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INVESTMENT & LIFESTYLE GUIDE • DISPLAY TO DECEMBER 31ST 2013

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A Barrel of Fun

Asian Art

Why investors are getting in on the ground floor

How wine investment combines passion with prudence

Most Wanted

The Luxury Investment Index Get rich and enjoy doing it

Stocking fillers for the ambitious

THE

PERFORMANCE I

S

S

U

E

Alternative asset classes that deliver ISSN 2251-3949

01

9 772251 394009

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OPENING BELL

A portfolio of investments is highly personal – just as each one of us has varied idiosyncrasies, as well as a unique set of fingerprints so will our choices of investments be a reflection of our unique circumstances, our personalities, our desires and future plans. In a financial and investment environment that is today characterised by upheaval many investors are seeking to diversify their holdings away from stocks and bonds and into investments that, while offering superior returns, also contribute towards increasing their quality of life. These are the passion investments. It is an examination of these investments, as identified by the Knight Frank Luxury Investment Index that is the foundation of the feature section of our first edition of Investment life. There is an ongoing debate with the investment community as to whether many of these investments, such as art or classic cars, or even fine wine deserve to be recognised as asset classes at all. This is in my opinion, an argument of semantics. The truth of the matter is that by purchasing a piece of fine art one is investing in an asset that will (all thing being equal – admittedly a dangerous assumption in this investment environment) provide a return on investment. In the case of assets such as wine and classic cars that return over the medium term is nothing short of spectacular. Of course this is a highly volatile grouping of assets – any investment that relies on the fickleness of human emotional attachment and the cyclical, yet arbitrary nature of trends is bound to be risky. However the fact of the matter is this – these assets offer superior returns on investment, but are however subject to a healthy tolerance for speculation. Why is this different from any other high-risk investment? With that question and the possibility of finding an answer I would like to welcome you to the inaugural edition of Investment Life.

Steve Mallach MANAGING EDITOR Investment Life

THE TEAM MANAGING DIRECTOR/PUBLISHER

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Panashco Media Pte Ltd is registered in Singapore 201127591R. Copyright © Panashco Media Pte Ltd 2013. All rights reserved. Any content of Investment Life may only be reproduced, in any shape or ­format, with the expressed permission of Panashco Media Pte Ltd. For reprints please consult the advertising department. While every care has been taken in the production of this publication, the publishers take no responsibility for any views expressed, errors, loss, or omissions that may occur. Currencies quoted are for information purposes only – and are accurate as we went to press. Printed at Times Printers, Singapore. MICA: 165/04/2012 • ISSN 2251-3949


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Contents NOVEMBER-DECEMBER 2013

16 Passion and Performance According to Knight Frank assets such as art, wine, classic cars and even stamps can insulate a portfolio against market volatility. What sort of returns can the investor expect from these nontraditional assets and passion investments? Investment Life takes a closer look.

ON THE COVER – Chateau Lafite Rothschild from the exceptional 1982 vintage. 1 double-magnum & 12 bottles sold at Christie’s first auction in Mainland China for USD $89,268. Image courtesy Christie’s Images Limited.

20 Intelligent Partnership

During times of market volatility alternative investments can mitigate risks. Investment Life asks Daniel Kiernan, Associate Director at Intelligent Partnership in London to explain more.

28 Take a Seat

Why antique furniture keeps delivering superior investment returns.

30 Time Gentlemen

Investing in classic and collectable timepieces continues to provide above average returns.

32

Chinese Ceramics Domestic investment in cultural iconography and collectables is powering a resurgent interest in Chinese Ceramics.

38 Seeing Red

Why exactly do fine wines excite the imaginations of investors?

44 Art Class

Is fine art an indulgent symbol of investor self-expression, an unpredictably volatile investment or simply supply and demand gone mad? Perhaps it’s all three.

47 A SEA Change

Changing gallery clientele and new areas of interest may be a sign of a uniquely Southeast Asian take on art as investment.

51 Heads you win

Head or heart - how do you decide on your gold coin investment strategy?

Fashion or 36 High Great Value?

New designs and classic settings are renewing interest amongst jewellery investors.

