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Returns from alternative asset classes

Alternative assets are sexy, but are they really good investments?

People are attracted to so-called alternative assets for various different reasons.

For some, tangible and desirable objects like stamps, paintings, and classic sports cars appeal in a way that shares in a company or government bonds can hardly match.1

Others are scared by the wild swings in share prices, and even in supposedly safe haven assets like gold.

Like those who argue that UK property will always be a good investment over the long-term, they believe a painting by a respected artist or a case of great French wine will hold its value whatever happens to shares.

But are they right?

Well, sort of.

Historical alternative asset class returns

Data on the historical returns from alternative assets is sketchy. Long-term returns tend to be whipped out by those with an alternative asset class to flog, although now and then you’ll find figures cited in academic research.

As I’ll get to below, investing in alternative asset classes also has more hidden costs than a Faustian pact with the tooth fairy.

However we have to start somewhere, and the Knight Frank Luxury Investment Index (KFLII) is as good a place as any.

The upmarket London estate agent tracks the sort of sexy alternative assets that appeal to the global elite that makes up its wealthy clientele. So no alternative investments in 1940s comics or Cabbage Patch Dolls here – it’s all fancy cars, classic watches, great wines, and the odd Ming vase.

Here are the one, five, and ten-year returns on the alternative assets it follows:

1-year (%) 5-year (%) 10-year (%)
Antique furniture -3 -15 -19
Watches 4 33 83
Chinese ceramics 3 43 83
Jewellery 2 51 146
Wine 3 3 182
Art -6 12 183
Coins 9 83 225
Stamps 7 60 255
Classic cars 28 115 430
KFLII 7 40 174
Gold -23 68 273
Prime London property 7 27 135
FTSE 100 12 11 55

Source: Knight Frank

A few sources are acknowledged for this data:

  • Prime London property is the return delivered by Knight Frank’s Prime Central London residential index.
  • Other sources of data include the Historical Auto Car Group, Stanley Gibbons, and Art Market Research.
  • The data for coins and jewellery is provisional from Q4 2012.

Getting back to the returns reported, on the face of it they look absolutely amazing.

Who wouldn’t want to have a luxury car parked in their garage and see its value go up over 400% for good measure?

Who indeed – but before you rush out to buy a Beamer, let’s quickly consider some of the snags.

Luxury assets are a luxury

Firstly, by its nature, this index follows the best stuff. It’s a luxury index, not an index of old tat offloaded at a car boot sale.

And sure, it’s easy to find examples of paintings by Picasso or pieces of furniture by 1930s modernists that have easily beaten inflation as well as every major asset class over many decades.

However these are the stars of the alternative asset world. Getting overly excited about them is a bit like judging the returns from shares solely from the returns made by those who bought into Coca-Cola in the 1950s. Many an antique banger or commemorative stamp has delivered much more mundane returns.

Survivorship bias also looms large. Andy Warhol’s early paintings now command millions, but what about his forgotten fellow pop artists? You can buy prints by some noted British rivals for a few thousand pounds. The divergence between the famous and the also-rans can easily be a hundredfold or more.

Then there’s the terrible liquidity of most alternative assets. You can sell a fund containing thousands of shares in 15 seconds. Try doing that with a Fabergé egg.

But suppose you do bag an Old Master. Where are you going to keep it? Who is going to look after it? How much will it cost to insure?

Knight Frank acknowledges this in the small print:

The index does not take into account any dealing, storage or management costs.

If cars, paintings, and bottles of Château Lafite could be bought cheaply on eBay and kept in the spare room, these returns would be more meaningful. But they can’t.

The historical returns from the FTSE 100 are also given without dealing and management costs, but for a cheap index tracker they’re a pittance by comparison.

Rich pickings

I’d also note the past decade has likely been a golden one for alternative assets.

We saw two big stock market crashes, which drove people to look for alternatives. Interest rates fell remorselessly, which reduced the effective cost of carrying income-less assets like gold. The financial crisis that made people lose their faith in all non-tangible assets was the icing on the cake.

There is however one tailwind that I think is likely to continue to blow positively for alternative assets (besides the hype factor), and that’s globalisation and the rise of the super-rich.

What good is it being a hedge fund manager, an oil sheik, or a Mexican telecoms baron if you can’t show off your wealth to the rest of the 0.1%?

Scarcity value will likely propel valuations for the very best paintings, properties, and collectibles for this reason, though I’m sure progress will be choppy.

