Esoteric assets feeling the cold

With property values continuing their downward slide, the FTSE 100 dropping in value by 31 per cent last year and economic confidence shaky, high net worth clients might be forgiven for considering a fine Bordeaux, a Rembrandt or a 1930s Bugatti a better home for their money.

But while there are suggestions that investors may increasingly eye up esoteric investment options in a bid for more tangible assets, the downturn means financial advisers and experts in the fields of wine, art and other collectibles, are recommending more than usual caution over the sector.

That said, experts say specific areas of the art market have been holding up well over the past few months, as have classic car values and stamps. The Mei Moses index, which tracks art auctions, suggests prices fell by 4.5 per cent last year, after seeing five years of growth averaging around 20 per cent a year. Wine has taken more of a hit with the Liv-ex 100 Fine Wine Index, the industry’s leading benchmark, showing a drop of 14.6 per cent in 2008. But these figures pale in comparison to the FTSE 100’s drop of 31 per cent last year, although the market is not so liquid.

You might argue that it is in their interests to say so, but fine art auctioneers Bonhams believes it is too early to make definitive statements about how these more esoteric investment classes are being affected by the current downturn.

Bonhams head of press and marketing Julian Roup says: “The time to really judge this, we feel, will probably be in the summer, when we’ve had six months of regular sales across the board to evaluate things,”

However, he says the early indications are that collector-driven areas are holding up better than areas where speculators and investors may have piled into the market.

Charles Dupplin, chairman of the art and private client division at specialist insurer Hiscox says that while levels of trading may be down in the British fine art market, he agrees there are areas that are still holding firm.

“People are buying good quality stuff and our sense is that they’re buying them thinking that at least this good quality picture at £5,000 or £10,000 is going to still be worth that in the future,” he says.

In difficult financial environments, investors stick to more traditional objects, rather than the contemporary and are suspicious of anything that may exhibit “bubble characteristics,” he says.

Areas such as Old Masters, along with English sporting paintings are holding up well, Dupplin suggests. In the year to September 30, 2008, Old Masters paintings were up 8.6 percent or 56.7 per cent over 10 years, he says. English sporting paintings were up 5.6 per cent and 89.2 per cent respectively and general collectibles 0.8 per cent, or 50 per cent over 10 years. How they have fared post-Lehman, however, remains to be seen.

The wine market is one area that has “taken a bit of a knock” but stamps have remained fairly solid, he says.

“There have been a number of stamp sales recently and the percentage of lots sold is down, but the prices are firm. There certainly is also evidence of people who are not collectors buying stamps at the moment in Britain,” Dupplin says.

Similarly, classic cars have also been achieving reasonable prices. Dupplin says: “Again the percentage of lots sold may not be quite what it was, indicating that some people don’t have the cash, but people are still buying these things. A classic car would have been a reasonable hedge in an era where the FTSE went down over 30 per cent last year.” He says there was a Rothschild family principle that an investment portfolio should consist of one third in art, one third in property and a third in money, which Dupplin describes as “not ridiculous”.

Fine art auction house Christie’s spokesperson Alexandra Buxton says that while she does not comment on art as an asset class as she never encouraged people to buy art as an investment, she had seen an increase in clients buying art for this purpose in recent years.

“But it is important to note that the most successful investors in art have traditionally been those who collect because they develop a passion and an interest in acquiring art for its own sake,” she says. “Whilst they may be aware of the potential financial gain, their investment is not driven by this as a primary motivation.”

London-based Fine Art Wealth Management is a global wealth management consultancy focused solely on art, collectibles and “investments of passion” as an alternative asset class.

Managing director Randall Willette says that a number of new art funds that were due to launch last year have put their plans on hold as they wait for the dust to settle on the current economic turmoil.

He believes many investors are sitting on the sidelines because of the market conditions, but that those with liquidity are likely to come back into the market searching for unique opportunities. However, these alternative asset investors are likely to be looking for greater transparency and will be more risk averse going forward.

“I think investment in art actually could end up benefiting from this dynamic, primarily because what you will see out of this is a move towards what are so called real assets – tangible assets that have an intrinsic value.

Assets such as land, art, property, equipment and infrastructure – all of these types of assets fall into that category,” Willette says.

But, investing in these types of assets is likely to remain the domain of the savvy investor, he warns.

“Traditionally, investors in alternatives are first and foremost sophisticated investors. They understand the risks associated with investing in alternatives. The reason they’re looking to alternative investment strategies is primarily for the diversification and/or performance,” he says.

“I think it will be very much the same type of investor (in this market in future), but you could argue that alternative investment strategies could become more mainstream in 2009 as more investors are looking to these investment strategies to fill the gaps in their investment portfolios.”

Indeed, investing in these more esoteric areas does come with significant risk, one of the biggest being liquidity – as there is no guarantee on how quickly a buyer can be found for a specific fine wine or high value art work. But, the current tough market conditions are throwing up opportunities for art investment – particularly for art funds looking to benefit from “distressed” art assets.

Willette says the credit crunch can force works of art into the market that may not ordinarily come up for sale and already the Fine Art Fund Group has announced it plans to set up a fund to do just that.

However, Bloomsbury Financial Planning branch principal Jason Butler is unconvinced on the merit of adding such investments to a client portfolio. “All of these things come with costs, they come with additional risks and you’re taking a big bet. You’re getting into speculating rather than investing,” he says.

“All I will say is, if you want to buy alternatives, buy the physical alternative –whether it be art, wine or stamps, because you enjoy it, because you’ve got some knowledge and because it’s not the thing that you rely on.”

WINE AND ART FUNDS: BEWARE THE WONDERFUL TRACK RECORDS

A collector of classic cars himself, wealth manager HFM Columbus director Marcus Carlton (below) has a clear insight into the mindset of people keen to invest in the likes of fine art, wine, classic cars and collectibles.

Despite that, he firmly believes that those looking to delve into these areas should do so for reasons other than chasing a return. Carlton sticks to a rule of thumb of only buying items the investor actually likes and wants, leaving any investment return as incidental.

“They’re very fickle markets,” he says. “There have been a number of schemes about like wine funds and art funds, but I’m always deeply suspicious about the pricing of those things and the costs associated with them. I just think if you want to invest in that then it should be as a hobby and you should be doing it for other reasons than trying to make money.”

Carlton says promoters of these assets as alternative investment classes will point to “wonderful” track records, but their volatility means that investors really need to know what they are buying if they want to make money.

“Obviously it’s a diversifier, but I’m just so against the whole idea that I can’t see a rational reason for doing it other than if you were interested in art or wine,” he says.

“I’ve bought classic cars because I like them and I’ve used them. I’ve sold them subsequently and on some I’ve made very good money, but that was never the reason why I did it.”