54 Under the Hood

Driving positive sentiment classic cars delivering exceptional alternative investment returns.


• Pointers on the potential for buying investment property overseas, including letting potential and visa or residency offers


Contents NOVEMBER-DECEMBER 2013

65

75

81 88

78 F E AT U R E S

65 FROM RUGS TO RICHES

Can investors leverage the handmade quality of Persian and other fine carpets to provide a solid alternative investment? The answer is a qualified yes.

OUTSOURCING 78 THE EVOLUTION OF SOUTHEAST ASIA

Investing Philippines - the emerging Asian Tiger.

IN 100 INVESTING SHALE OIL

Does the exit of an oil supergiant mean investment opportunities for smaller players?

68 GOING POSTAL

FINAL FRONTIER 81 THE FOR INVESTMENT

REGULARS

70 COOL BRITANNIA

STEM CELL 88 CAN STORAGE DELIVER

06 NEWS

Can China save the dying collectible stamp asset class?

How property investors can take advantage of London’s outlying suburbs.

What is it about space that is capturing the imagination of investors across the globe?

INVESTMENT VALUE? There’s a company that’s got news for you.

01 OPENING BELL THE MANAGING EDITOR 08 ASIA FOCUS 10 BY THE NUMBERS 12 HEARD RECENTLY

72 AUCTION INSIGHT

The Christie’s view of alternative investments in Asia.

75 SEA SICK

So you want to invest in a yacht?

91

GET IN THE GAME Sentiment and success lift memorabilia and collectibles markets.

LATEST CREDIT SUISSE 96 THE GLOBAL WEALTH REPORT The Rise of Asia.

14 MOST WANTED 90 POWER LUNCH - SERENITY 102 THE WORST INVESTMENT DECISIONS IN THE WORLD FLOWER POWER 104 CLOSING BELL – THE PUBLISHER


NEWS

ISSUE 01

NOVEMBER / DECEMBER 2013

8 investment banks Shift to Markit Messaging service

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Investment banks are updating their systems in a bid to catch up with the fast-paced development of information technology. On October 7, 2013, eight of the largest investment banks in the world joined the industry-wide central directory switchboard that connects the messaging system of Thomson Reuters, Goldman Sachs, Deutsche Bank, Citigroup, Credit Suisse, Barclays, JPMorgan Chase, Morgan Stanley, Bank of America Merrill Lynch and GFI Group, an interdealer broker. The roll out of the free viral messaging service by Markit, a UK data provider, challenges Bloomberg’s hold on daily communications in the financial markets. Instant messaging on private networks is considered one of the many ways that industry stakeholders participate in the financial markets by exchanging daily information, which drives trading. It is part of the search by financial service companies to find ways to share on the rising cost of IT and compliance requirements. ‘This is about helping our customer find new counterparties and unearth new business opportunities whilst reducing complexity’, Financial Times quoted David Craig, president of Financial and Risk at Thomson Reuters. Bloomberg charges $20,000 per terminal yearly, prompting subscribers who are shifting to Markit to describe the service as ‘a very expensive Facebook’.

Bad News for Europe’s Banks: LONDON (Reuters) - Grim investment bank revenues, a mixed economic backdrop and increasing regulatory and legal concerns are set to weigh on results from three of Europe’s biggest banks on Tuesday. But Britain’s biggest domestic lender Lloyds Banking Group will buck the trend by reporting a sharp rise in third-quarter profit, benefiting from the improving health of the UK economy. European banks are set to echo the grim performance shown by Wall Street’s big banks in fixed income, where revenues - which account for about half of total investment bank income - were down about 15 percent on average from a year ago. Banks in Europe could fare even worse, analysts said, a downturn that could intensify scrutiny on how far Deutsche Bank and UBS are shrinking and realigning their investment banking arms. Deutsche Bank is expected to say its third-quarter pretax profit fell 43 percent to 642 million euros ($886 million), a Reuters poll showed.

