For many years, Investors Chronicle has been interested in alternative investments. These often take the shape of wine, art and cars. It’s a well-trodden path, and one that contains few surprises for seasoned investors, but a headline in March this year sparked our interest all over again. A report titled “A Hermes Birkin is a better investment than stocks or gold” made for interesting reading. A study by Baghunter – an online marketplace for buying and selling luxury handbags – revealed that the famous Birkin bag produced by the French leather company had far outperformed both the S&P 500 and the price of gold in the past 35 years.
Comparing the three types of investment, the study concluded that, over the same time period, the stock market had an average nominal return of 11.7 per cent, with a real return average of 8.7 per cent. Gold had an average annual return of 1.9 per cent and a real return average of -1.5 per cent, while the value of Birkin bags rose by 14.2 per cent and never fluctuated downwards. Instead it increased steadily, with the most dramatic surge in value in 2001 when it escalated by 25 per cent.
Even today there are huge waiting lists for this product – an average of six years – as well as its close cousin the Kelly bag, both of which retail for tens of thousands of pounds. The more exotic the material, the more expensive the bag. For example, in 2015, a single pink crocodile-skin version sold for a record $223,000 (£177,173). That seems ludicrous, frivolous and beyond materialistic, but when set in context about accretive value and stability of the investment, maybe it isn’t such a bad idea. After all, it is Christmas.
Handbags at dawn
Where does one trade this kind of commodity? Ebay might have been the traditional destination for cashing in on these kinds of investments. But that’s proved difficult as counterfeit copies flood the market and well-intended buyers are hoodwinked into acquiring fake merchandise. Enter Paris-based website Vestiaire Collective. The site requires sellers to list items for sale much like eBay, and also takes a healthy commission on completed transactions. But there are two crucial differences. First, the site doesn’t charge any listing fees – it only makes money on items that sell – and second, it takes full responsibility for authenticating all sold items. It doesn’t matter if it’s a £100 Gucci scarf or a £100,000 Birkin bag, when the product sells it must first be mailed to the company’s Paris headquarters, where it is verified by a team of experts before being shipped to buyers. This provides a degree of comfort for those spending significant amounts of money that what they will receive is genuine and, crucially, should maintain its value if sold again.
But, like any good stockpicker, it’s crucial to know what you’re buying and to be able to sell at a profit. Like stocks, not everything holds its value. Handbags traditionally do well, but only if they come from top luxury houses such as Dior, Louis Vuitton, Chanel or Hermes. They should also be in mint condition, barely worn and come with all the relevant accessories, such as dust bags, boxes and, if possible, original receipts. Limited editions or discontinued items are popular, with Chanel ‘Boy’ bags – which are released in one-off colours and materials every summer – known to sell for up to twice their price once the originals have sold out. But where special editions do well, so do timeless classics. According to racked.com, a Chanel classic flap bag retailed for $220 (£164) in 1995. More than 20 years later, that same handbag sells for up to $4,900. On average, Chanel bags undergo a 15 per cent price rise every year.
Timing is everything
In short, jewellery is a terrible investment. Diamonds rarely hold their value and ‘trade-in’ prices rarely match what you paid for the piece originally. This is less true of watches. This accessory has always been a good alternative investment for those looking to diversify their wealth, but prices for traditional time pieces are accelerating at an extraordinary pace. This is an interesting phenomenon given the proliferation of smartwatches and technological developments in this category.
Interestingly, between 2004 and 2014, the watch sub-category of the Knight Frank Luxury Investment index rose 68 per cent, which actually made it the worst-performing sub-category barring furniture. But prices are suddenly on the up, which appears to be directly tied to the number of investors clamouring for a piece of the action. There are several, conflicting views on why this is the case, but most agree that there’s been a shift in investment attitudes. Younger investors are less trusting of the stock market (many came of age during the last recession) and many like to ‘look at their money’. Watches are also considered an easier category to appreciate, with a good degree of accessible information making it straightforward for buyers to understand what they’re buying.
Brands such as Rolex and Patek Philippe are considered the most stable investments, while Tag Heuer, Omega and IWC are less secure. And, if it was once owned by a celebrity, you could be on to a winner. In November this year, a Rolex Daytona owned by actor Paul Newman sold for a record $17.8m at auction. Rolex Daytonas were first introduced in 1963 under the ‘Cosmograph’ label, but soon became associated with the famous 24-hour motor race held every year in Daytona, Florida. It thus became known as the world’s first dedicated motoring watch.
What’s interesting about the Paul Newman sale was that there was nothing remarkable about this incarnation of a ref. 6239 Rolex Cosmograph Daytona. It was made of stainless steel, not gold or platinum, and the base calibre was a Valjoux 72 chronograph found in tens of thousands of watches from the same period. Hardly a one-off. But it was in mint condition, and was listed as part of an already high-profile horology auction. It’s said it only took 12 minutes for competing investors to smash the previous year’s highest sale – a Patek Philippe watch that sold for more than $11m.
Now, thanks to this sale, investors are desperate to get their hands on one of these watches from the 1960s. The same model of the Paul Newman Daytona was so unpopular in the 1960s and 1970s that existing examples are rare, and good-condition pieces complete with box and papers even rarer, which goes some way to explain why such items regularly sell for an average £100,000 or higher – even for the most mundane of examples in terms of design and engineering.
Music to our ears
Musical instruments are another category garnering renewed attention from investors. A report from Coutts concluded that this kind of hard asset outpaced both classic cars and fine art in 2016. The report – which analysed the Coutts Index capturing the price return in local currency of 14 ‘objects of desire’ assets – said ‘objects of desire’ assets increased by 1.2 per cent in total through 2016, and by nearly 77 per cent since the beginning of 2005. Rare musical instruments took the top spot last year, rising in value by 16.4 per cent, while classic cars fell by 10.4 per cent and fine art by 6 per cent.
But unlike watches and handbags – the prices of which tend to move more quickly – musical instruments are arguably more illiquid. Pop star merchandise is considered a stable investment, but it’s likely investors will be asked for a pretty penny upfront as the asset is already renowned. Turning it for a higher profit in a short amount of time might prove difficult. Even in the classical realm, a Stradivarius violin, which inspired the film The Red Violin, sold at Christie’s in 1990 for $1.7m, and is now said to be worth $10m. But that equates to a 23-year lock-up period: investors who can put their money away for that length of time can profit, but for shorter-term investors the returns just aren’t there. It’s estimated the average return period for musical instruments is roughly 10 years, with returns of between 3 and 4 per cent expected after inflation.
But, like many alternative assets, the value of antique musical instruments is rising as newer, younger investors look to diversify their holdings in the wake of the financial crash and continued political uncertainty. There’s also been an influx of support from new markets across Asia and Russia, although risks do persist. First, costs associated with these sorts of assets are steep, from insurance and maintenance to transportation and security. Like fine art, these prized possessions are often the target of sophisticated thieves, particularly as it is easy to move them – even across borders. There are also several determinants of value: who made it; quality; provenance; who owned it in the past; freshness in the market; and even something as arbitrary as fashion is considered a huge driver.
One thing’s for sure – the margin for error is just as wide as with stocks, bonds or commodities. Education is key, as is strict evaluation of the item and market conditions.
