Putting some passion into portfolios

Investments of passion, such as vintage wine, fine art or classic cars, increasingly appeal to the wealthy.

This has led private banks to expand service offerings to include these new alternatives to engage both new and existing clients. The enhanced product range also helps differentiate themselves from competition and offer a more holistic and personal approach. 

The primary purchasing driver for assets is ultimately the joy of ownership. Yet investment grade collectibles can also provide diversification benefits and, as a physical store of wealth, help to hedge against inflation.

“A passion investor typically starts with a hobby, moves to become a collector and then advances their expertise to become an aficionado and realises there is an investment value in their passion. By then, they are hooked,” explains Angie O’Leary, head of wealth planning for RBC Wealth Management, US.

Wine is a great example of passion investment, she states. It offers a continuum of options from collecting, directly investing in bottle ownership, owning a vineyard to a second career as a wine maker. 

Impressive returns

These types of investments are typically less correlated to markets.  Many collectibles over time have earned above average returns compared to traditional investments like stocks. The Knight Frank Luxury Investment Index, which tracks the theoretical value of 10 luxury asset classes, increased 8 per cent over the past 12 months and 145 per cent over the past 10 years.

Rare whisky has posted the highest price increase, rising 35 per cent in the past 12 months and 563 per cent over the past decade. During the past 10 years, as of mid August 2019, the S&P 500 has generated 11 per cent annually, twice its 120-year average.

“Interest among wealthy clients for passion investments proved particularly strong after the financial crisis, and the trend seems to be continuing, with investors constantly looking for the ‘latest’ alternative asset class, rare whisky currently being a prime example,” says Andrew Shirley, editor of the Knight Frank Global Wealth Report. 

While plenty of people have made money from such assets, some of it could well have been accidental as they may have been purchased long before they were considered investments. Many of these alternative markets are not particularly established, so can be more volatile than conventional investments, he adds. 

Predicting future performance is also tricky, because these markets are often driven by sentiment, taste and fashion, rather than economic fundamentals. And then there are hidden damages, fakes and forgeries to deal with. They involve unique risks, costs, insurance and tax liabilities, and working in partnership with third party specialists becomes paramount. 

“It is important the client understands the space they are investing in, and has experts to help value, store, protect, insure and ultimately sell or pass on to the next generation or bequest to a charitable passion,” says RBC’s Ms O’Leary. 

Liquidity is also an issue. Given their niche appeal and high-ticket price, forced sellers may have to take a discount to dispose of assets quickly. Trading these alternatives typically involves the services of a specialist auction house, and commissions can be in the region of 20-30 per cent. Because of liquidity and tax considerations, these assets should not be intended to fund lifestyle spending. 

But it is critical to take a “full balance sheet approach to wealth planning”, including assets held in collectibles. “It is helpful to understand how these assets play into the clients’ total wealth, how clients might use them to achieve their goals and their risk characteristics,” adds Ms O’Leary. 

There are important tax considerations in titling and gifting these types of investments and specialists can help clients think about the sustainability of these assets and disposition at end of life. 

False hopes

Yet, private banks are highly sceptical around offering investment advice on “passion assets”, because they are opaque and illiquid, with most deals executed privately. “Investing or suggesting that passion investments are alternative investments would be poor advice,” says Mo Syed, head of global markets at Coutts. 

“We absolutely do not recommend our clients investing in these assets, as there is neither transparency nor liquidity.”

However, more and more private banking institutions, including Coutts, provide financial planning around passion assets, offering insights and knowledge. They also give clients access to specialists, such as art dealers or watch manufacturers, as well as like-minded individuals, “whom collectors love talking to and learning more from”. 

The need to offer a holistic client service drove the UK bank to start producing the Coutts Luxury Price Index in the mid-90s. The index measures inflation on high-end items and experiences, covering 150 goods and services across 12 categories, with assets including classic cars, jewellery, real estate, as well as stamps, contemporary art and Chinese works of art. 

Passions and hobbies often overlap, spheres of interest tend to have blurred lines, and it is quite common for car collectors to start developing a passion for watches, and for watch collectors to become transfixed by fine art. 

“Most clients are curious, and want to know how other asset classes are doing,” says Mr Syed. Wealth creators tend to have a global perspective, and their passions evolve as their knowledge and thirst of understanding increases, he explains.

Passion assets can also facilitate talks on succession planning. “Hobbies bring families together, as it is a common interest. It is not a common interest to sit around the table and talk about the latest hedge fund,” he adds wryly.

UBS makes a “deliberate distinction” between passions and investments. “In our experience, the driving force is quite different. When it comes to passions, clients are looking for emotional enrichment over and above financial gain,” states Josef Stadler, head ultra high net worth at UBS. The bank’s art advisory team provide insights and knowledge around issues that art collectors face, as well as thought leadership on market trends. This year, for the 26th time, the world’s largest wealth manager supported The Art Basel  – a major global event in the modern and contemporary art calendar – and produced its Global Art Market Report. 

“We work hard to understand our clients, personally and culturally. Passion services help us to build trust and offer clients a more personal approach,” explains Mr Stadler. Investing in areas such as art, as well as philanthropy and impact investing, are ways for clients to create their own legacy, he adds. 