Nigeria’s Investment Image Improves The more than USD $500 billion investment commitments and projects at different stages of execution are indicators of Nigeria’s coming of age as an investment haven. With a president named Dr. Goodluck Ebele Azikiwe Jonathan, good luck appears not to run out on this African nation recently ranked by KPMG – one of the top audit, financial and tax advisory companies in the world – as one of the four major global investment destinations and growth areas. In 2011, the United Nations Conference on Trade and Development’s World Investment Report 2012 likewise named Nigeria as Africa’s biggest destination for foreign direct investment (FDI) after it received USD $8.92 billion FDI, followed by South Africa with USD $5.81 billion. South Korean companies are among the biggest investors in Nigeria. Among them are Ibaka Deep Seaport, Brass LNG/Shipyard and Koo Oil & Gas Complex, which are shipyard builders. The other potential industries for investment are in agriculture, mining, iron and steel development, security, construction, oil and gas, refineries and petrochemicals and diaspora fund remittance. However, flow of investment funds is also two-way with Bonny Gas Transport, a subsidiary of the Nigeria Liquefied Natural Gas Company, ordering six new LNG vessels with South Korean giants Samsung and Hyundai Heavy Industries.

Samsung to Cut Chip Investment SAMSUNG ELECTRONICS, the world’s top supplier of memory chips, plans to cut its investment in components by as much as 30 percent next year. The company doesn’t plan to build any more plants to make memory chips because the industry is undergoing rapid structural change. Industry officials at Samsung’s local primary parts suppliers say that aggressive investment does not guarantee high returns anymore due to industry consolidation as well as rising uncertainty surrounding technology and sluggish demand.

Goldman Sachs Sees Gold Falling in 2014 The gold price—currently hovering around the $1,300 an ounce mark— will likely fall to $1,100 an ounce next year, according to a forecast from investment bank Goldman Sachs, as quoted by Reuters. The investment bank’s exact 2014 price expectation is $1,144 an ounce.   For the time being, “gold will likely remain volatile,” analysts predicted, staying in the $1,250 to $1,350 an ounce range until the Federal Reserve’s “tapering” policy becomes clearer.  At press time, gold was trading at $1,346 an ounce. It began the year at $1,657.


NEWS

World’s First Bitcoin ATM Opens

BILLION

It is the property investment sales in Singapore in the third quarter of 2013, a record level. It broke the old record of USD $12.4 billion in Q3 2007, according to a DTZ report. Property investments include sale of land, buildings and multiple residential and commercial units worth a minimum of USD $5 million each. Among these investments were the sale of seven hotels totaling USD $2.86 billion or USD $1 million per room. These include the Grand Park Orchard hotel, Gallery Hotel, The Sentosa Resort & Space and Hotel 1929.

6,000+ UNITS

After just one month of sales, County Garden sold that number of units at its Danga Bay project in Johor Bahru in Southern Malaysia. The sales of the Guangzhou-based property developer is estimated at CNY 9.1 billion yuan (USD $1.49 billion). Ruan Jiasheng, president of Country Garden’s Malaysia branch, pointed out that level of sales is rare in the Malaysian real estate market and is even higher than the annual total sales in Johor Bahru. He explained the good volume of sale to Country Garden being the first Chinese developer in the area, making residents of Chinese origin seize the opportunity to invest in real estate.

7 www.investmentlifenews.com

Four years ago, Christopher Koch was working on a thesis paper about encryption. His research led him to the budding digital currency known as Bitcoin and on a whim, purchased 5,000 Bitcoins for just $27. He quickly forgot all about his investment until widespread news reports jogged his memory this past April. There was just one problem - Koch had forgotten the password to his Bitcoin wallet. Fortunately, he was able to remember it after some trial and error and when he logged in, he quickly realized the initial $27 investment was now worth $866,000. Based on today’s exchange rate, his nest egg would be worth more than a million dollars. 

USD $13.3

NOVEMBER / DECEMBER 2013

The Best ROI – EVER

That was the amount of foreign direct investments into Ireland in 2012, according to the country’s Central Statistics Office or the equivalent of USD $40.7 billion. It is almost double the EUR €17 billion (USD $23 billion) foreign direct investments in 2011. The increase mainly came from The Netherlands (EUR €22 billion or USD $30 billion) and Asia (EUR €5 billion or USD $6.8 billion). The CSO explained that the figures show the immediate source of the money instead of the nationality of the parent company. Thus, an investment in an Irish subsidiary by a Dutch subsidiary of a US multinational was recorded as investment from The Netherlands.

