Alternative profits

This magazine’s principal focus is on those baskets that are most widely and easily traded: equities, funds, bonds, cash and property. They are also the most common ways investors can balance and spread risks. But taken together, these asset classes neither capture the entire investment universe out there, nor most individuals’ net wealth.

This is probably true of your own life, as it is for your average ultra-high-net-worth individual (UHNWI) – defined as someone with at least $50m (£40m) of assets to their name. According to a 2017 survey of UHNWIs by real estate consultancy Knight Frank, financial assets, real estate, personal property and business interests only account for 88 per cent of the average portfolio. The remainder may be harder to value, categorise and exchange, but is no less important than the traditional asset pile.

Twelve per cent in treasure might seem like a lot. Indeed, Credit Suisse reckons that the prevalence of so-called “treasure assets” in the portfolios of the ultra-rich is, while part of a focused drive for financial diversification, also a reflection of the pleasure involved in acquiring beautiful or culturally important items or collectables.

Nice for some, you might well conclude. For multi-millionaires, it is an easier exercise to create a mini-portfolio of alternative treasure assets when the cost of a wine or art consultant to guide you is negligible, in relative terms. Generally speaking, the wealthier you are, the lower the opportunity cost of foregone dividends and interest. An investor with a £200,000 pension pot to invest will need their capital to work in different ways to, say, an oligarch.

But investors shouldn’t discount an asset that doesn’t provide a financial yield. A study by finance professors Elroy Dimson and Christophe Spaenjers found that art, stamps and violins appreciated by a healthy 6.4 to 6.9 per cent a year in nominal terms between 1900 and 2012, or 2.4 to 2.8 per cent in real terms. A 2018 paper by Philippe Masset and Jean-Philippe Weisskopf found that post-war classic European cars and cases of Bordeaux outperformed equities, fixed income, real estate and gold in the period between 1998 and 2016. Naturally, for some alternative investments and collectables, 'enjoyment' might be limited.

Another caveat is the high transaction costs involved in many alternative investments, as anyone who has sold at a professional auction house will attest. But an increasingly connected world has also opened up niche and illiquid markets once closed off to the average investor.

The pages that follow identify 10 such ‘alternative’ portfolio ideas for investors to consider, including traditionally-defined treasure assets and four baskets of financial assets – raw commodities ETFs, pre-public equity, cryptocurrencies and P2P lending – that we would not normally cover. AN

1): Art is long, life is short

During 2018, the value of art as an asset class increased by 9 per cent. Over a decade, it grew by 158 per cent. That’s according to Knight Frank’s Luxury Investment Index, drawing on data from Art Market Research. It didn’t hurt that David Hockney’s 'Portrait of an Artist' changed hands last November via Christie’s for a cool $90m – becoming the most expensive work by a living artist to be sold at auction. This sum – and the attention surrounding such record-breaking achievements – might well inspire enthusiasm about art as an alternative portfolio idea.

But art investment can be vulnerable to changing trends and tastes. “I would defy anybody to predict what’s going to happen to any particular work of art in the future,” says private art consultant Christopher Penn. “Broadly speaking, if you look at the history of art, very few artists were making their works in order to be a financial investment,” he says, suggesting that investors should view the pleasure of a hung painting as a dividend in its own right. That said, Mr Penn says it is possible to get a feel for prices in the market, especially when approached with “sensitivity, knowledge and good advice, and you are buying a good artist and a good example of that artist’s work”.

“I think you have to do it through a genuine sensitivity for what it is you’re buying and a genuine love of it,” he adds. “Because if you do that, not only will you get the non-financial benefits, but there’s a very good chance other people in the future will have a similar reaction.”

Online platforms such as Artsy.net and artnet.com offer artwork from highly recognised artists, but would-be investors should be aware of additional costs on top of the price tag. Transaction costs (for both buying and selling) can be very high, particularly at auction. Holding costs can also add up, and art investment lacks the regulation of other asset classes. HC

David Hockney’s ‘Portrait of an Artist’ changed hands for $90m, becoming the most expensive work by a living artist to be sold at auction

2) Tender, aged

An equitable trade in rare and collectable stamps and coins, in common with that of other alternative assets, relies on two interrelated – perhaps interdependent – features of the market: price discovery and liquidity.

Although the markets for both stamps and coins can draw on a well-established collector base worldwide, supported by independent bodies such as The Royal Philatelic Society and the Professional Coin Grading Service, there is debate as to whether quoted prices provide a true reflection of what sellers in either market can realistically achieve. And even if we were to take the various indices covering these alternative assets as gospel, the wide spread between bid and offer prices typically charged by dealers makes a sizeable dent in annual rates of return.

