July 2, 2007
From diamonds to violins, the world's elite are pushing up the prices of exotic assets. Discover how you can get a share
INVESTORS are being enticed into exotic assets such as diamonds, oriental art and even violins to cash in on the biggest boom in alternative investments since the late 1980s.
An unprecedented surge in global wealth has pushed prices for everything from fine wine to luxury goods to record levels.
Wealth held by the world’s richest people — those with more than $1m (£498,000) in liquid assets — soared to £18,000 billion last year, an 11% rise on 2005 and the fastest growth for seven years thanks to the booming global economy, according to last week’s world wealth report from Merrill Lynch.
About £335 billion of their money is in collectables including art, jewellery, wine, antiques and sports investments such as race horses and yachts.
The boom has been driven by newly wealthy investors from Asia, Russia and the Middle East who tend to prefer alternative assets over traditional investments such as equities and bonds.
Last year the number of people with more than $1m to invest rose by more than 20% in Singapore and India and 16% in Russia, compared with 8% in Britain.
Russian money in particular is driving an alternative-asset boom in London. The record-breaking sales of Impressionist art in the capital this month, in which a painting of water lillies by Claude Monet fetched £18.5m, were driven by buyers from the former Soviet Union.
The market for classic cars is also at an all-time high as the super-rich splash out on what Merrill Lynch calls “investments of passion”. Bonhams raised a record £6.1m at an auction at the Goodwood Festival of Speed earlier this month — the highest amount in the event’s 15-year history. The sale saw no fewer than 14 cars surpass £100,000, with the top spot taken by a 1932 Alfa Romeo 8C-2300 Spider, which fetched £1.4m.
In Asia modern luxury cars are proving more of a draw. China is now the third-largest market for Rolls-Royce cars, after America and Britain.
The luxury carmaker is part of a charmed circle of global brands whose profits have received a boost over the past three or four years from the spending power of the super-rich, and some analysts say they are among the best ways to profit from the burgeoning moneyed classes in Asia.
Merrill Lynch has a Lifestyle index which tracks global luxury brands such as Bulgari and Christian Dior. Their shares are up 28% and 40% over the past year, compared with a 16% return from the FTSE 100.
While some analysts fear we may be close to the top of the market, others argue that the extraordinary growth potential in emerging markets, particularly Russia, China and India, means the boom can continue for some time.
Shaun Port at BDO Stoy Hayward Investment Management said: “The growing buying power of the wealthy elite, especially in the emerging markets, is driving demand for alternative investments and luxury brands.
“The last time we saw this, in the 1980s, the bubble burst dramatically. However, this time the growth in wealth has been more widespread. While the global economy remains strong it can go on.”
Investors who want to cash in on the spending habits of the super-rich now have several schemes at their disposal.
Chic, an investment fund launched this month, is dedicated to luxury brands such as Porsche, Louis Vuitton and Gucci.
Analysts said the trick to making money from the ultra-wealthy was to buy their next big thing, which is why investment firm Diapason Commodities Management is launching a diamond fund on July 10.
The Diamond Circle Capital fund will be the first scheme dedicated to the precious stones to list in London.
Diapason was founded by Jim Rogers, one of the first people to predict a bull market in everything from gold to corn on the back of growing demand from China and India. He and his colleagues believe it is now the turn of diamonds. Stephen Wrobel at Diapason said: “Diamonds have been lagging other commodities, but the supply and demand situation is now ready to drive prices higher.”
Over recent years almost all commodities except diamonds have skyrocketed: the Goldman Sachs Industrial Metals index soared by 180% in the three years to the end of 2006; precious metals were up 56%. Diamonds, meanwhile, are up only 34% over the same period, according to Tacy, a consultant.
However, demand in emerging economies is surging and, at the same time, supply is shrinking because many of the world’s diamond mines are past their most productive years. Although producers such as De Beers have increased spending on exploration, so far they have little to show for it.
Another offbeat investment targeting the spending habits of wealthy connoisseurs is the Fine Violins Fund set up by instrument dealer Florian Leonhard.
