Thinking outside the box

Written by: Dr Desne Masie Posted: 12/04/2021

BL72_Altinv1Amid increasing appetite for diversified portfolios, investors are turning to a wider range of alternative investments. But what are the challenges posed by investing in movable physical assets, both for investors and trustees?

With recent global economic and political turbulence, many family offices and investors are wondering if the traditional safe haven investments are as sound as previously thought or if they need to be thinking about diversifying their portfolios. 

As a result, increasingly investors are looking to alternative assets such as fine art, collectibles, cryptocurrencies, yachts and jets, to name a few.

But while these can offer great opportunities for investment returns, and large rewards in terms of the personal enjoyment delivered by ‘passion’ purchases, there are also unique risks to be considered. 

Lawrence Wintermeyer, Executive Co-chair of Global Digital Finance, says cryptocurrencies in particular have been maturing as an asset class. Recent research shows that Americans find bitcoin twice as attractive as gold, with 20% of respondents claiming to have used cryptocurrency.

However, increasing interest in crypto and volatile movement have seen bitcoin quadruple in price since January, prompting the UK Financial Conduct Authority to warn investors there are still huge risks in the industry – and that they should take particular care with the companies they are dealing with. 

Notwithstanding, the sector is becoming mainstream, and serious investment players are beginning to build positions, including BlackRock and Tesla. 

Artistic edge

Fine art investments also offer potential to profit handsomely, although due diligence is key here. 

Amanda Gray, Partner in the luxury assets group at Mishcon de Reya, warns that anyone acquiring such assets should be mindful of their authentication, provenance, valuation, condition, customs, tax liabilities, attribution, title and ownership – to name just a few considerations.
Gray also cautions that the art world is notoriously small, and the closeness and friendship of all those involved – dealers, agents, sub-agents and art advisers – should be considered. 

She says particular care should be taken when artworks are offered as a security, and to keep an eye on developing trends. 

The shift to online sales, for example, accelerated by Covid-19, compounds the problem of guaranteeing authenticity and provenance, creating increased scope for transactions to be intercepted, and for data to be stolen and misused through identity theft or fraud. 

Brexit uncertainty, such as changes to import and export requirements, may also present challenges.

Family offices focus

For the more practical issues around the transacting and custody of such assets, family offices can turn to trust companies, banking trusts and fiduciary services, and private client service providers to accommodate their unique considerations.

Joel Chinn, Director, and Silvia Andriotto, Associate Director, of JTC Private Client Services, explain that family offices often provide support for unique assets ranging from yachts to fine art, and that specific expertise is needed for the maintenance, performance or transfer of such assets.

But family offices are also turning to alternative structures to organise the management of complex assets. 

In fact, research by Ian Rumens, Head of Private Wealth at Intertrust, Jersey, shows that, while the family office arena has been dominated by trusts and foundations, fund structures now allow families to invest directly into a wider variety of assets. 

Fund structures can be particularly effective for crypto, says James Burnie, Partner at City law firm Gunnercooke. “After the recent bitcoin highs, we are seeing a resurgence in crypto funds. The new offerings are far more polished than the previous rush of crypto funds in 2017, and we are seeing established fund managers beginning to support crypto.” 

Funds that are investing in crypto, he adds, “have very different risks involved, so it is important to recognise this both as an investor and when preparing risk disclosures as part of selling a product”. 

Mo Baluchi and Timothy Townsend, Senior Managers at Standard Bank International, have also seen greater demand for crypto and other alternatives to be added to client portfolios.

“Our investment team at Melville Douglas International almost exclusively invests in more traditional asset classes, so a client’s portfolio would normally form their ‘core’ investing, while seeking to preserve capital as well as incorporating liquidity. 

“When clients seek advice for the ‘satellite’ investment components, such as the asset classes mentioned, we tend to suggest bringing in the appropriate expertise via specialist advisers – through strategic partnerships.”

BL72_Altinv 2Managing chattels

Often, alternative investment comes in the form of chattels. These are classed as any item of tangible movable property – personal possessions, including household furniture, paintings and antiques, cars and motorcycles – as opposed to real estate or intangibles such as shares. 

Chattels are wide-ranging and complicated: even items of plant and machinery that are not fixed to a building are considered chattels.

Andrew Walters, Director at Trust Corporation International in Guernsey, says: “We are a firm of trustees and always look at these things from the perspective of what the trustees’ underlying duties are. 

“So if ever we are asked to acquire a chattel on behalf of the trust, the most important question we have to ask ourselves is whether it is in the best interests of the wider class of beneficiaries.

“We need to make sure that we adequately protect the trust fund and the chattel, and therefore need to take measures specific to that chattel. This includes issues such as custody, unique insurance and risks such as theft, fire and accidental damage.“

As for trustees acquiring chattels such as artefacts or artworks, Walters says: “When trustees hold chattels on behalf of beneficiaries, they tend to form part of a diverse collection forming a balanced portfolio of assets, to ensure that, where necessary, it can provide financial assistance to beneficiaries.

“But, where you have unique artefacts or antiques, or artwork, there may be less liquid markets for those kinds of assets, so this can be challenging,” he adds. 

“The trustees would also need to satisfy themselves with the authenticity and provenance of the asset because there is a great deal of fraud that goes on in the chattels industry.”

Trustees will also normally employ the services of professional custodians.

“Sometimes, an artwork will be on display at the home of a beneficiary, for their enjoyment,” Walters continues. “In such instances, the trustee needs to satisfy itself that it’s in a safe place and adequately insured, and that here is a user licence document that sets out how the artwork is made available to the beneficiary.”

Valuation is also very important but, when finding experts and advisers, it is important to look out for conflicts – such as advisers acting as brokers as well, or being offered some sort of commission. 

Walters adds: “We have seen very big swings in prices for art, wine and classic cars. These assets are best held for the long term, but that does not mean you can’t profit out of them in the short term. The difficulty trustees face is identifying the correct time to sell – which varies widely on taste and investor appetite.”

Yachts and jets are particularly complex, with issues such as depreciation, maintenance and running costs often bearing down.

Walters says: “Yachts and jets could also be acquired for the benefit of the beneficiaries. In such cases, you have to think about the terms on which you acquire the use of that yacht or that jet, and how it should be made available to the beneficiary – whether they should be absorbing the cost associated with its usage, for example.”

He continues: “With a yacht, one commonly referred-to expense ratio is that it will typically cost 10% of its total value to run each year. There need to be adequate liquid funds to meet those costs, and sufficient funds to protect those assets, because by, their very nature, they require maintenance to preserve their value. 

“But, as a trustee, you equally need to ensure these assets are not run in a manner that presents a danger to third parties and that they are run within the proper regulatory frameworks.” 

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