There is no shortage of interest in collectables, but there is an inherent problem linked to trading frequency, particularly regarding stamps or what’s termed ‘postal history’. Price discovery is the central function in any marketplace, but collectors, as opposed to investors, predominate in philatelic markets. One of the criticisms levelled at trading platform Stanley Gibbons (SGI) as its market value was eviscerated, was that its catalogue was set at unrealistically high levels relative to the prices typically available in the market.

There are exceptions, at least at the top tier. Five years ago, a British Guiana one-cent Magenta postage stamp from 1856 – coincidentally the same year as Stanley Gibbons’ incorporation – sold for a record $9.5m (£7.6m) at Sotheby’s, but these one-offs are rare. And a danger exists that the market for mid-tier stamps could falter as hobbyists thin out due to the spread of electronic communications.

Conversely, interest in rare coins has blossomed in recent years, conceivably due to fears of currency debasement in the wake of quantitative easing. However, you would be well advised to look to coins with intrinsic value, as investors who have been shoring up their portfolios through purchases of gold and silver bullion have realised that the value of coins struck in precious metals can increase in value through relative scarcity. In other words: a store of value and a potential source of long-term returns. MR

3) In vino veritas (and profits) 

Over the five years to August 2019, the Liv-ex Fine Wine 100 index – which tracks 100 wines from around the world – rose by 32 per cent. The Liv-ex Bordeaux 500 index climbed by 35 per cent during the same time frame.

That’s not to say that putting one’s money into expensive fermented grape juice will guarantee good returns. Indeed, these indices both dipped by 1 per cent over a shorter one-year period. Like other assets, the price of fine wine can go up and down; not every stock will do well.

But the very existence of Liv-ex – which describes itself as the global marketplace for the wine trade, with more than 440 members worldwide – is indicative of the appeal that fine wine investment can hold. With the right research and knowledge, it could, perhaps, constitute an interesting ‘pairing’ to other portfolios.

Hugo Rose is a Master of Wine, and runs Cellar & Co – an online fine wine dealer. While there’s no accepted definition of fine wine, he says that “essentially, it’s wines that are traded globally and generally wines that have a tendency to increase in value as they mature”. Among the cases for investing in wine, Mr Rose notes that it’s a tangible asset, has low volatility and can be a diversifier. And “the tax treatment for individual collectors in the UK is benign”. Of course, HMRC could change the rules.

“In terms of investment, most people talk about a five or 10-year investment horizon. And one of the reasons for that is the wide bid-offer spread on wine. So, it’s got to return something like 20 per cent before you get your money back,” says Mr Rose. He adds that commercial/professional storage is essential, partly because of tax; wines stored ‘in bond’ haven’t had VAT levied yet. It also gives a kind of warranty about good keeping.

Mr Rose notes that the storage cost per case is typically a flat rate – say £15. On a £100 case of wine, that seems a lot. But the average cost of first-growth Bordeaux is around £5,000 per case. The storage cost thus becomes less important, being smaller as a percentage. And these are the ones with a global profile, known around the world – an indicator of a “global wine asset”.

Mr Rose flags up that the sector has endured scammers and failures in the past. People should choose a trusted supplier, and question whether the advice they’re receiving is impartial. HC

4) The classic car chase

The idea of buying a beautiful classic car, enjoying it on the weekends and then, after a few years, selling it for a healthy mark-up sounds too good to be true. But is it? Investors may be tempted by the idea of making money from owning a Ferrari, but experts say investing in classic cars requires a balance of passion and pragmatism.

The value of classic cars can vary wildly over time based on both wider market trends and the demand for specific makes and models of cars. The Historic Automobile Group International’s index for “exceptional historic automobiles” showed a drop of 2.09 per cent in value for the year to August 2019. However, over the past 25 years returns on average have been strong. The K500 index, which tracks the market for collectors' cars based on historical auction results, showed the market average price has increased from roughly $326,000 (£261,000) in 1994 to just under $1.93m today.

Alex Cheatle, co-founder and chief executive of concierge service group Ten Lifestyle Group (TENG), warned that many so-called investors use the potential for appreciation as a thinly veiled rationale to justify the expense. “A lot of the time people just want that car, so the fact it might appreciate becomes a rational reason for an emotional purchase,” he says.

This is not to say there is not money to be made, but Mr Cheatle warned that anyone looking to invest should bear in mind the potential costs of storage and upkeep when making their decision, as “almost no car appreciates faster than the storage cost of keeping it within an hour of London”.

James Constantinou, founder at Prestige Pawnbrokers, said some level of passion for cars was useful, however, as enthusiasts are more likely to be aware of the subtleties such as matching engine numbers and period-authentic parts, which can have a huge impact on the value. 