Very rich people also tend to have the sort of private banking facilities and similar that reduces the incremental cost of storing just another classic watch.

Little alternative for the little guy

All these problems mean that most of us should probably avoid focusing on alternative assets, except when we want to own them for their own sake.

I was always told by rich people to buy antique furniture, for example, but its weak performance over the past ten years shows how fashions can change. However the price slide wouldn’t stop me buying a truly lovely Art Deco wardrobe that I liked. If it held its value, all the better.

Gold can be bought and stored fairly cheaply with the likes of Bullion Vault or via an ETF, but most of the other assets are hard to invest in with confidence.

Fine wine funds, for example, have had a lot of bad press after more than 50 reportedly went bust in just five years!

As a more active investor, if I was very optimistic about alternative asset classes I’d probably look into listed companies like Stanley Gibbons (stamps) and Noble Investments (coins). But these are small cap shares that come with their own lengthy risk list, and most people should steer well clear.

In fact, I can’t help feeling that interest in alternative assets is a sign that most people need to understand the traditional asset classes better. And be more wary of financial services geeks bearing antique gifts…

  1. I know, who’d prefer to own an Aston Martin over an exciting stocks and shares ISA? Tsk! Some people. []
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{ 22 comments… add one and remember nothing here is personal advice }
  • 1 Dave September 12, 2013, 11:51 am

    I’m surprised by the return on stamps given that they have become virtually obsolete over the period. All the other items, although conveying an idea of luxury, retain some use for the buyer. Stamps are fast becoming a historical curiosity, rather like horse brasses.

  • 2 Neil A September 12, 2013, 1:52 pm

    Do the FTSE 100 returns include dividends?

  • 3 dearieme September 12, 2013, 2:49 pm

    When flats on the Ile St louis have fallen into my price range, let me know.

  • 4 Neverland September 12, 2013, 4:20 pm

    I’m watching this blog with interest as this guy appears to have bet the farm on a few quite specialised assets:

    doerupperdiary.blogspot.com

    I also learned to spell schadenfreude

  • 5 ermine September 12, 2013, 6:08 pm

    Did you perhaps miss the canonical alternative asset class, land?

  • 6 BeatTheSeasons September 12, 2013, 6:49 pm

    Why is prime residential property categorised an alternative asset class?

  • 7 dearieme September 13, 2013, 12:05 am

    Buy timber. Centuries of experience show that no bugger understands its economics.

  • 8 The Edge of Cultivation September 13, 2013, 10:06 am

    Someone at Stanley Gibbons Group has obviously been reading the blog and fancies diversifying the stamps business into coins!

    The Group has put an offer together for Noble Investments:

    http://www.standard.co.uk/business/business-news/stanley-gibbons-eyeing-a-bid-for-coins-firm-noble-at-42m-8811700.html

  • 9 The Investor September 13, 2013, 12:15 pm

    @ermine — I don’t think land is an alternate asset, I think it’s a subset of property.

  • 10 The Investor September 13, 2013, 12:15 pm

    @BTS — It’s not, it’s a comparator.

  • 11 Nathan September 13, 2013, 1:46 pm

    @Neverland – Oh my word that’s got to be Ozzy, writing under a nom de plume. Policy writ large.

  • 12 Neverland September 13, 2013, 2:26 pm

    @Nathan

    It needs someone with a skill with words that I lack like Ermine to do a little critique of doerupperdiary.blogspot.com

    Maybe a counterpoint to his piece on families on benefit….

  • 13 The Investor September 14, 2013, 2:29 am

    @edge — Bit of a shame if it goes through. One less alternative play on alternatives…

  • 14 Moneyobserver September 16, 2013, 10:06 am

    @Dave – I can confirm that stamps bring high returns. I have been collecting stamps from age 13 – 20. Now I have 6 albums with different themes. Not long ago I have double checked those stamps which I had bought 6 years ago, and their price has doubled. So yes, it’s a valuable investment =)

  • 15 Tedious Pseudonym September 30, 2013, 12:33 pm

    There is definitely something to be said for the cars thing.

    However.

    The ones that are rising dramatically are ones that are mighty expensive in the first place. I got offered a McLaren F1 GTR about 10 years ago for various reasons, and I knew it would be a classic. This didn’t have a particularly good race pedigree, but it was rare, fabulous, and fast. And if I’d bought it, I’d have made something like 1200% capital return over 10 years. Not bad.