Passions are becoming more collaborative. Wealthy clients are increasingly turning to peers to share knowledge and find common ground in addressing issues together, he says. This is driving UBS to create “communities for like-minded individuals of great wealth to connect and inspire”.

Deutsche Bank supports clients in their passion-related activities, and offers networking opportunities through sponsoring events, as well as financing solutions. This year the bank has been the global lead partner of Frieze Art Fairs for the 16th year and will be the trophy race sponsor of 1000 Miglia until 2021, a prestigious race for vintage car enthusiasts in northern Italy.

Other institutions acknowledge the importance of diversifying portfolios through passion investments. Swiss private bank Lombard Odier has added art collections and other illiquid assets to its global custody and reporting solutions platform. This gives the client a “personalised bird’s eye view” of their entire wealth, be it managed by Lombard Odier or third parties. 

Tread carefully

Unlike institutions which shy away from building internal art advisory expertise and prefer to partner with external specialists, Citi Private Bank started offering these specialisms 40 years ago. 

Its team of seven helps clients find top quality artworks, aiding negotiations for best prices. “Art is a buyer beware market, with more fakes than you can imagine. We spend much time doing provenance research from sources we can trust,” says Suzanne Gyorgy, head of art advisory and finance at Citi Private Bank.

Contemporary art, especially, is subject to price speculation and manipulation, and collectors need to be wary of trends and fads. One risk, particularly with contemporary artists, is that artworks come too quickly to auction, suddenly lifting prices, leaving them unsustainable in the long term. 

“A reputable gallery will protect their artists, so their artworks will not get huge price spikes; they will see a steady progression over time,” suggests Ms Gyorgy.

The due diligence work aims at making sense of what appear to be random factors affecting value and discern trends in order not to buy into already inflated markets. Contrary to global political tendencies, there is increasing interest today around women artists and artists of colour. “The quality of women artists is so good, and prices are still affordable,” adds Ms Gyorgy.

Art is a wealth holder, which is a key growth driver for the sector. Global market transactions in 2018 increased 6 per cent to $67bn, according to The Art Basel and UBS Global Art Market report. Of these, around 43 per cent were public auction sales. 

The Mei Moses All Art Index, which tracks auction prices, gained more than 11 per cent over the past 24 months to the end of 2018, with post-war and contemporary art showing the strongest growth at almost 13 per cent. 

“People love that they buy an asset and see its value increase. But those that see this as a key factor, and buy art purely for investment, won’t see it happen,” believes Ms Gyorgy. 

The best results are achieved by savvy collectors, who do their homework on art and artists. These enthusiasts have educated themselves by building relationships with gallery owners, art critics, artists and other collectors and “developed their eye” over time. “The best collectors are passionate, and will get the very best pieces,” she adds. 

Increasing numbers of art funds are being launched, attempting to “financialise” the art market, investing in a group of paintings, which are then traded to deliver a return. The pitfalls are that passionate collectors do not want to own a share of the painting and many dealers do not want to sell their artists into a fund, preferring to build their artist’s career, explains Ms Gyorgy. 

Independent art investment and advisory firms are a key part of this growing ecosystem. One successful example is The Fine Art Group, founded by Philip Hoffman nearly 20 years ago. The firm works with banks, wealth managers and family offices globally, offering clients “unique access”, art fair guidance and sale and purchase advice, plus reports and educational events. 

“The art market is opaque and incredibly difficult to navigate… this is why it is essential to work with a professional adviser,” says Mr Hoffman, who previously worked for Christie’s auction house. Across its art investment funds, the group has achieved an average annualised return of 13 per cent, recording a profit on 90 per cent of deals. 

“We have seen a huge shift in attitudes towards art investment,” says Mr Hoffman. “Collectors are no longer looking at their art as a separate, purely passion driven entity. They want it to be financially savvy, secure and efficient, from buying, storing to selling. And even if they are not looking to invest and generate returns, they certainly want to protect their wealth.”

While there may not be agreement on how to view passion investments, the financial industry is keen to capitalise on client interest in these assets and new markets will develop, driven by advances in asset tokenisation using blockchain technology. 

“Fractional ownership seems to be a growing trend, to allow a wider pool of investors to get involved, rather than the just the very wealthy who can afford to buy expensive paintings and classic cars outright,” believes Knight Frank’s Mr Shirley.

Art lending

Owners are increasingly using their art as collateral to raise finance or release liquidity to invest back into businesses or to expand their collections. 

“The market for art financing is bigger in the US than the UK or Europe, but when collectors realise how simple it can be, it becomes a very attractive option,” explains Mr Hoffman. Several private banks, including Bank of America and HSBC, offer specialist lending across a range of passion assets, including art, aircraft and yachts. 

This type of lending brings revenue to banks through the margin spread. Citi Private Bank reports annual growth of 15 to 20 per cent over the past five years for its global art lending business. “Financing is a sector where our business has grown dramatically,” says Citi's Ms Gyorgy. 

This has been driven by increases in the value of art and clients realising their art collections can boost liquidity in portfolios. Many are doing arbitrage, borrowing from the bank and investing back into their business. The art market, she says, “has really provided a stable form of collateral”.