“The key is to be passionate about something. People that are into cars… tend to understand the market quite well,” he says. “If you don’t know what you’re looking at, you could have your fingers burned.” TD

5) Multi-baggers

Similar to classic cars, handbags can make an appealing investment for enthusiasts, but the market is relatively immature, and swathes of extremely high-quality counterfeits mean ensuring the provenance of any purchase is critical.

The market for luxury handbags – particularly Hermès Birkin bags – is booming. Luxury auction house Christie's recent handbags and accessories spring auction in Hong Kong reported sales of HK$45.59m (£4.66m), with 57 per cent of lots sold above high estimates and a white Birkin bag made of crocodile, diamonds and white gold sold for $256,000. 

Alex Cheatle said storage of handbags was – as might be expected – far easier than with classic cars, but investors should still be mindful of the risks. “Ideally you [would] store it in a sealed container,” he says. “We’ve had people who’ve had entire dress collections ruined because they didn’t have adequate moth protection.”

Unlike the car market, which has varied sectors divided by period, geography and brand, Mr Cheatle said Hermès dominates handbag investment, making up roughly half of all bags Ten Lifestyle is asked to source.

Mr Constantinou echoes concerns about provenance, as fakes can be very convincing. “Buy off a reputable dealer,” he says. “There are so many fakes, they’re so good you need to have your wits about you.”

Beyond ensuring authenticity, Mr Constantinou said the key to successful handbag investing was buying quality products that were made in limited numbers, such as ones made from exotic skins or in limited edition collections. TD

The market for luxury handbags – particularly Hermès Birkin bags – is booming

6) A scarce story 

Those who have seen the film The Big Short, may recall one of the last lines that flashes on screen just before the credits roll. For Michael Burry, famed for predicting (and profiting from) the 2008 sub-prime mortgage crisis, “the small investing he still does is focused on one commodity: water”. 

That might seem odd when water is seemingly one of our most abundant resources – around 71 per cent of the planet is covered in the stuff. But less than 1 per cent of the earth’s water is actually accessible freshwater. With rapid population growth, climate change, pollution and leakage from ageing infrastructure, that supply is coming under growing pressure to meet increasing demand.

The threat of a global shortage could therefore make water a valuable commodity in the years ahead. While investors may already hold shares in individual utilities such as Pennon (PNN) or Severn Trent (SVT), given that water scarcity is set to be a global phenomenon, you might consider ETFs as a way to gain broader exposure. An example is the iShares Global Water UCITS ETF (DH20) which tracks an index comprised of 50 of the largest global companies engaged in water-related businesses.

With agriculture using 70 per cent of the world’s freshwater, it is also worth looking at one of our other prized resources – food. The combination of globalisation and advances in agricultural technology have served to increase the yields of crops such as corn and wheat, taking a scythe to prices. Indeed, these soft commodities are currently trading only a little above their decade lows. But consider that in 2012, both grains hit record highs after a severe drought hit the US. As climate change progresses, such extreme weather patterns could once again send prices soaring.

So, while we may be seeing oversupply right now, long-term trends would point to a reversal – environmental changes, shrinking farmland and water shortages. At the same time, demand will not only be fuelled by population growth – the UN projects the global population will reach 8.5bn by 2030 – but also rising incomes that will see people consume more animal proteins that require grain feeds. Now could be a good time to go against the grain and make a long-term bet on worsening food security through Allianz Global Agricultural Trends (LU0342692547). NK

7) Beyond public equities 

For many investors, the public markets might already contain a wide enough risk-reward spectrum. But if listed equities aren’t quite satisfying your sense of adventure, you might consider heading off-piste, tapping into the potential of unlisted companies.

The Enterprise Investment Scheme (EIS), and Seed Enterprise Investment Scheme (SEIS) were set up by the government to encourage investment in small, private companies who might otherwise struggle to raise capital from more traditional sources. Whilst these young companies have the potential for fast growth and high future returns, it must be said they are more likely to fail than larger and more established businesses.

Generous tax relief is therefore designed to compensate for the high level of risk involved. If you hold an EIS for a least three years, you can get 30 per cent income tax relief on annual investments of up to £1m. This cap increases to £2m if at least £1m is invested in “knowledge intensive” businesses like those in the life sciences sector. Investing in even earlier stage companies, SEISs involve greater risk and a correspondingly more attractive 50 per cent income tax relief on annual investments of up to £100,000. For both vehicles, selling the shares does not incur capital gains tax on your profit, and any losses can also be offset against tax. If you have held them for at least two years, they are also exempt from inheritance tax.

Whether investing directly in shares in individual, early stage companies or gaining broader exposure through a fund, both EIS and SEISs are generally illiquid investments. With returns only realised when the companies are sold or floated on the stock exchange, they carry a long investment horizon.

