Investing in Château Lafite, Picasso or Patek Philippe - The rise of collectible assets | Press articleDOWNLOAD
What do Bill Gates, Queen Elizabeth II and Brad Pitt have in common?
Beyond being worldwide celebrities, each in their own way, these three people are passionate collectors. The American business magnate drives a 1999 Porsche 911 convertible, while the movie star has gathered an impressive contemporary art collection, and the Queen owns rare stamps.
Celebrities are not alone. Today, collectibles represent sizeable assets for many High Net Worth Individuals (HNWIs). Whether it is 18th century art, cases of Mouton Rothschild, Aston Martin cars or Swiss watches, investors are adding collectible assets to their portfolio in order to own things they love and — this is a growing trend — holding them for diversification purposes. Over time, many collectibles have earned higher returns than traditional investments such as stocks.
In line with this trend, recent years have seen the emergence of investment vehicles dedicated to collectibles. The current economic crisis has led many investors to seek investments outside of traditional financial vehicles.
This article is divided into two sections: first, a definition of collectible assets and an attempt to understand why they are increasingly recognised as real asset classes; and second, a focus on art investment funds, chosen because they have a longer track record than other collectibles funds — such as wine, violin or luxury car funds.
In 1959, before he was elected as President of the United States, John F. Kennedy gave a now famous definition of a crisis, outlining the fact that difficult times also open doors to alternative opportunities: “When written in Chinese the word crisis is composed of two characters. One represents danger, and the other represents opportunity”.
The current economic crisis is no different. With equity returns being eroded by market volatility and bond yields at record lows, a trend toward investors putting money into collectible assets has been observed. While the term 'collectibles' covers a very diverse range of assets, they all possess similar DNA. They are tangible, meaning that they have a physical presence. They also have longevity, are transportable and can be stored relatively easily. But what really differentiates them from other items such as luxury goods or precious metals, is that they are scarce and non-fungible. Their rarity makes prices wholly demand-determined and transactions in such assets very infrequent compared to the daily trading of traditional securities.
Owing to these unique attributes, collectibles provide a hedge against inflation and currency devaluation, and have a low correlation with other financial assets, which makes them a safe haven in the current economic turmoil. For these reasons, High Net Worth Individuals (HNWIs) and Ultra-High Net Worth Individuals (Ultra HNWIs), are increasingly investing in collectibles. According to the CapGemini and Merrill Lynch World Wealth Report 2011, the 10.9 million HNWIs around the globe allocate a significant part of their wealth to 'passion investments', including luxury collectibles (luxury cars, boats, jets), art, jewellery, gems and watches, sports investments and other collectibles (coins, antiques and wines).
The fascination people hold for luxury collectibles — accounting for 29% of HNWIs’ total passion investments — was clearly demonstrated at the aeronautics sale held by the Artcurial auction house in October 2010, during which a 1971 Mirage V expected to go for between €30,000 and €35,000 was sold for €102,153. In second place is art, accounting for 22% of passion investments, driven by an upturn in the art market, which rose 52% from its lowest point in 2009 to reach a total of US$60 billion in 20103. Other collectibles are taking their place as real investment classes. The Liv-ex Fine Wine 500 Index, which tracks wine trades between merchants on the Live-ex exchange in London was up 4.52% in the year to 31 December 20114. Record prices for diamonds were also reached at international auctions in 2011, where a huge diamond known as the 'Sun-Drop Diamond' sold for US$12.36 million, a world record for a yellow diamond. Demand for fine and rare watches is also evident, with every watch sale hosted at Christie’s salerooms in Dubai, Hong Kong, Geneva and New York achieving sell-through rates above 90% by value in 2010.
But who are these HNWIs investing in collectibles?
The typical art collector would be between 45 and 65 years old, well-educated, successful (probably working in the financial, medical or law sector), well-travelled, and has probably been collecting for over 30 years. Chinese investors are generally younger: 73% are under 45, and 45% are 18-34 years old. With regard to art, it is noteworthy that some of those collectors have invested astonishing amounts in their collections. Together, the top 14 art collectors around the world hold collections worth a total of US$75,200 billion. As an example, François Pinault, the renowned French businessman, owns an art collection worth US$1.4 billion, representing 12% of his total net worth. A new trend is that bankers, hedge funders and, financiers and more generally, Wall Street titans are also becoming collectors. Pierre LaGrange, J. Tomilson Hill, Andrew Saul, Robert Menschel and Raymond Learsy have been ranked as the top five Wall Street collectors by 'Business Insider'.
The last decade has also seen the rise of a new type of collector. China is emerging as a major market for collectible products. This growth is driven by the increase in the number of Chinese millionaires. Statistics from the World Wealth Report show that in 2011, the Asia-Pacific HNWI population expanded by 9.7% to 3.3 million, thus becoming the second-largest in the world behind North America (3.4 million HNWIs), and ahead of Europe for the first time (3.1 million HNWIs). Many of these HNWIs have a passion for collectible goods. As a consequence, the forecast for 2014 is for Chinese wine consumption to grow by a further 19.6%. At this point, China will be the sixth largest wine-consuming country in the world. Similarly, the Federation of the Swiss Watch Industry (FH) recently reported that Asia absorbed 52.6% of the value of Swiss watch exports in 2010. It also registered the highest growth, with a rate of increase of 34.6% compared to 2009, the leading market in absolute terms being Hong Kong (+46.9%).