EXTRA BITCOIN NEWS

BILLION

ISSUE 01

Three young entrepreneurs have opened an automated teller in Canada, saying it’s the world’s first ATM able to exchange bitcoins for any official currency. The machine, delivered to Vancouver by Robocoin, an American manufacturer, stands against a wall of a popular coffee shops and resembles an ordinary cash ATM. However, instead of cash transactions it swaps Canadian dollars for bitcoins, the virtual currency of the internet invented in 2008 by an anonymous computer scientist known only by the pseudonym Satoshi Nakamoto. Customers lined up there on Tuesday to use the ATM, then used their smart phones to buy coffee and muffins at the Waves coffee shop. The ATM is the world’s first, said co-owner Mitchel Demeter, a local entrepreneur who started trading in bitcoins several years ago, then earlier this year with two partners set up Bitcoiniacs, a Vancouver storefront money exchange. He and his friends, who were high school students together, said they saw ATMs as a business opportunity.

EUR € 30


NEWS

Investment Life Asian Focus:

ISSUE 01

NOVEMBER / DECEMBER 2013

Aging Threat to SEA Coconut Industry

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Asia’s coconut palms, which mark the landscape from the Philippines to India, face a crisis as rapidly aging groves become less productive, curbing harvests that are a source of food and income for millions. India, Asia’s third-largest economy, is the top producer, harvesting 17 billion nuts last year, followed by Indonesia, which gathered 15.4 billion, and the Philippines, with 15.2 billion, according to the Asian and Pacific Coconut Community. The trees, many of which were planted about 50 to 60 years ago after World War II, no longer yield enough to meet rising global demand, according to the Romebased Food & Agriculture Organization. There’s an urgent need for replanting and rejuvenation, said Hiroyuki Konuma, regional representative for Asia and the Pacific at the United Nations agency. At stake is the productivity of a core part of the rural economy in the Asia-Pacific, which accounts for about 85 percent of the global supply of the commodity that goes into food, fuel, soaps and cosmetics. In the Philippines, among the three biggest growers, one in five people depends on the crop to some extent. More than half of Indonesia’s 4 million hectares of palms are aging, or over 50 years old, said Irawadi Jamaran, chairman of the Indonesian Coconut Board, which groups producers, processors and sellers. The main problem for the industry is a lack of government attention.“Coconut is often overlooked by many people because we’re always looking at rice and oil palm, and people don’t think coconut is an important one: this is not true,” the FAO’s Konuma said in an interview.

Asia Needs to Look to Home for Infrastructure opportunity Asia needs infrastructure investment to boost intra-regional trade in order to counter weak demand from Europe and North America, says Donwoo Ha, director of the Transport Division at the United Nations Economic and Social Commission for Asia and the Pacific (UN Escap). Ha suggests that many Asian nations have invested a lot in establishing trade relations with Europe and the US and as a result have become overly reliant on these deals and on maritime transport. The region has invested a great deal in seaports, which are now not working to capacity because of weak demand from overseas trading partners, says Ha. “Their economies therefore very much concentrate on coastal areas, neglecting many developments that could happen inland. The

development of dry port areas would help cluster logistics services, manufacturing and processing around them,” Ha told the Bangkok Post. In order to counter this effect, Ha has suggested that Asian nations look to refocus their investment in hard infrastructure projects, like roads and railways, and on building more solid institutional infrastructure in order to sustain prolonged growth in the region. According to the Asian Highway Database, around eight percent of the total highway network remains below regional standards and requires significant investment. He said there was already a shift of investing patterns as investors were attracted to yields from the commercial sector which could be higher compared with residential properties.

