Investing for Passion - Knight Frank

Investing for

Collectables are now widely considered more than just desirable objects. Using data from The Wealth Report and the Knight Frank Luxury Investment Index, Andrew Shirley sheds some light on the trend.

Ever since the eyes of the first humans widened as they glimpsed a flash of light reflecting off a precious stone or nugget of shiny metal nestling in a streambed or vein of rock, mankind has been a collector.

To begin with, these objects of desire were simply collected for personal pleasure, adornment and status, but as commerce developed, they became items to barter and trade with or even use as currencies. With this new-found value they also became easily transportable stores of wealth.

Over the millennia those roles have remained largely unchanged, albeit the objects themselves became more varied and started to be manipulated into increasingly complicated forms and shapes, as humans learned to paint, create jewellery and work metal and other materials.

As the centuries passed, collecting became a more formal pastime, culminating in the great collections of the Renaissance and the treasure troves of the British country house, often designed around the high art accumulated by their owners on long trips around Europe.

Motivations

Now, however, in a world fixated on capital returns, where your house is no longer a home but an investment, these objects have developed a new raison d’être in the eyes of many. They have become investable asset classes in their own right, sometimes acquired by speculators with no real appreciation of their beauty or provenance, just their potential to turn a profit.

Cases of fine wine sit in bonded warehouses, shuffled between owners but never uncorked. Funds acquire works of art that sit unappreciated in vaults, while jewellery, precious stones, or rare coins languish untouched in safety deposit boxes.

Thankfully, the out and out speculator is still a relatively rare breed, particularly in the ultra-high-net-worth individual (UHNWI) community.

Research from the findings of The Wealth Report Attitudes Survey, an annual poll of the world’s leading private bankers and wealth advisors, shows that “joy of ownership” is still the main motivating factor for their UHNW clients who enjoy collecting these so-called investments of passion. I recall interviewing Pink Floyd drummer Nick Mason about his classic car collection. I was struck that he still drove around and raced his Ferrari 250 GTO, which he bought for £37,000 in 1977, even though it could be now worth around £50 million.

However, “capital appreciation” does comes a very close second and in some parts of the world, including Asia, it is considered to be the prime motivation, followed by “joy of ownership”.

One of the factors contributing to this increasing focus on value, is the growing volatility of conventional investments such as stocks and shares, and the search for alternatives.

In times of uncertainty, gold was always – and still is to a large extent – the safe haven asset of choice. It generates no income, but is 100% tangible – you can touch it and know that it won’t disappear overnight in a stock market crash. Investments of passion like classic cars, art and jewellery, also score highly in this regard. Indeed, in our Attitudes Survey, “safe haven for capital” was considered the thirdmost important motivating factor for collectors.

In general, however, investments of passion require a bit more

passion

TLC than an ingot of precious metal in a bank vault, which can make them a problematic hold for long-term speculators. Cars, for example, need to be driven. They cannot just be parked up in a warehouse for years on end and driven out in perfect condition.

Another motivating factor behind the rise in popularity of these asset classes is the sheer weight of money looking for a home. Despite the lingering impact of the 2008 global financial crisis – or perhaps because of the huge amount of money that quantitative easing pumped into the investment sphere - wealth was created at a rapid pace in the last decade.

In the past five years alone, according to the Knight Frank Global Wealth Sizing Model, the number of UHNWIs – those with a net worth of over US$30 million – has increased by 33% to over 521,000. In Asia, the figure was 79%, taking the number of super rich in the region to almost 117,000. It’s therefore no surprise that the surge in popularity – and values – for many collectable asset classes, in particular rare whisky, is being driven by newly minted Asian collectors.

Data from the Attitudes Survey consistently shows that a significant proportion of UHNWIs around the world are active collectors, with a growing number becoming more interested.

Tracking value

Given this growing focus on luxury investments, a desire to track performance was unsurprisingly also mounting. And given that many of Knight Frank’s clients who buy property through us are also UHNW collectors, it seemed logical to create our own index. Not to offer specific investment advice, it should be made clear, but to reflect how the demand for different asset classes changes over time.

And so in the 2013 edition of The Wealth Report we launched the first instalment of the Knight Frank Luxury Investment Index (KFLII), tracking the value of nine assets classes over a ten-year period. The contribution of each asset class to the index was weighted to reflect its popularity giving us our overall average.

At that point the Index averaged ten-year growth of 175% with classic cars (+395%), the topperforming constituent by some way.

As mentioned earlier, the Index is not intended as an investment guide, and while it does show a direction of travel, its limitations should be understood. One of the main reasons is data. Each of the indices for the various asset classes is compiled based on different criteria.

