Alternatives: moving into the fast lane

While stock markets and Bitcoin have been stealing the investing headlines, alternative assets have been quietly going about their business. But are they about to step back into the spotlight?

Shortly after the financial crisis of 2008/09, certain alternative assets (or collectibles) – wine, classic cars, art and coins – were talked about as viable alternatives to more traditional options as safer, long-term investments. 

However, as global stock markets have recovered, such talk has become less common. Indeed, the picture for alternatives seems a little mixed – a Da Vinci painting was sold for a record US$450 million in November 2017; while in the same month, Stanley Gibbons’ investment arm based in Guernsey went into administration.

Some alternative investments do appear to have performed strongly over the long term. The Knight Frank Luxury Investment Index (KFLII) regularly pulls together performance data on various alternative investments into one report. The most recent version shows that certain asset classes, such as classic cars, fine wine and coins, have done very well over the past decade (see box). 

However, other alternatives have disappointed – over the same period, the value of antique furniture has fallen 32 cent, with Chinese ceramics down two per cent.

To add to the mixed message, deeper analysis of the performance in a single asset class reveals segments that have outperformed the stated figures and others that have underperformed. For example, the Liv-ex 100 index of most-traded Bordeaux wines is up 29.4 per cent over 10 years (to December 2017). It’s the accepted industry benchmark, quoted by both Bloomberg and Reuters. Yet the Liv-ex 1,000 index, which Liv-ex itself states is ‘the broadest measure of the market’, is up 76.9 per cent.

Putting this performance into proper context, Liv-ex Director Justin Gibbs explains: “As a portfolio diversification tool, the long-term data suggests that fine wine is an interesting alternative asset. Detailed Liv-ex data going back to 1988 shows a compound average return on investment grade wine – specifically Bordeaux – of 12 per cent. However, like all markets, there are cycles. Timing plays an important role.”

Finding a niche

In the shorter term, certain assets have performed well over the past year. According to the KFLII, wine is up 17 per cent for the 12 months to the third quarter of 2017, ahead of art (16 per cent), with cars delivering seven per cent and coins four per cent.

There doesn’t seem to be any simple reason for the divergence in performance, and Adam Moorshead, Managing Director, Guernsey at JTC Group, disputes the view that with stock markets booming and cryptocurrency in the limelight, people are now less interested in alternative assets. 

“The level of interest is higher than ever in my view,” he says. “The explosion of interest in cryptocurrencies and initial coin offerings, blockchain, the bullish markets, and the generally positive global economies have meant that there are investments being made in alternatives that have been pretty dormant since the crisis. 

“Investing in alternatives has never been about chasing aggressive returns in my view – it’s largely driven by personal interest aligned with availability and a healthy risk appetite.”

Moorshead also believes alternative assets as a whole are too broad in scope to make the simple generalisation that they’re all cyclical in nature, though they are clearly driven by basic market principles of supply and demand. “Given the niche nature of the markets involved, there’s an inherent risk of significant volatility and the market can disappear very quickly if the asset falls out of fashion,” he adds.

He doesn’t believe the usual reasons for investing – diversification, non-correlation with equities and high returns – apply so much to alternatives, given that “there are plenty of other ways to diversify your portfolio without the equivalent risk”. Indeed, he says: “For the majority of investors, it’s about passion and having a flutter.”

James Haithwaite, a private client trustee who specialises in classic car collection management and curation services at First Names Group, believes collecting classics can satisfy hobbyist and investors alike.

“For the enthusiast, there’s still the thrill of sharing their passion with like-minded people at events like Goodwood and the Le Mans Classic, as well as just going out for an early-morning drive to clear the cobwebs. For investors, there’s the potential of getting a significant return on their investment, although it should be noted that there is now a flight to quality within the asset class. 

“The days when all collector cars appreciated in value appear to be over for the moment, with primarily the best of the best becoming more sought after.”

That said, Haithwaite points out: “I’ve seen car collectors buying cars because they’re a passion, but then they find that the value of the cars becomes more than their house, which is something that probably wasn’t envisaged when they invested in their hobby.”

Robert Lewis, Chief Executive at Lordes, which offers classic car owners premium storage for their vehicles, is more pragmatic. He’s of the opinion that a combination of inelastic demand for rare vehicles, an uncertain economic climate and growing global demand for alternative asset class investments demonstrates that investing in such vehicles is “a secure and sensible diversification”.

Ins and outs

For those seeking to access niche alternative asset markets, investment via a fund structure is a common approach. There are plenty of investment funds out there, although investors should do their due diligence and make sure they know the risks involved. And then there are those who prefer to invest directly, taking physical possession of the asset – likewise, there are all sorts of caveats here.

One issue often associated with alternatives is a lack of liquidity. It’s a risk that needs to be considered, given the relatively small, niche nature of these markets. Yet, as Moorshead points out: “Liquidity is nearly always available in any market, but rarely at a value that investors want to accept.”

As for classic cars, Haithwaite says his clients have found them to be “generally pretty liquid”, with many potential sale routes – specialist car auctions, specialist brokers, as well as the online sale market. 

That said, he believes investors should always fall back on the tried and tested buying rules. “The five important factors that are essential for all potential purchases are provenance, rarity, usability, desirability and originality,” he explains.  

Liquidity is certainly a concern among wine investors, as Andrew della Casa, Director of The Wine Investment Fund, confirms. “We deal exclusively in select Bordeaux wines where this volume is assured. We also avoid wines at the en primeur stage, where price and liquidity are typically more volatile and the returns achievable don’t justify the risk.”

Yet despite the liquidity and volatility issues, one in six investors holds collectibles such as watches, coins, stamps and wine as part of their portfolio, according to a study by Lloyds Private Banking. 

So does this mean that, despite flying under the radar for a while, investing in alternatives is still an attractive proposition? The consensus among our experts is that alternatives as a whole remain popular, with each niche delivering good returns for those that have combined their passion with sound investing sense.