Wine, whisky, art and for the more flash amongst us, cars. All potential gifts for the festive season, but how do they measure up as investments. Low interest rates, coupled with the volatility of certain global currencies, have boosted the popularity of investing in physical assets in recent years. For those thinking about ploughing their cash into some alternative investments it can be difficult to know how to go about doing so. The main difficulties are pricing as well as assessing the liquidity of assets. There is also the issue of checking the authenticity of the assets you are buying. It should go without saying - avoid cold callers at all costs. We take a look at some of the options open to those wanting to invest in alternative assets, and how to safeguard your investments and try to achieve the best returns.
Turning old cash into new
Stamp and coin collecting may not be a hobby that sets everyone's pulses racing, but there can be big money to be made in these little postage pieces. The highest price achieved for a stamp at auction was for the British Guiana 1c magenta, which last year sold for a whopping $9.48m (£6.27m) in New York. Like the vast majority of collector's items, the value of a stamp or coin is dependent on its rarity. For instance, there is only one known British Guiana 1c magenta stamp in the world.
Online marketplace eBay as well as traditional auction houses such as Sotheby's and Bonhams all trade in rare stamp and coin collectibles. But the uninitiated need not worry - you don't have to be an expert collector to make money from a stamp or coin portfolio. There are specialist retailers, perhaps the most well known of which is Aim-listed Stanley Gibbons (SGI), who will select rare stamps and coins to build your portfolio depending on the amount you wish to invest. Of course the downside of this is the management charges incurred. For one of its more flexible products, Stanley Gibbons charges 70 per cent on any profit made on investments held for under a year. Clients receive more of the profit the longer they are invested. However, most specialist retailers will offer storage services, valuation and insurance on a portfolio, reducing the risk of theft or damage.
Coin and stamp collectibles are long-dated investments, likely a defensive part of an investor's portfolio. Keith Meddle, head of investments at Stanley Gibbons, says: "Most people will come to us and have their bases covered, they'll be in bonds, they'll be in equities." However, clients will often be "sitting on cash or low-performing bonds", which they want to invest in these types of uncorrelated assets. Coins, stamps and books are relatively illiquid, though. Mr Meddle says for clients of Stanley Gibbons it can take anything from three weeks to six months to make a sale, depending on the rarity of the item. There can also be early exit fees if you need to access your cash quickly before the agreed term of your investment.
The GB250 index, which tracks the performance of the top traded 250 British stamps, showed a compound annual growth rate of 11.8 per cent over the 10 years to 2014.
Grape expectations dwindling?
Just as the thirst for wine in emerging markets such as China caused prices for fine wine to surge to a peak in 2011, so weakness in these markets has resulted in a fall back in prices. The Liv-ex 100 tracks the prices of 100 of the most sought-after fine wines, the majority of which are Bordeaux wines, although wines from Burgundy, the Rhone, Champagne and Italy are also included.
Since 2008 UK investors have incurred major losses from various managed wine investment vehicles. For this reason, in 2013 the Financial Conduct Authority (FCA) banned the promotion of wine funds and other alternative investments the majority of retail investors. Fund managers running unit trusts are not allowed to invest in wine funds. Of course, not every wine investment scheme is badly administered, but we think a DIY approach to wine investment is probably best for the vast majority of retail investors.
Wines produced in the Bordeaux region of France have historically performed best. However, the relative scarcity of the very best wines, coupled with the fact that vineyards and wholesalers have established relationships with long-term industry buyers, means that you will probably struggle to get hold of First (Premier Crus) or Second (Deuxièmes Crus) Growth vintages. There are other regional wines from areas including Bergundy, which have achieved good rates of return in the past year.
A good starting point for investors looking for advice on building a wine investment portfolio is well-established wine and spirits merchant Berry Bros & Rudd. The company offers advice on purchasing and storage, as well as pricing lists. Storage is key when investing in fine wine. Wine should be stored under the investor's name in a reputable bonded warehouse. Berry Bros & Rudd can arrange this for your, while industry bodies such as the Wine Investment Association can also offer advice on this.
Investors should remember to factor in storage and commission costs when calculating returns. However, there are tax advantages to investing in wine. VAT and import duties are not payable while the wine remains in bond. When investors come to sell their wine the proceeds will generally be exempt from capital gains tax. This is because HM Revenue classes wine as a wasting chattel - an asset whose predictable life, from the point of view of the acquirer, does not exceed 50 years.
Keep the whiskey in the jar
For those looking for an alcoholic investment but wary of cooling sentiment towards the fine wine market, whisky could be the answer. UK auction sales of rare whisky grew by a third during the first half of the year. Co-founder of Fintech's Findawealthmanager.com Lee Goggin says the starting point for investing in whisky is understanding its providence. "You need to know the history," he says. The cut of the bottle can be important. Limited edition bottles in particular are a good fine, as prices are likely to rise once products are sold out.
There are a few different ways an individual can invest in whisky. The first standalone whisky auctions started in Glasgow 15 years ago, when interest in investing in the sector began to take off. Since then the market has grown steadily. For example, Bonhams whisky department sells rare and collectible whisky via auction several times a year in Edinburgh, New York and Hong Kong. The focus is on Scottish whisky, although buyers also have the chance to snap up Irish and North American whiskeys. But investors should note auction houses can take up to a quarter of the value of the whiskys in order to sell them.
There are also more ways to invest in whisky online. Recently launched WhiskyInvestDirect gives investors the opportunity to buy and sell Scotch whisky online as it matures in the barrel. Investors must register an account with the online trading platform, then transfer cash in to purchase litres of pure alcohol (LPA) - the industry's standard accounting unit. Investors are given flexibility - there is no minimum investment or length of time they have to hold the whisky. Each trade costs 1.75 per cent*, whether buying or selling. Insurance, storage and maintenance are charged at a total of £0.15 per LPA a year, but with a minimum of £3 a month.
An important risk to note for would-be investors is that these investments are unregulated, meaning investors cannot fall back on the Financial Services Compensation Scheme if the investment goes wrong. As with wine, storage costs can mount, especially for smaller investors. Since whisky does not produce any income or earnings, price fluctuations are based solely on supply and demand.