For those looking for a starting point, Sheridan Leech, head of client services at investment platform Wealth Club, recommends the Parkwalk Opportunities EIS Fund. Its focus is on companies that commercialise scientific discoveries made at UK universities. “They’ve had a great track record of exits – they sold Vocal IQ to Apple. When you talk about the liquidity of EIS, it’s nice to know you have a manager there that has a demonstrable track record of successfully exiting investments.”

Investors should only consider EIS and SEISs if they have a high appetite for risk, a long-term investment horizon and have tax to offset. As always, it’s best to seek advice before dipping your toes in this more niche and complex investment landscape. NK

8) A peer at peer-to-peer 

The past decade has created several gaps in the world of credit. While banks have retrenched from many areas of lending and the interest on savings products barely beat inflation, the demand for both debt finance and yield has remained constant.

One elegant solution to this conundrum has been the growth in online peer-to-peer (P2P) lending platforms, which match savers to borrowers, cutting out the traditional banking middle-man. As an investment, P2P loans fit somewhere between a long-term individual savings account (Isa) and an income fund, meaning they are unlike many of the other ‘alternative’ stores of value mentioned in this article.

The price for a higher rate than your average saving account is greater risk. Because investors’ cash is loaned to third-parties, their capital doesn’t have the same financial protection that accompanies a savings account or a cash Isa, although some P2P platforms provide their own protection schemes. Others also offer full Financial Services Compensation Scheme protection for cash held – but not loaned through – the platform.

As an alternative investment class, P2P lending is also increasingly diverse. Targeted annual returns range from 4 per cent to as much as 14 per cent, depending on your risk tolerance. Some, such as European platform Mintos, source loans originated by alternative lending companies, while Funding Circle allows investors to focus on lower-risk businesses with lower estimated bad debt rates. Lending categories also vary, and range from personal loans to senior debt facilities secured on real estate. One website, Bridgecrowd, focuses entirely on pooled bridging loans secured against property, and boasts both double-digit annual returns and a 100 per cent success rate in returning capital and all interest owed.

P2P comparison website www.explorep2p.com is a good place to start. AN

9) Be jewelled

Jewellery is often seen as an emotional rather than a financial investment and admittedly it is likely to hold its value better than most consumer purchases over the longer term, but whether these goods will earn investors a good return is less clear cut. 

Jewellery rose 125 per cent in value during the 10 years to 2018, according to Knight Frank’s Luxury Investment Index, outperforming US equities and gold, as well as alternative investments such as coloured diamonds, wine and art. However, last year jewellery declined 5 per cent in value on the prior year, according to the index.

For those who want to invest, buying new items is not advisable, as the wholesalers’ mark-up is typically 100 per cent. Buying jewellery second-hand is a better way to make a return, given it also does not attract VAT, although buyers at auction would still have to pay commission of between 10 and 20 per cent of the sale price. It’s also best to stay away from designer labels, where buyers are typically paying a marketing premium. Instead heritage names such as Bulgari, Cartier or Graff, will typically have a higher resale value, due to brand recognition and provenance. 

What’s more, purchasers should not expect an immediate return. It can take up to 30 years for jewellery to go up in value. That will also depend on the fortunes of the gold and precious gem markets, which an item's value will be correlated to. EP 

10) Crypto-walking

The thought of buying into cryptocurrencies may spark scepticism from investors. The most famous, or perhaps infamous, is Bitcoin, the payments system that operates via a digital network called the blockchain. Part of investors’ concern may stem from Bitcoin’s origins. The first proof of concept for Bitcoin was published in 2009 by an anonymous individual under the name Satoshi Nakamoto, but advocates will argue that the open-source nature of the cryptocurrency and public knowledge of the protocol and software negate any shady motives.

Another concern for investors may be Bitcoin as an unstable store of value. At the time of writing, one bitcoin could be purchased for £8,177, but this price has fluctuated wildly in recent years, reaching highs of more than £14,000 in early 2018. Those who are interested in buying bitcoins may do so for different reasons. Some may want to use bitcoin as a form of digital money, used to pay for goods and services using the online bitcoin wallet. This can be challenging, since the dramatic movements in the value of crypto will require real-time prices. Others may look at it similarly to a traditional investment, where the asset is purchased in the hope of an appreciation in value.

Those who do want to buy Bitcoin can head to various online exchange websites, find a seller via a peer-to-peer directory, or find a physical Bitcoin ATM. Those looking to diversify their crypto holdings can look towards other popular coins such as Ethereum, Ripple and Litecoin. Some companies have also borrowed the crypto idea, using 'initial coin offerings' to raise funds. Crypto investments should be reserved for investors with a high risk appetite and capacity for loss, as this is a highly speculative addition to a portfolio. JF

Crypto investments should be reserved for investors with a high risk appetite and capacity for loss