Stringed instruments have surprisingly beaten shares over the long term — in the 10 years to the end of 2006, prices jumped 100% compared with a 63% gain in the FTSE 100, according to Leonhard.
As wealthy collectors have moved into the market, the prices of stringed instruments have shot up. A Stradivarius violin fetched a record $3.5m at auction in 2006.
Getting independent advice about such unusual investments can be difficult because most advisers do not cover them. Consequently, advisers urge caution before piling in to any of these schemes.
Mick Gilligan at Killik, a stockbroker, said: “These are niche investments in markets that are not well understood and where it is very difficult to establish valuations. During a recession investments focused on luxury spending are likely to suffer because they are the first things people cut back on.”
However, people have been calling the top of the market for over a year, and experts say there are still bargains if you know where to look.
How to profit from the super rich
EVEN if you aren’t about to join the growing ranks of the super wealthy, you can put your money to work like they do. But some of their favoured investments are risky, so you should already have a balanced portfolio and be prepared for volatility if you adopt the same approach.
How do I invest in art?
Several art funds will invest on your behalf if you are not confident about making your own choices, but entry is not cheap.
Soci�t� G�n�rale Asset Management has just launched an art scheme with a goal of making between 15% and 20% a year from post-impressionist and contemporary art. Listed in Luxembourg, it has a minimum investment of £84,000.
An alternative with a broader scope is the Fine Art Fund, run by Fine Art Management Services (Fams), created by Philip Hoffman, a former deputy managing director of Christie’s. It covers old masters to contemporary art and asks for a minimum of £125,000.
Hoffman has also just created an Indian fine art fund to take advantage of the popularity of art from the sub-continent. This follows the launch of a similar Chinese fine art fund last December. Both schemes have a minimum investment of about £50,000.
With prices already up an average of 42% over the past year, experts said you should look for pockets of value, or for what Russian and Chinese buyers will move on to next.
Corfield Morris, an art consultant, tips artists from the West Coast of America such as Samantha Fields. To view their work, visit zerodegreesart.com. There is also a buzz round Chinese and Indian contemporary art, although it is getting harder to find bargains.
Karl Schweizer at UBS, a private bank, thinks Zhang Xiaogang, Liu Xiaodong and Zao Wou-ki are interesting. Visit chinesecontemporary.com. Hot names from India include Atul and Anju Dodiya and Subodh Gupta. You can buy works online at saffronart.com.
Investors are also advised to look beyond paintings to find bargains. Corfield Morris recommends 18th and 19th century English furniture as potentially fertile ground.
Is now a good time to buy wine?
Vintage wine has boomed along with other alternative assets, with prices up 64% over the past year.
Last year’s fine 2006 Bordeaux, which recently went on sale for the first time, is expected to cost £3,000 a case on average, which would make it the second most expensive in history.
Justin Gibbs at Liv-Ex thinks wines from previous exceptional vintages such as 1990, 1995 and 1996 offer better value.
The Fine Wine Fund is the only wine investment vehicle directly regulated by the Financial Services Authority. It has a £50,000 minimum investment. Charges are 2% a year and the managers keep 15% of the profit as a performance fee, while investors can only get out every quarter.
Can I invest in a fund that focuses on luxury brands?
A handful are available offshore. ING’s Prestige & Luxe fund, based in Luxembourg, was one of the first, launched in 1998. Its biggest holdings are LVMH, the group that makes Louis Vuitton handbags, and Richemont, which owns jeweller Cartier and fashion label Chloe. Over the past year it has returned 29%, before charges, and over five years is up 48%.
Credit Suisse, Pictet and Soci�t� G�n�rale also run schemes. A new contender is Chic, launched on the Irish stock exchange on June 4 by Dominion, a Swiss investment management company. The fund, which requires a minimum investment of £5,000, invests in firms like BMW, Prada and Tiffany as well as middle-market companies such as Apple and Nike.
Alternatively, you could buy the stocks yourself through a broker. Most trade European shares for the same price as UK stocks.
However, experts say many premium brands look pricey compared with the rest of the market: they are trading on about 20 times earnings compared with 12 times for the average UK company. It might be worth waiting for a setback in world markets to snap up buying opportunities.
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