The return of uncertainty fuels demand for real assets

‘Real’ assets are have become increasingly attractive through the early part of 2013 as investors have gone into a period of uncertainty following strong gains by a number of other asset classes over the previous year.

Real assets have become a new focus for investors, if not fund managers. During the pre-2008 boom years, these opportunities were often dismissed as being too niche (wine), too illiquid (timber), too specialist (fine art or classic cars), or – especially recently – too volatile (gold).

But all have demonstrated remarkable resilience as underperformance of more mainstream asset classes persists. Each offers a distinct form of protection and capital appreciation, although often requiring compromise in terms of liquidity or yield.

Gold struggled in the first quarter as markets became increasingly positive about a global economic recovery, and investors rediscovered their appetite for risk. ABN AMRO Private Banking, in a Q2 outlook, expected the US dollar to continue rising, while gold trended lower to end the year at about $1,400.

But the return of the eurozone crisis following the Cyprus episode, where local and foreign bank depositors were ‘bailed-in’, simply reinforced what many investors had long suspected: that few financial assets are safe from governments desperate to tackle debt burdens.

Nicholas Brooks, head of research and strategy at ETF Securities, says: “The deal set a precedent of haircuts to be sustained by depositors. This has reminded investors of continued unresolved large financial system and sovereign debt vulnerabilities. Gold naturally benefits from these concerns.” By the end of March, Gold ETC (exchange-traded commodities) inflows reached a seven-week high, totalling $139.4m.

Gold bull run

Graham Tuckwell, chairman of ETF Securities, an independent provider of ETCs, believes the gold bull run is far from over, and untapped demand from China and India, and retail investors, will lead to a second decade of growth.

Tuckwell launched the world’s first physical gold exchange-traded product (ETP) in Australia ten years ago. Similar products are now listed on 31 exchanges globally, with assets under management reaching $147bn. In 2012 alone, investors allocated a total of $2.5bn in net new assets into the firm’s physically backed gold products.

Brooks says strategic investors see gold as a long-term hedge against currency debasement, diversification and insurance against worst case economic scenarios.

Wine is another ‘real’ asset that has made its way on to the investment radar. Fine wine rose to be the third most popular ‘Investment of Passion’ for high-net-worth individuals in 2012, rising from fifth place in 2011, according to the 2013 Knight Frank Wealth Report.

Over the ten years to the end of Q3 2012 the Knight Frank Luxury Investment Index (KFLII) grew by 175%, compared with the 36% rise in the UK’s FTSE 100 Index (including dividends).

Classic cars rose by 395% just behind gold, which rose 433%. Fine wine over 10 years rose 166%, although the Liv-ex 100 Index dropped 9% over the 12 months to September 2012, due mainly to the performance of one wine, and the biggest constituent in the index – Chateau Lafite.

“It was the brand of choice for Chinese buyers and they and other buyers drove prices up creating a bubble. Now they have broadened their palates, the market has over-corrected and we see this as a good buying opportunity,” Andrew della Casa, director, The Wine Investment Fund (TWIF) told the Wealth Report.

Fine wine investment

Investment in fine wine in 2012 increased 10% globally and 40% in Asia. After fine art, wine was the most popular and fastest-growing investment, seen as a non-correlated, tangible asset which can generate high-risk adjusted returns.

“We retain our forecast of 14% growth for 2013,” commented della Casa. “Like gold, wine is a physical asset which is immune to inflation and its value cannot be eroded by the actions of governments. It is therefore likely to attract attention when inflation fears rise… There is also the prospect of new sources of demand from markets, such as India, coming through.”

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