, who heads up the Strategic Solutions team at Coutts, one of the biggest British private banks, says that, while this illiquidity means it can be difficult to sell an investment, it is not “a real deterrent” for most investors. This is more about an emotional purchase, he stresses.
“To most people who want to invest, we say that treasure assets are always a very long-term investment, and can be illiquid and opaque. Most people know this, but they are buying it because they are passionate about it and profits are not necessarily the driver.”
Coutts itself caters for the trend by offering its clients at home and abroad a panel of specialists to whom they can turn for advice.
“We act as a bridge to these experts in their chosen fields and who can help our clients better understand what drives that particular collection or investments in, say historical or contemporary art,” Mr Syed says.
Will the buoyant start to stock markets around the world this year, hitting their strongest levels since 2007, turn the rich back to conventional investments like stocks and shares?
Mr Syed doubts this, saying: “Art or alternative assets are really not a substitute for bonds and stocks. It’s more of an allocation question. Most clients are driven by their passions rather than thinking, ‘prices are going up, so should I buy this?”