Discover what’s driving Investments of Passion
Investments of passion, or passion assets, encompass anything that is tangible and is not a financial asset (it is not a collective investment scheme, the asset is not securitised in any way and there is no income stream for traditional valuation models to be applied to). They are essentially high-value luxury items that people take pleasure from owning.
Examples of passion assets include: Antiques, Furniture, Chinese ceramics, Vintage watches, Jewellery, Fine wine, Fine art, Rare coins, Rare Stamps, Classic Cars.
According to the 2009 issue of the World Wealth Report4, the financial crisis and uncertainty that followed had a marked impact on the spending patterns of high net worth individuals (HNWI) and their spending (and investment) on passion assets. Although globally spending patterns varied, on a whole this group of investors cut back on their spending on luxury goods and collectible items during 2008.
But the impact of this was relatively short lived, with HNWIs “cautiously” returning to passion investments in 2009, although demand remained weaker than before the crisis in many categories of assets. Traditional mainstream investments proved to be very volatile during the credit crunch and subsequent economic recession, leaving many investors facing significant losses.
Those that looked to passion assets for diversification approached the sector as “investor-collectors”, looking for tangible assets as a long-term store of wealth. Even prior to 2008, passion assets were rising in value due to increasing demand from emerging Asian markets – particularly newly wealthy Chinese and Indian investors. As the global economy continues to recover, there are signs that this demand is picking up once more.
The Wealth Report does not include rare stamps in its IoP classification, but coins are included under “Other Collectibles”. Globally this category of other collectibles accounted for 24.4% of HNWI’s allocation to IoPs in Q1 2013, but there is a large variation across geographic regions. The most popular category across all regions is jewellery, gems and watches – assets which are likely to be considered more mainstream.
There have been attempts to measure the performance of passion assets, most notably from Coutts who compile the “Coutts Index: Objects of Desire”, and Knight Frank who compile the “Knight Frank Luxury Investment Index”. Both indices show strong performance from passion assets as a whole, with both stamps and coins proving to be some of the most steady and reliable performers.
“The clear advantage of Investments of passion over traditional investors is the enjoyment – physical or emotional – and social cache that they can bring the collector. Even if the value of a classic car, watch or work of art does fall in value, it will have undoubtedly provided its owner with a huge amount of pleasure.” – Andrew Shirley, Knight Frank
The Economist has also released the Economist Valuables Index, which combines the performance of recognised indices covering vintage wine, fine art, rare stamps, precious coins and classic guitars and violins.
Each asset on the index has been weighted according to Barclays wealth management holdings of rich individuals: 36% fine art, 25% classic cars, 17% coins, 10% wine, 6% stamps and the remaining 6% guitars and violins.
The chart below shows the performance of this index since 2003, tracked against the performance of each individual asset and the MSCI World index to evidence global stock market returns. There has clearly been a large amount of volatility across asset classes, but an investor that diversified across the whole Economist Valuables Index would have achieved 211% nominal growth over a 10 year period since 2003 – compared to 147% (including dividend income) from the MSCI World index.
Passion assets have some defining characteristics: the supply of the asset is relatively fixed and scarce; they tend to have the ability to last and they provide portfolio protection in a way that traditional financial assets do not. Companies can fail, rendering equities worthless and bonds can default, but a bottle of fine wine (although it may degrade if not stored correctly or kept past its prime) will always be a bottle of fine wine, a piece of art will always be a piece of art and rare stamps or coins will remain rare – nobody can go back in time and mint more coins or print more stamps.
These kinds of assets are all unique and individual. They are not fungible (individual units are not capable of mutual substitution in the way that say a barrel of oil or a gold bar is – each asset has to be assessed and valued individually) and as mentioned earlier, there is no income stream on which to base valuations. For these reasons they do not fit into mainstream investment models and are often overlooked by mainstream finance professional and investors. This helps to give them their unique diversification properties and keep them removed from the volatility seen with mainstream markets, which are becoming increasingly correlated.
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Source: Alternative Investment Report; Intelligent Partnership