What is worth for an investor? Buying shares of Ferrari, purchasing a Ferrari for the pleasure of driving it or investing in a portfolio of Ferraris and other cars ? The portfolio managers of car investment funds would plaid for the second option, being car enthusiasts, but would obviously opt for the third one.
Geneva-based Hugo Reyneri is a portfolio manager and the co-founder of car investment firm Honoris Cars launched last year. “An old dream” he concreted as he has been involved in the automotive sector since young, having spent years on race tracks, participating to historic rallies.
“Also I have bought and sold a number of cars while being a portfolio manager in Lombard Odier and then in HSBC Private Bank. I was already advising some tips to private clients for car acquisitions and sales,” Reyneri says to InvestmentEurope.
According to him, the automotive sector will split in two categories : “on the one hand, there will be cars for daily use such as electric cars or Google cars, and on the other hand, there will be classic cars bought by passionate individuals.
“The less people will drive because of the robotisation of cars, the more classic cars will be seen as art pieces. It is a way to diversify portfolios. It needs a reel selection among cars. I am convinced that over the 15 to 20 coming years, cars will be part of a classic asset allocation as it may provide investors with returns that are decorrelated from traditional investments.”
It is also in Switzerland but in the German-speaking region of the country that the Classic Car Fund, a car hedge fund, was launched in 2012 by Filippo Pignatti Morano (pictured) who worked 20 years in private banking before deciding to mix his passion for classics with finance.
“The classic cars have been the most profitable asset in the last 10 years and this will be the case in the next 10 years, with a lower volatility than the FTSE,” foresees Pignatti Morano, speaking to InvestmentEurope.
“Just think about the BRIC nations, the baby boomers, every year there are more and more billionaires and China will soon open its doors to the import of classic cars – don’t forget that classic cars are limited,” he adds.
About electric cars, he raises the question of whether they will be considered as classic cars in 30 years from now or not.
Who are the car funds’ investors?
For Honoris Cars’ co-founder Reyneri, cars remain an illiquid asset class that suits more high net worth individuals than institutional clients. But you can achieve big gains.
Though he underlines a few individuals have bought cars at CHF30,000 to resell them CHF150,000 only few years after purchase.
“Some individuals aged 35 to 40 years old have started to form car collections with cars of the 90s/2000s with an initial budget of CHF30,000. There is a dichotomy between vehicles. Ferraris have seen a 500% rise in value between January 2007 and May 2017 (Hagerty data) while Chevrolet models have seen their value up 20% on the same period,” Reyneri develops.
Pignatti Morano says investors in the Classic Car Fund are family office, banks, asset managers and individuals.
“The biggest investor at the moment is an asset manager, followed by a bank. Investors look at The Classic Car Fund as a diversification not correlated to the finance market for their portfolio. The fund has also big classic car collectors that subscribe the fund with some of their cars with the aim of asset protection. The fund gives this collectors the possibility to continue driving and storing this cars in their garage if they wish so,” he points out.
Pignatti Morano’s garage currently tallies 12 classic cars, including a Lamborghini Espada, a Ferrari Daytona, a Ferrari 308 GTB fiberglass (only 712 vehicles produced), a Ferrari Testarossa (bought for CHF80,000 and now traded for more than CHF120,000). All cars have been purchased with a team of consultants.
Both portfolio managers emphasise on diversification as a key factor in their approach to car investments.
“Diversification in cars lowers volatility of a car portfolio but could also yield less than a concentrated portfolio. But if you are to focus on two or three models to generate high returns, you have to make the right bets,” argues Reyneri.
“Diversification is the basis for all asset managers as this is the only way to reduce the risk associated with an unsuccessful investment. By putting the financial resources to multiply them into collector cars, it is hard for us alone to reach an adequate level of diversity of our collection to make a profit. We approach each car emotionally, often by focusing on models of a particular brand during our free time,” highlights Pignatti Morano.
Which data car portfolio managers look at?
Honoris Cars’ portfolio manager issues a warning against prices listed in specialised automotive magazines. According to him, they do not always reflect transaction prices.
“My two main ways of finding right cars at the right value are my network that I have been building for years and people involved in car auctions because assessing a model is really uneasy by ourselves,” he says.
As for the founder of the Classic Car Fund, classic cars’ sales prices reported by independent providers are screened in order to assess overall market conditions for classic cars and recognise the emergence of certain market trends.
The rarity of a car obviously tops the investment criteria list of both managers to appreciate the value of a vehicle. Then the desirability of the car, its original value, its provenance, the pleasure of driving it follow.
The two Swiss car investment managers conduct proper due diligence on each car prior to any purchase.
“You have to know what to buy, this is very difficult as at the moment most of the classic cars are at their highest price. Therefore you have to buy under the market price and know how to add value to the car you will buy. The global classic car market is based around restorers, vendors and private collectors, dealers, auction houses and associated events.
“Grassroots support of the market comes from magazines and clubs where steady demand is produced. This moves through specialised dealers and collectors and onto auction houses and more recently to classic car investment funds. The market is relatively well established and has attained a certain maturity,” Pignatti Morano explains.
Reyneri observes that the downside of investing in cars remains the running costs. “To sum up, these costs that include compliance and maintenance form 10% of a car’s value,” he specifies.
Returns and regulation
Returns targeted through car investments by Pignatti Morano fall in the 8-12% range but he says this will be achieved in the next few years once the Classic Car Fund will have more assets under management. His fund has delivered annual returns of more than 5% since 2012.
“The fund administration costs remain the same, but car maintenance costs will be lower as the garage and oil change costs for a $10m car and a $100,000 car are exactly the same. In 2015, the fund generated a net return of 9.5%, a 10.23% alpha over the S&P 500 (minus 0.73%).”
Regarding an eventual strengthening of the regulation on car investments, the founder of the Classic Car Fund does not express concerns at the moment but he keeps himself aware of regulations to be flexible. “Don’t forget that cars are mobile, compared to real estates that are immobile,” he recalls.
Reyneri believes that the car investment market will be further more controlled, in particular for money laundering checks.
“Some high valued cars are still paid in cash sometimes. But overall, regulation will still be less strict as you cannot speculate on the car market by buying large quantities of a same model.”