Uncertainty fuels demand for real assets
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 Q1 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 around $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.
“The deal set a precedent of haircuts to be sustained by depositors,” said Nicholas Brooks, Head of Research and Strategy at ETF Securities. “This…has reminded investors of continued unresolved large financial system and sovereign debt vulnerabilities. Gold naturally benefits from these concerns.” By end March, Gold ETC (exchange traded commodities) inflows reached a seven week high, totalling $139.4m.
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 10 years ago and 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.
ETF Securities head of Investment Strategy Nicholas 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” which 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 10 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 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.
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.”
The fine wine market is unusual in that the majority of stock in existence is not held for resale but for eventual consumption. TWIF estimate that of a global stock of fine wine of around £6bn, only around £1bn – around 17% of the total – is held by funds or private individuals with a view to resale.
The remainder is held in collections or cellars for eventual consumption (although it may be sold if the price rises significantly). This helps provide stability to the wine market and protection from large speculative flows and rapid price movements.
High-end Collections are another possible route to greater security and strong returns, encompassing anything from rare autographs to celebrity memorabilia, coins or stamps. Sellers describe a market in tangible assets, offering low correlation to stock markets, and supported by strong demand from emerging economies such as China and India.
Bristol, UK-based Paul Fraser Collectibles notes: “The items…are getting rarer by the day as their counterparts are lost, damaged or pass into museum collections.” He cites the sale in New York of renowned PIMCO fund manager Bill Gross’ 1847 and 1851-1856 issue stamps, the first sale from his collection. Presented in 375 lots, it is expected to realise between $1.5m to $2m.
Securitisation of such assets continues apace. The PFC40 autograph index details the 2000-2012 price performance of the most sought-after autographs, both celebrity and historical. The values within the index are for genuine, fully authenticated items, of museum grade quality.
Over the period 2000-2012, the average increase in the value of an autograph in the index was 383.3%, or an average compound increase of 14.03% per annum. The top performing autograph, up 1,310.3% in 12 years, was Beatle George Harrison, while Nelson Mandela’s is the world’s most valuable living signature, rising +391.7%.
Fraser acknowledges all concerns about authenticity, liquidity and valuation of collection-quality items. He cites the example of Napoleon’s engagement ring, which arrived at auction in Paris with an estimated $20,000 estimate. It eventually went for $1.2m.
“The wealthy buyers outbidding each other in the last moments of the auction were not thinking about the ring’s investment potential,” he remarked. “They wanted to own it for the pure enjoyment they would get from it. And when two or more bidders set their minds on owning a piece, prices can escalate quickly.
Classic cars are another asset which increasingly attracts serious investor interest. The World’s Greatest Collector Car Auctions at Scottsdale in generated nearly $109m in gross sales of rare, high-end collectible vehicles, according to the The Classic Car Fund.
A record number of cars were sold, with a 17% increase in sales versus 2012. The total sales figures from Artcurial Motorcars Retromobile Auction 2013 was the highest ever for a collector car auction staged in France, beating Artcurials own records set at the same event last year.