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Returns from alternative asset classes

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 [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 [2] 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 [3] 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 [4]. 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 [5]

A few sources are acknowledged for this data:

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 [6] 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 [7] 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 [8] 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 [9] 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 [10].

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 [11], 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 [12] or via an ETF, but most of the other assets are hard to invest in with confidence.

Fine wine funds [13], 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 [14] 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. [ [17]]