Investing in the lap of luxury

Art and wine are bringing a new flavour to the portfolios of high net worth investors. While Europe’s top private banks advise their clients on such investments, they stress that, unlike stocks and bonds, they are as much about passion as financial gain.

In the face of poor results from traditional investments, HNWIs are diversifying into “luxury collectibles”, according to the latest World Wealth Report from Merrill Lynch. During the past year “auction houses saw increased interest and sales in art and wine collections,” says the report. A wine index, compiled by Fine Wine Management in the UK, for example, outperformed equities by 97 per cent in the 2000–2002 period.

Investors interested in wine can opt to invest in physical cases of wine or in vineyards. According to the UK-based Fine Wine Investment Service, fine wine increases in value by an average of 15 per cent a year.

Fragile cargo

However, Doris Meister, head of private wealth management at Merrill Lynch in New York, warns that investors face the problem of maintaining delicate storage conditions, transporting fragile cargo and the fact that before buying a large amount of wine, they usually taste only a single bottle.

For those keen to take a more substantial stake in the industry, Jean-Luc Coupet, head of wine and spirit banking at UBS, recommends acquiring a vineyard. “For long-term investors who are not sure their children will want to carry on with the wine business, I would recommend buying in a classic area, such as Burgundy, Bordeaux or Tuscany,” he says.

“If you are making a smaller investment and you are just interested in making your own wine, I would recommend less conventional areas which have excellent quality soil, such as the Loire Valley in France or Italy, Spain and Portugal.” But he stresses that such an investment will take a lot of work to maintain. It is less a route to diversification than a “new lifestyle”.

In order to make money from the wine itself and the sale of the vineyard investors need the right contacts. Banks such as UBS and Rothschild in France offer networking services.

Labour of love

Art investments are to an even greater extent labours of love. Manuel Gonzalez, global head of Art Advisory Services for JPMorgan Private Bank, says: “If an art collector’s goal is purely a financial return, then we think the buyer may be looking at art for the wrong reason. Investing in art takes commitment, an incredible amount of expertise, an extremely high-risk tolerance and a long- time horizon.”

“Lack of information and overconfidence are the most common pitfalls that face collectors,” says Mr Gonzalez. “Whether it is outright fraud and forgery or a simple condition issue, all collectors must perform comprehensive due diligence. The research of a work’s provenance, authenticity, condition and comparables before every purchase is critical. Otherwise a collector risks paying too high a price, buying a damaged work or obtaining tainted title.”

The art market is notoriously fickle. “Tastes change constantly,” says Mr Gonzalez. “Right now, the 1960s Pop Art market is a popular genre worldwide. Our recommendation is that collectors should never purchase the latest trend for its own sake. Collectors should buy works of art that they will continue to value highly regardless of market tendencies.”

Ms Meister of Merrill Lynch adds that works of art do not generate income or pay dividends and “you spend money maintaining them all the while”.

A further problem concerns the valuation of pieces, as highlighted by research from the global network of small private banks, 21i.net. There is usually a conflict between the desire on the part of investors to obtain as low as possible a valuation for the taxman, but a higher valuation for insurance purposes.

These complications mean that a decision to collect art or invest in wine must be made strategically and be supported by proper expertise. But the investor also needs to have a strong interest in the investment that goes beyond the desire for financial gain.

Art collecting for ‘HNWIs’

JPMorgan offers help to clients at various stages of art collecting:

1. Education of clients about the art market through:

• museum tours
• gallery visits
• auction house trips
• introductions to personalities in the art world

2. Refining clients’ strategies for:

• purchases
• sales
• upgrades

3. Locating potential acquisitions for clients through:

• researching provenance
• establishing authenticity
• verifying condition
• evaluating prices

4. Advising on effective collection maintenance:

• housing
• restoring
• exhibiting
• record keeping

5. Creating an insurance programme in collaboration with JPMorgan’s insurance advisors.

6. Developing strategies to ensure efficient transfer of artwork in collaboration with JPMorgan’s team of trust, estate and tax specialists.