Individual preferences play a large part in HNWIs’ decisions to commit to investment of collectibles, especially given emotive variables such as aesthetic value and lifestyle appeal. But purchases of items like these are no longer just about indulging an expensive hobby. HNWIs are increasingly using these items to preserve and appreciate their capital over time, diversify their portfolio exposure or even capture short-term speculative gains. Fine wine, for example, yielded a return of 14.97% for the period September 1991-September 2011.
Following the rise of collectors seeing collectibles as real investment classes, and not just beautiful objects, dedicated investment vehicles have emerged. In the second section of this paper, we will examine the art fund industry and see how it has evolved to answer the demand of more and more HNWIs.
There are different ways to invest money in the art market: non-profit funds, collectors clubs and charities have existed for decades or even centuries. But today, art funds, defined as “privately offered investment funds dedicated to the generation of returns through the purchase and sale of works of art”, offer investors a new opportunity to purchase high-end artworks and at the same time make a return.
The history of art investment funds began in 1904 with André Level, a French financier, who persuaded twelve investors to contribute to a new investment fund called La Peau de l’Ours (Skin of the Bear). The fund acquired more than 100 artworks from famous artists such as Picasso, Matisse and Van Gogh, before selling them at auction in 1914, quadrupling the initial investment. After this, almost nothing happened in the art fund industry until the 1970s, and the entry of institutional investment funds, with the most notable example being the British Rail using 2.5% of its total pension fund to acquire some 2,500 artworks. The whole collection of the British Rail Pension Fund was sold between 1987 and 1999, offering investors an overall return of 11.3% (compounded) between 1974 and 199920. Some of the paintings far exceeded expectations, with, for example, a Renoir pastel portrait of Cezanne purchased for US$230,000 being sold for US$2.4 million.
It was not until 30 years later that the art fund industry boom really began to take hold, with a number of funds appearing in the late 1990s and early 2000s. These new ventures started investing money in hard assets such as artworks as a diversification strategy, using a new type of organisation: the dedicated fund structure for artworks. The emergence of art funds in this period was underpinned by increased access to information about the art market, with the establishment of art price service providers and market analysts, and a range of fine art price indexes such as Artnet, ArtPrice and Art Market Research. According to the Deloitte/ArtTactic 2011 Art & Finance report, the art fund market then went through three cycles from 2000 to date. In the initial phase, between 2000 and 2005, many funds were created, including the Fine Art Fund Group, launched in 2001 by Christie’s former finance director, Philip Hoffman. As at 30 June 2011, the fund had assets of approximately US$100 million under management and a track record Internal Rate of Return (IRR) of 24.5% per annum. But aside from this successful fund, almost all art funds launched in this period did not see the light of day. A second cycle, beginning in 2005 and during which a number of art funds emerged in India and South Korea, ended in 2008, when the global financial crisis hit the market.
In 2009, we entered the third cycle of the art fund industry. This involves survivors of the previous two cycles and newly-established funds such as Artemundi, Dionysos Art Fund and the Brazilian Golden Art Fund, which are administrated by professional fund managers with experience of both the art and investment sectors. Apart from the typical tasks that accompany fund administration, they are in charge of identifying and buying artworks, supervising all the logistics related to transport, storage and insurance, liaising with cultural institutions if the fund collection is to be showcased, and selling the artworks at the closing of the fund. The global investment fund market was worth an estimated US$960 million in 2011. It has also gone global, with 44 art funds and art investment trusts in operation in countries such as Luxembourg, the United States, Singapore and Switzerland. Many more are waiting in the wings: at least eight new art funds are planning to launch in 2011-2012.
It is interesting to note that, among these 44 art funds, 21 are Chinese. In fact, in the last five years, Asia, and more specifically China, has become the leading player in the art fund industry. China’s art fund and art investment trust market reached just over US$320 million in 2011, and US$300 million are in the process of being raised in the second half of 2011 and the first half of 2012. These art funds coincide with the birth of a new HNWI generation in this part of the world, willing to demonstrate they are sophisticated and in the same league as some of the world’s best collectors. However, Chinese investors differ in their preference for Chinese artists. Chinese art funds are therefore focusing on native artists, such as Fanzhi Zeng, Xiaogang Zhang, Yifei Chen, Yidong Wang or Chunya Zhou27. Chinese art funds are also driven by the willingness of banks to participate in the art fund industry. In 2007, China Minsheng Bank, China’s first privately-owned bank, initiated an art investment plan, becoming the first banking institution in China licensed by the China Banking Regulatory Commission to get into the area of art funds. The fund was successful, producing returns up to 25% according to the bank, and leading Minsheng to launch its 'No 2 Product, Works of Art Investment Scheme' at the beginning of 2010, which was fully subscribed in just one week.
Although the art fund industry has survived the crisis and has seen positive development in the last three years, it is still a niche market, and great obstacles need to be overcome before art becomes a mainstream asset class. For now, capital raising remains a challenge to the majority of art funds, especially in a context where these funds have to meet standards like the New Alternative Investment Fund Managers Directive (AIFMD), which requires alternative investment managers to report to financial regulators and meet minimum capital requirements. With the financial crisis, investors have also grown more prudent and now conduct deeper fund evaluations than ever before.
However, with the continued global economic uncertainty combined with low interest rates, we can expect more alternative financial vehicles to come to the market. As the alternative fund industry matures, it is likely that there will be an increasing move towards consolidation taking place among offshore tax jurisdictions such as Jersey, Guernsey, the Cayman Islands, the British Virgin Islands, Ireland, Singapore and Luxembourg.