The art index we use, supplied by Art Market Research, is based on auction sales, as is the data for rare whisky, compiled for us by Rare Whisky 101. But the HAGI classic car index we use is based on a mixture of private and auction sales. Likewise, the coloured diamond numbers from the Fancy Color Research Foundation tracks the whole market.

Other sectors like jewellery and watches, again provided by Art Market Research, rely on a basket-of-goods approach

where a representative selection of various items of the asset class in question are revalued by an expert on a regular basis. For niche collectibles like coins, we use catalogue data from industry specialists such as Spink.

The methodology measuring the performance of each asset class is robust, but the variation means it is not possible to compare asset classes in the same way that you can with, say, the share price of publicly listed companies. And most of the indices do not claim to track a market in its entirety, rather a representative segment. An annual rise of 10% in the value of classic cars, for example, does not mean your own cherished motor will have followed suit.

New attractions

Since 2014, KFLII has grown and now covers 10 different asset classes with rare whisky and Hermès handbags added, as new data became available in 2019 and 2020, respectively. This evolution enables the index to keep abreast of current collecting fashions.

I am often asked what the next inclusion will be, but to be honest I am not sure. The auction results that have caught my eye recently are the staggering prices paid for athletic wear, in particular sneakers. A pair of 1972 Nike Waffle “Moon Shoes” set the pace by selling for US$437,500 in 2019, but even that was eclipsed by the private sale of a pair of prototype Nike Air Yeezy 1s worn by Kanye West to the 2008 Grammy Awards for a staggering US$1.8m in April 2021.

Whether there will be enough sales to ever justify an index dedicated to sneakers remains to be seen, but it is clear that people are prepared to collect and pay vast sums of money for objects that would have seemed of little interest just a few years ago. Celebrity provenance and the role of influencers certainly seems to help in this age of social media.

So how is KFLII looking at the moment? Clearly Covid-19 has had an impact on various markets with public auctions and some cross-border markets being seriously disrupted.

Price-wise though it doesn’t seem to have had a significant impact on the value of most of the asset classes. So far, with one exception, there hasn’t been the huge surge in values that some were expecting off the back of the global economic uncertainty we are all experiencing. Even in March I was being asked whether investors were flocking to so-called safehaven assets, but markets take time to react and this recession is clearly very different in nature to the one we saw in 2008.

In the second quarter of 2020 when the pandemic was at its peak, we saw our wine index, created for us by Wine Owners, rise by 5%, whisky rose 3%, while cars accelerated by just 1%. Hermès handbags, though, rose by 9% during that turbulent three months.

Nike Waffle 'Moon Shoes' sold for US$162,500 Image Courtesy of Sotheby’s (Photo Credit: UNRAH/JONES)

Sotheby’s Hong Kong: 12 bottles of Romanée-Conti Domaine de la Romanée-Conti 1990 from the Cellar of Joseph Lau sold for HK$3,750,000 / US$509,545 Image © Sotheby’s

One of the reasons could be that online auction sales for handbags were already very well-established prior to the outbreak, so the market could continue to function smoothly. Other markets like art and classic cars have taken a little longer to adapt, unsurprising perhaps given the amount of money at stake.

During 2020 Hermès handbags were the overall strongest performer in our index with growth of 17%. Over a 10-year period, whisky absolutely dominates with growth of 478%, compared to cars up “just” 193%.

But to me it would be sad if these numbers were all that mattered to a collector. I would rather the eyes of today’s collectors widened with delight, just like our forebears' thousands of years ago, because they had spotted an object, be it a car, painting, bag or piece of jewellery, that made their heart sing.

If the value of that object goes up, fantastic, but it’s hard to put a value on the feeling of the wind blowing through your hair as you blast your classic car down the road or the connection that a piece of art can give you every time you stand in front of it. And it’s also true that those who buy for pleasure understand what they are buying and know the true value of what it is they are acquiring.

For more information on the Knight Frank Luxury Investment Index and to view the latest results, please contact andrew.shirley@knightfrank.com or visit www.knightfrank.com/ wealthreport

The Wealth Report, published annually by Knight Frank, the world’s largest independent property consultant, offers a unique global perspective on prime property, wealth trends, investments and passions, and is distributed to UHNWIs and their advisors. Please email Andrew to receive a copy of the 2021 edition or sign up for future editions.

Top handbag sold at Sotheby’s in 2020: Hermès Himalaya Kelly 32cm of Matte Niloticus Crocodile with Palladium Hardware, sold for $151,200 – NY, Handbags & Accessories, August 2020 Image © Sotheby’s