Can collectible investments be a useful diversifier?

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Can collectible investments be a useful diversifier?

Collectible investments have been tarnished by investment scams in the past but for some clients they can be a serious investment and another way of diversifying a portfolio.

In his book, ‘101 Extraordinary Investments’, author Toby Walne points out investing in collectibles dates all the way back to Edwardian and Victorian exploration.

He writes: “Exploration funds were often simply raised by trading in curiosities picked up on travels – from shrunken heads used as a currency in Papua New Guinea, to African chieftain masks, Amazonian butterflies, and colonial postage stamps.”

He goes on: “What is not commonly known is that this business is still very much alive and thriving today hidden by the very same – as well as many other – closed doors, with a wide range of modern collectables changing hands along with traditional and unusual curiosities.”

Lisa Best, research manager at Intelligent Partnership, says today, these “passion investments”, which range from classic cars to fine art, watches, antiques or jewellery, are often purchased for pleasure rather than profit.  

I wouldn’t recommend anyone seek out unusual investments, but where people have a knowledge or interest in a particular collectible area it is quite common for them to want to invest in their passion.Claire Walsh

She adds: “But, ‘investment grade’ collectibles can provide diversification, inflation hedging, a physical store of wealth and an additional source of returns as well as the pure joy of ownership.”

Cautionary tales

But recent coverage of niche investments, such as fine wine and antiques, is often in the context of a scam, in particular those which target older or vulnerable people.

It is fair to say, investing in collectibles should come with a warning of some kind as they are not appropriate or suitable for every investor.

Claire Walsh, chartered financial planner at Brighton-based Aspect 8, explains: “I wouldn’t recommend anyone seek out unusual investments, but where people have a knowledge or interest in a particular collectible area it is quite common for them to want to invest in their passion.”

She suggests: “Many people do this without really considering it as an ‘investment’ but they are indulging their hobby and see a potential growth asset as a bonus.”

So who might benefit from investing some money in collectibles?

Ms Walsh believes: “Investing in collectibles should really only be considered by people where they have sufficient income and/or assets in mainstream investments to meet their needs and they are looking for something a bit different and where they can afford to lose the money. 

“The value of collectibles can be highly volatile and much more dependent on buyer sentiment.”

Ms Best believes those with a well-diversified investment portfolio may benefit from a small allocation to collectibles.  

“Their value is driven by scarcity rather than mainstream market movements, but it can be impacted by spending patterns, and it’s vital to have a high level of expertise or a trustworthy specialist to avoid the pitfalls,” she explains. 

“Those looking for income, quick gains or with a low capacity for loss, shouldn’t be considering collectibles.”

Diversification tool

Indeed, there are some investors who should avoid collectibles entirely and stick with regulated financial products.

Sam Mudie, portfolio manager at Cult Wines, says fine wine investing is not for those who are “looking to make a quick buck or have access to your capital with a moment’s notice”.

“As with most passion asset classes, investors should only be committing capital they consider ‘excess’ to their regular investable assets,” he explains. “In other words, this should be a diversification tool for everyday investments such as equities, bonds or property.

“It’s also not easy to draw any form of dividends from the wine market so investors should be prepared to sit it out for capital growth rather than hoping to get any income from it.”

For those who have decided they would like to dip their toe into the world of collectibles having sought advice before doing so, how should they go about it?

Ms Best admits: “Fraud and forgeries do exist, so it’s essential to deal with reputable parties and to get as much transparency and authentication as possible on the provenance, ownership and valuation of the assets.”

Intelligent Partnership produced a report in 2014 titled, Collectibles: Risks and reasons to invest, which offers some helpful pointers.

It points out Coutts launched the ‘Objects of Desire’ Index in 2013, which tracks the value of several passion assets.

Figure 1: Collectible price indices comparison in US$ 2003-2013

 

Source: Intelligent Partnership, 'Collectibles: Risks and reasons to invest'

As collectible investments do not come under the remit of the Financial Conduct Authority, or any other regulatory body, there is often no quality mark or certification which might help potential investors identify a trusted seller.

Jamie Ritchie, worldwide head of Sotheby’s wine, acknowledges among fine wine, there is a wide range of wine merchants from which to purchase a wine investment.

“I would counsel someone to go to the ones which are the most well-known, the most reputable and also not just to go to one, but counsel the advice of two or three. Using a few different sources gives you balance and different information sources to check the information you’re receiving,” he notes.

Mr Mudie points out: “Unfortunately, following the Asia-led, Bordeaux boom between 2008 and 2011, a string of companies took advantage of a lot of positive performance to trade under misleading pretences. Thankfully, none lasted too long. 

“These served to highlight existing issues and weaknesses in legitimate companies’ business models and has ultimately sharpened up the industry as a whole. It also has steered consumers down a more considered approach to investing in wine, something that we warmly welcome.”

This process could apply to any collectible investment – it would seem wise to see the investment in person before handing over any money.

Calculating costs

Another aspect of these passion investments is not just the initial cost of purchasing them, but also the ongoing charges associated with such specialist and often precious items.

Particular attention also needs to be paid to arrangements for transporting and storing the physical asset and that proper, often specialist insurance is in place.Lisa Best

These costs apply especially to wine, where often quite specialist storage needs to be paid for, and vintage cars, which also come with storage issues of their own and the ongoing costs of repairs and maintenance.

Ms Best suggests: “Particular attention also needs to be paid to arrangements for transporting and storing the physical asset and that proper, often specialist insurance is in place.”

Mr Ritchie says: “When you’ve paid the price for your wine do you have any shipping costs? Do you have any insurance costs? Do you have any storage costs? What are your annual costs for keeping that wine?

“If you’re using professional storage, you’re insuring the wine. You want to take those costs into account as well as any sellers’ fees on the other end of it.” 

Ms Walsh recalls a client of hers sold some works by street artist Banksy at Sotheby’s which charged commission at 35 per cent.

Adviser views

Individual advisers will feel differently about discussing these types of investments with clients. 

Darren Cooke, chartered financial planner at Red Circle Financial Planning, voices his concerns about the lack of regulation and abuse by scammers in the past.

He says: “I would not advise a client to invest in any such areas as I think you need specialist knowledge of that area. 

“If a client knew enough and wanted to invest that is up to them. I have one client who trades in antique clocks but he has been doing that for nearly 40 years.”

Earlier this year, charity Independent Age produced a checklist for advisers to give to any clients they believe might be vulnerable.

It suggests it could be a scam if the communication is unprofessional or the client is being asked to hand over money upfront.

Claire Walsh, chartered financial planner at Aspect 8, has a slightly different view of collectible investments.

She admits: “When it comes to buying collectibles, clients often assume my advice is going to be po-faced and to keep all their money in investment funds but my ethos is very much about enjoying your wealth and, where people can afford it, I encourage them to spend their money, whether that is on luxury holidays or buying the classic car, or adding to their antique collection.”

Ms Walsh continues: “Several clients have asked my advice about the best timeframe to dispose of assets to reduce risk and mitigate capital gains and inheritance tax liabilities. 

“Like everything with financial planning it is better to think ahead and have a plan, rather than try to do things quickly.”

eleanor.duncan@ft.com