Investors in Malaysian Property Shift Focus Kuala Lumpur Property investors could be shifting their interest to commercial properties following new cooling measures introduced by the Government to curb speculation in the residential property market. However, demand for office space could be suppressed by supply that are already in the pipeline arising from big commercial projects like the Tun Razak Exchangeand the Warisan Merdeka Tower. “The good news is that demand is still there with a take-up rate of

three to four million sq ft of office space every year. However, the issue would be on the supply side which would certainly put pressure on the market and this would be a cause for concern. “However, it would just be temporary until it is absorbed by the market in three to four years,” said property consultant Knight Frank Malaysia managing directorSarkunan Subramaniam at the launch of its Global Investment report yesterday.


NEWS

Growing Choice for Investors in Malaysian Palm Oil

BILLION

Malaysian state-owned oil and gas company Petronas committed that amount to build a liquefied natural gas plant in British Columbia in Canada and the pipeline to feed it. Canadian Prime Minister Stephen Harper secured the commitment from Petronas when he attended the Asia-Pacific Leaders’ Summit in Bali, Indonesia on October 6. Petronas purchased in 2012 for over USD $5 million Alberta’s Progress Energy.

USD $800 BILLION

Some tech stocks, including electric-vehicle maker Tesla, entertainment-streaming provider Netflix,  Priceline.com and search company Google are doing much, much better. These stocks are up as much as 470% over the past year. In the minds of some there’s a certain sinking feeling of déjà vu.

So far this year, the Dow has climbed 19%, the S&P 500 24% and the Nasdaq 30%. When a select group of speculative stocks trading at huge multiples of their earnings due to high expectations for future earnings that momentum can be harder to sustain the gains than in a bull market led by companies with moredependable earnings. “It reminds me of the tech go-go years of the late 1990s,” says Jack Ablin, chief investment officer of BMO Private Bank.

9 www.investmentlifenews.com

Some market commentators in the United States are getting a bad feeling about the current exuberance surrounding the tech IPO action and dizzying valuations. The frenzy surrounding the Twitter IPO is certainly not helping any.

NOVEMBER / DECEMBER 2013

470%

ACWA Power, the water and power project developer in Saudi Arabia, plans to sell that amount of Islamic bond this year and list on the country’s bourse by the end of 2014. With the amount of funds to be raised from the bond offer, ACWA targets to put in place 38,000 megawatts of power by 2017 from the current 15,850 MWs. ACWA Chief Executive Paddy Padmanathan believes it would not be necessary for the company to secure a credit rating prior to the launch of its sukuk or Islamic bond. He explained: ‘That was one o the things that kept us back for a while, and there was a decision (internally) around ‘do we need to be rate’ as ratings area one-way street – once you rate, you are stuck with the story forever’.

ISSUE 01

Despite accusations of being contributory to climate change, Malaysia’s palm oil sector is still a potent growth engine. Although Malaysia’s palm oil industry is being accused of contributing to global climate change, it has nevertheless been a potent growth engine for the South-East Asian nation and even neighbour Indonesia. Palm oil production and processing has either become a growth industry and valuable source of export dollars for these two countries or provided a source of affordable food imports, in the process, advancing global economic expansion. At Bernama’s Palm Oil Industrial Cluster (POIC), several Malaysian and foreign companies have begun operations, covering different downstream industries and the biodiesel sector. Datuk Dr Pang Teck Wai, chief executive officer of POIC, said that Malaysia’s palm industry is expected to boost production volume to 100 million tonnes of biomass by 2020 from the current 80 million tonnes. He added the potentials go beyond palm oil but extends to all oil palm wastes. In turn, biomass could generate additional increment to Malaysia’s gross national income by value adding on 20 million tonnes of biomass produced locally. But that would involve the upgrade of capabilities of existing support industries, which calls for investments. The first phase would focus on major palm oil industries like refineries, biofuel plants, oleochemicals, biomass and fertiliser plants, which would require a central steam provider, bulking installations and dedicated jetties. The second phase would be a broaderbased cluster, encompassing energy-intensive sectors, cocoa, ship repairs and construction, food, furniture and machinery sectors. Pang said POIC Lahad Datu is an attractive setting for investment opportunities, particularly its strategic location.