    But – it was about £400k + VAT at the time IIRC. And to insure it, run it (ouch) and so on over the period would have cost tens and tens of thousands of pounds, all the while providing no income.

    So, in short, unless you can afford to plonk that money slightly speculatively for a long time into something (which obviously I couldn’t/can’t now!) then it’s not really an investment many can make. Which is a shame, as irrespective of the value, I’d love to have one, and every time I do OK, the values just go up even faster. Rats.

  • 16 The Investor September 30, 2013, 12:57 pm

    @TP — Yes, it’s the best in breed stuff that drives these alternative indices. If you’ve got the cash and would love to own anyway, then at least your getting rewarded in multiple ways long term.

    I wonder if there’s any threat to collectibility of cars if the world eventually goes fully electric / Tesla style. Obviously one could argue not — even more collectible — but if petrol stations gradually disappeared etc, it would make for a different kind of investment profile. I know many classic car collectors don’t drive them, but suspect the option to drive them is part of the appeal / price?

  • 17 Tedious Pseudonym September 30, 2013, 4:46 pm

    I think it highly unlikely to be an issue certainly with high end race cars.

    I was at Goodwood in the summer when they sold a 50’s F1 car for £17.6m – plus 10% “buyer’s premium” + vat (time to invest in auctioneers me thinks – that’s some profit!).

    It seems unlikely that that car will be driven more than once a year, doubtfully by the owner (almost certainly by a pro driver) and with a support team. I don’t think petrol is in danger of running out so significantly that you won’t be able to fuel it at all, even if it’s slightly harder than driving down to the petrol station.

    It’s likely to more affect things like Aston DB5s, which are now fetching nearly £500k (or even the plentiful E type Jag – fetching over £100k these days).

    It does also smack somewhat of a bubble – I know there are more and more mega rich, but how many of them – especially Asians – will resonate with say a D type Jag enough to part with millions for one in the future…?

  • 18 The Investor September 30, 2013, 6:08 pm

    Yes, to be clear I don’t think petrol will run out. I’m an anti-peak oiler! 😉 But I wonder how owning classic cars would look in such a world. Presumably someone out there collects classic old horse drawn buggies, but at what premium?

    Cheers for your thoughts here, cars are well outside my wheelhouse!

  • 19 Richard Cranium January 19, 2014, 7:23 pm

    There’s another alternative asset class, as far as I can see it’s overlooked by all but a relatively small community of traders. That is short/single word internet domain names in the premium top level categories (.com or in uk, .co.uk).
    There are counter arguements but too little space here, suffice it to say all those I have heard are without merit.
    I did a quick analysis at the time the price of gold was near its peak at that time the second market in domain names had outpaced the gold price increase. Unlike most other alternative assets the cost of holding a name is chicken feed, no special storage or insurance costs. It’s digital so transferring ownership can be nearly instant. Buying and selling need not involve a broker, there are some out there but some are looking for as much as 20% commission. That sounds too much for a digital asset and makes me think there’s a business opportunity for a better model. An inexpensive trading system would improve the liquidity of the assets.

  • 20 stuart hudson September 27, 2015, 6:43 am

    Dave rare stamps especially the 1840 penny black and rare two-penny blue will always go up in value and command a premium because only a limited number of these exist as to what was printed and they are no longer printing them and the digital age has made letter writing a thing of the past and as the markets continue to decline alternative assets like rare stamps will be in more demand pushing the prices of these items even higher!

  • 21 stuart hudson January 6, 2016, 7:38 am

    i agree with you moneyobserver i have been collecting rare australian state stamps since i was approximateley 8 years old mostly the mint-unhinged higher values at auction, and have most of them including the higher value issues and just over the last 5 years or so some of the early issues particulary the early 1850 victoria issues have gone up over 60% in value so according to this knight frank survey it is just about spot on according to my research so cheers moneyobserver and happy collecting regards stewy Dalby City, Queeensland:)

  • 22 stuart hudson December 28, 2016, 7:55 am

    i have been told by my late great grandfather that it is a wise man who does not have all of his eggs in one basket and who lives by the cut of his cloth!!!! i own properties, and a proportion of growth australian shares as welll as some money in cash, term deposits in case of a downturn as well as approximateley 10% of my aseets in gold, rare stamps and coins as these are uncorrelated to the stockmarket in case of a market crash!!!!!i hope this is some good advice cheers regards stewy Dalby City, Queensland 4405:)

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