How to add luxury to your portfolio

Rolex watches, Hermes bags, burgundy wine, a night at the Amman hotel…. none seems particularly desirable in the throes of a pandemic. Yet despite the initial shock when the global economy shut down last March, 'revenge spending' on the finer things has seen the sector thrive as aspirational consumers splash excess savings on luxury items.

According to consultancy Bain & Company’s annual luxury study, which it says covers 80 per cent of the total market led by luxury cars, luxury hospitality and personal luxury goods, the overall market shrank by 20 per cent last year. But figures from luxury goods makers this year tell a very different story. For example, LVMH (FR:MC) – maker of Louis Vuitton handbags and Moët champagne – reported last week that revenue in the second quarter was 14 per cent higher than in the same period in 2019, before the pandemic. Taking a step back, and Bain’s study shows that the luxury goods market has proved a thriving industry with a compound annual growth rate of 6 per cent since 1996.   

There are structural reasons why luxury goods are booming. The strongest force is the rise of the middle classes, driven largely by Asia. According to Statista, in 2020 Asian middle class numbers had grown to 2bn and this is set to increase to 3.5bn by 2030. The enormous stimulus programmes issued in response to the pandemic, on top of loose monetary policy since the global financial crisis, has also led to the rich getting richer and elevated savings rates bode well for the value of luxury items as the economy recovers. As for the increasing focus on sustainability, this should draw people to higher-quality, longer-lasting items too. 

As an investor, there are three main ways to invest in luxury goods: buy the assets directly, buy collective vehicles that give you exposure to the assets or buy the companies that make the assets. Some of these options require a huge amount of due diligence, but they can also be one of the rare types of investments that you can enjoy beyond simply financial gain.

Buying directly

It is notoriously difficult to make money out of buying luxury goods, as most will depreciate in value once they are no longer new. But two assets that could help diversify an investment portfolio provided you know what you are doing are wine and art. 

When buying wine as an investment, you buy and store it with the hope of selling at a higher price later. If you’re buying wine, you need to consider how its vintage affects its saleability and also make a call on what region is likely to remain in fashion. You can use advisory investment services, such as Amphora Portfolio Management, that will make the investment decisions for you.  

Amphora builds portfolios of physical wine for private investors and stores it in their warehouses. Former City stockbroker and Amphora founder David Jackson says owing to storage and dealing costs and the need for sufficient diversification, you should have a minimum of £10,000 if you want to invest. He says investors have to pay £20 per year per case for ownership costs. 

Investing in wine is a risky business. Ben Yearsley, director at Shore Financial Planning, says in his experience it has been very difficult to make money. While the Liv-ex Fine Wine 1000 Index is up 42 per cent over the past five years, price moves can be very hard to predict. For example, when former US president Donald Trump placed a 25 per cent tariff on French wine it caused the Bordeaux market to stall, and there was a crash in the wine market in 2011-12 as China clamped down on corruption, including the gifting of wine to lubricate business deals.

As an asset class, art has similar characteristics: high-risk, illiquid, opaque, unregulated, high transaction costs, at the mercy of erratic public taste and short-lived trends. Artworks do not generate any cash flows that can be discounted, except to the extent that income can be obtained through lending, and they incur expenses in the form of storage, insurance and associated costs.

If you want to invest in art, it’s best to speak to a specialist. Deloitte reported in 2019 that 72 per cent of wealth managers claim to offer art and collectable investment advice as a core service. Alex Davies, founder and chief executive of the Wealth Club, says “it is notoriously difficult to predict what will do well and what won’t. Unless you are very knowledgeable, very wealthy or very well connected to the market, the only advice I could give you is to buy what you like, the investment element should come second.” 

And be wary of getting caught up in the hype of rising art prices: you’ll mainly hear about the winners and art price indices only register items that have been sold (so do not record the times when works fail to meet their reserves). 

Buy the maker

While some jewellery can appreciate in value, most luxury items bought today – from clothing to handbags to sports cars to yachts – will depreciate once bought new. This is why from an investment perspective it might be best to buy the companies that make the goods when demand is rising. 

Several luxury goods makers have proved excellent investments over a long period of time. For example, LVMH’s share price rose by 487 per cent for the decade to 30 July, compared with 73 per cent for the Stoxx Europe 600 Index. And its latest results saw first-half profits almost €1bn (£850m) ahead of the consensus forecast of €4.4bn, as analysts missed consumer appetite for mid and post-lockdown spending. 

Luxury carmaker Ferrari (US:RACE), a long-term holding in Scottish Mortgage Investment Trust (SMT), has also delivered handsome returns to shareholders. Since it floated in October 2015, the stock has risen by 350 per cent. In an interview last year, SMT manager Tom Slater said he liked the Italian car company because it makes some of the best cars in the world and is also one of the world’s most desirable brands. Not all luxury carmakers have shared Ferrari’s success, however. Aston Martin’s (AML) share price is now over 80 per cent lower than its float price in 2018.

Gucci-owner Kering (FR:KER) is a new addition to the Blue Whale Growth Fund (GB00BD6PG563), as manager Stephen Yiu explained on a recent Investors’ Chronicle podcast. He says Kering’s products are very high-quality and Gucci is celebrating 100 years of the brand, which is being supported by a lot of promotion. Burberry (BRBY), which has had weaker performance in recent years, remains a favourite of famed fund manager Nick Train who believes an improved sales mix should help profit margins in the near future. Watches of Switzerland (WOSG) has also delivered very strong returns – up over 200 per cent since it came to market in May 2019.   

Invest in a collective

There aren’t many funds that enable you to invest in luxury real assets, but Amundi S&P Global Luxury UCITS ETF (LUXG) tracks the S&P Global Luxury Index. Its top holdings include LVMH, Tesla (US:TSLA), Kering, Compagnie financiere Richemont SA and Daimler and it has a low expense ratio of 0.25 per cent. As mentioned earlier, a number of fund managers see opportunities in luxury brands, but their funds only offer diluted exposure. 

Davies says that Pembroke VCT (PEMB) would also be worthy of consideration for those seeking an earlier-stage, and tax-efficient, exposure to luxury. The venture capital trust has performed well recently, partly thanks to exposure to a number of luxury consumer brands. It sold its stake in high-end pasta delivery business Pasta Evangelist in January 2021, making a 2.3x return, after just 12 months. Lyma Life, the luxury wellness business that sells supplements and an innovative skincare laser (costing £2,000), is also performing strongly and now accounts for 7 per cent of the VCT's assets. Other luxury investments within the VCT include; Alexa Chung, Bella Freud and Kat Maconie. Davies expects the VCT to open for new investment in September.