USD $38


NEWS

ISSUE 01

NOVEMBER / DECEMBER 2013

AsianEnergyInvestment RequiredUrgently:

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10

The International Energy Agency (IEA) says Southeast Asia (SE) will need $1.7 trillion in energy investments over the next two decades to cope with a surge in demand and counter growing reliance on oil imports. It said the region’s energy usage was still low at half of the global average but demand is likely to increase by more than 80 percent through 2035. An IEA report projects Southeast Asia’s oil imports to rise to just over 5 million barrels a day by 2035, making it the world’s fourth-largest oil importer. It warned that heavy dependence on oil imports could see the region more vulnerable to potential supply disruptions, and estimated that $1.7 trillion in investment is required to boost energy security.

The region’s huge appetite for energy will see its bill for imported oil surge to $240 billion by 2035, leaving nations exposed to price shocks, the IEA added. The region will guzzle more than five million barrels of oil per day – double current levels of consumption – to fuel its breakneck economic growth, the IEA said. Total energy demand is expected to increase by more than 80 percent over the same period, according to the agency. The 10 members of the Association of Southeast Asian Nations (ASEAN) will need to invest a total of around $1.7 trillion in energy-supply infrastructure between now and 2035, it predicted. It forecast the region would become the world’s fourth-largest oil importer, after China, India and the European Union.

MongoliaLevelsPlaying FieldinMininginvestments Mongolia just passed a law that ended different treatment of foreign and local mining companies, in effect leveling the playing field. The new rules follow a chain of events in the mining industry, including progress on funding for the next phase of the Oyu Tolgoi mine, which is being developed by the Rio Tinto Group, said Mongolian Cabinet Secretary Saikhanbileg Chimed. Another event is preparations to list the state-owned Erdenes Tavan Tolgoi mine. These twin measures are expected to boost business confidence, he said. ‘When we make a final decision, there should not be any political… When we make the initial talks of course maybe the politics comes up but the final approach in terms of policy should be

a normal business practice. A practical decision should be followed’, Blooomberg quoted the minister. Saikhabileg said resolving the Oyu Tolgoi financing package is the number one priority of the Mongolian government, and it should be made by the mining company’s directors, not by politicians. Mongolia enjoyed a 17.5% growth rate in 2011, but its mineral resource boom slowed due to the elevated level of resource nationalism fueled by the election cycle, which caused investor confidence to dip. As a result, there was failure to agree on the terms of a USD $5.1 billion expansion of Oyu Tolgoi, causing the lay off of 1,700 workers.

+26%

Indian scooter sales have clocked a growth rate of 26% in the past four years, compared with 15% for motorcycles, aided by better urban infrastructure and popularity among Indian women - who constitute 40% of first-time buyers. The shift is a goldmine for scooter companies like Honda and local two wheeler manufacturer Hero. Scooters are not only the fastest growing segment of the Indian automotive market, but are increasingly taking on their most-erstwhile rival - bikes, as the gearless vehicles gain favour in the country. Increasing urbanisation and female buyers have given a fillip to the sale of scooters across India. Honda Activa displaced the two-decade-old market leader Hero’s Splendor motorcycle from the top slot in September. Scooters already outsell bikes in many significant markets like Chandigarh, Imphal, Goa and Kerala. Robust growth over the years has also helped scooters bridge the sales gap with bikes in other major markets like Delhi, Mumbai, Chennai and Pune.

USD $2.8 BILLION

A study published in June by the ChinaBrazil Business Council (CBBC), a Rio de Janeirobased group found that Chinese Foreign Direct Investment in Brazil fell to $8 billion in 2011 and $2.8 billion in the first six months of 2012, the last period for which the CBBC tabulated such data. Investment from China soared from $95 million in 2009 to a whopping $13.1 billion in 2010, but has since fallen sharply. The CBBC report, based in part on interviews the group held with executives from Chinese companies and their Brazilian partners, said Chinese investments focused on natural resources “have plummeted” since 2011. The report attributed the drop to “uncertainties regarding Brazilian policies,” highlighting recent changes to mining laws as well as new restrictions on how foreigners buy land. “These and other related policies are ausing companies to hold off investment plans,” the CBBC said.


AiR

ALTERNATIVE INVESTMENT REPORTS “FEIFA recognise the need for balanced, informative and regularly updated research on different asset classes. The AiR reports are an extremely valuable resource for any adviser researching the alternative investment sector and the various products and strategies in the market; we are pleased to be able to make their reports available to our international membership base of financial advisers and wealth managers.” Paul Stanfield, Chief Executive, FEIFA “Intelligent Partnership are undoubtedly the leading provider of research, reports and education on Alternative Investments; as a professional investor or intermediary we would urge you to read their regular editorial in Investment Life and to access their reports on the various alternative investment sectors they cover – there really is no better place to get this quality of research.”

The alternative investment sector is extremely wide ranging and the AiR reports aim to educate the reader and aid their understanding of the sector. “Alternative” is a very broad term which is often used in the investment world to categorise any asset class that isn’t part of the mainstream public markets such as equities, funds or bonds. Assets covered include property, land, forestry, energy, farmland, precious metals and collectibles. Our analysis is based upon in-depth market research; giving readers an up to date snapshot of the types of alternative investment products available in the market. Comprising a market update, demand and supply factors, investment considerations as well as activity and potential in the sector. Our reports are primarily aimed at advisers, intermediaries and professional investors that want to carry out research on the sector and investment opportunities available.

AiR

ALTERNATIVE INVESTMENT REPORT

AiR AiR AiR

ALTERNATIVE INVESTMENT REPORT

PURPOSE BUILT STUDENT PROPERTY – 2013

ALTERNATIVE INVESTMENT REPORT

ENERGY AND RENEWABLES – 2013

ALTERNATIVE INVESTMENT REPORT

HOTEL AND RESORT PROPERTY – 2013

INDUSTRY REPORT 2013 PURPOSE BUILT STUDENT PROPERTY

COMPLIMENTARY COPIES www.AiReport.co.uk/a/ILIFE

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Intelligent Partnership Ltd 0044 203 375 1700 AiR@intelligent-partnership.com www.intelligent-partnership.com


FEATURE

worldwatch Heard During October

"I think it is really possible we’ll see massive Chinese investment, not just in nuclear but across the board. And I think we’ll see massive Japanese investment and Korean investment.” - Ed Davey, British energy and climate change secretary

"I think we actually have the major players in liquefied natural gas here, there’s at least 10 of them here with significant opportunity to want to make some investment.”

- Rich Coleman British Columbia's minister of natural gas development

"Tepid external demand from advanced economies and a slowdown in China dampened industrial activity throughout much of emerging Asia."

ISSUE 01

NOVEMBER / DECEMBER 2013

www.investmentlifenews.com

12

- International Monetary Fund Spokesperson

“It’s easy money, and a profitable way to supplement your income."

- Luis Molino, a 35-year-old dentist from Venezuela

LONDON. “Britain is the most open economy in the world, and

“We are delighted to be expanding our business due to strong demand for our super-premium and ultra-premium Irish whiskey brands, which are crafted in the best tradition of 19th century Irish whiskey distilling.”

that goes for our energy markets as well. So there is absolutely no reason why Chinese companies can’t enter our markets. I couldn’t be clearer than that,” Ed Davey, British energy and climate change secretary, said in an interview.

“I think it is really possible we’ll see massive Chinese investment, not just in nuclear but across the board. And I think we’ll see massive Japanese investment and Korean investment.” His comments came amid heated debate over security regarding China General Nuclear Power Group’s talks to share the costs of Electricite de France SA’s planned power station at Hinkley Point in southwest England. The project has an estimated cost of 14 billion pounds (USD $22 billion).

Ottawa. “I think we actually have the major players in

liquefied natural gas here, there’s at least 10 of them here with significant opportunity to want to make some investment.” Said Rich Coleman British Columbia's minister of natural gas development at a press conference held in mid October. The Minister said that a commitment by a Malaysian national company to build a liquefied natural gas (LNG) plant in B.C. and investment by other countries suggests the province isn't chasing an LNG pipe dream.

- Bernard Walsh, founder of Walsh Whiskey Distillery, Ireland

Washington. Says the International Monetary Fund, which has cut its growth forecasts for emerging Asia by 0.9 per cent since April for both 2013 and 2014 to 6.3 and 6.5 per cent respectively.

Royal Oak in County Carlow, Ireland. Independent, family-owned Walsh Whiskey Distillery will make a significant €25m expansion programme for its award-winning, Irish whiskey brands – The Irishman and Writer Tears. Its expansion plans have attracted significant development funding from the Italian drinks giant, Illva Saronno Holding SpA. Irish whiskey has been the fastest-growing spirit in the world in the past five years growing from 4.4 million cases to 6.5 million since 2008. Drinks industry analysts expect that growth to continue with sales of Irish whiskey expected to double to over 12 million cases in the next five years.


FEATURE

"I think more and more students who studied overseas are missing Britain, so that’s why many investors are looking to go back, to know more."

Mumbai. In India's biggest bullion market, Mumbai's Zaveri Bazaar, gold dealers are out of ideas and avoiding

phone calls because they don't have any gold to sell. Battling a huge trade deficit and a weak currency, the government has taken various steps this year to make it harder and more expensive for Indians to get hold of gold. India is the largest importer of gold in the world. Curbs including a higher import duty of 10 per cent on the metal have drastically brought down gold imports. Many suppliers are turning to smuggled gold, especially as that also avoids the 10 percent import duty. As a result, even smuggled gold commands a premium of USD $50 an ounce above London prices, according to the Bombay Bullion Association (BBA). The desperate search for gold has even prompted digging under a ruined palace after a Hindu village sage dreamt that 1,000 tonnes might be buried there.

- Investor Lie Li

Caracas. Luis Molino, a 35-year-old dentist, who went to Peru to do the el raspao, or scrape, which exploits of a foreign exchange loophole to net Venezuelans a 700% return. With the value of the Venezuelan currency, the bolivar, dropping in value, demand for stable currencies like the U.S. dollar is high. But Venezuela does not allow people to change their money for dollars except under strict circumstances, one of which is to obtain money to spend overseas. Venezuelans who possess an international airline ticket can exchange their bolivars for dollars through the Venezuela foreign exchange agency at the state-set rate of 6.3 bolivars per dollar. One can get up to USD $3,000 in U.S. dollars this way. Venezeulans sell the dollars on the black market for 45 bolivars to the dollar, a much higher rate they what they paid for the dollars before they left. “A lot of travelers don’t even bother to fly once they have their cards credited with the dollars,” says Mildred Amaro, who runs Barquero Tours in the central industrial city of La Victoria.

“When I was here nine months ago we had only a few people in this office and now it’s 35." - Stephen Schwarzman, Blackstone Chief Executive Officer

- Simon Luhr, Managing Partner and CEO, FinEx Capital Management

➑ "Having investment relationships with nearly 100 countries shows just how globally connected New Zealand is."

- Statistics New Zealand spokesman Jason Attewell

Wellington – New Zealand. New Zealand's investments overseas increased by about $5 billion over the past year, while the amount of money flowing into the country also lifted. Statistics New Zealand released data in October showing New Zealand had money invested in about 100 different countries as at the end of March this year. Those investments amounted to USD $163.9 billion, up from USD $158.4 billion in the year to March 31, 2012. Of New Zealand's total investment abroad, 64 per cent was into five countries Australia, US, UK, Japan, and the Netherlands. Australia held its position as New Zealand's biggest trading partner, with investment there rising by USD $2.5 billion to reach USD $48.2 billion as at March 2013.

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“Our research shows there is substantial appetite among investors for gold now and going forwards. We anticipate significant demand for this product, especially in Russia.”

NOVEMBER / DECEMBER 2013

South Korea. Maria van der Hoeven, executive director of the International Energy Agency Van der Hoeven, executive director of the International Energy Agency told Reuters on the sidelines of the World Energy Congress in South Korea that China was in the market for energy, no matter who supplied it. “They (China) would like to get oil from everywhere. Whether it’s by ship or, let’s not forget about Russia, by pipeline.” Fast-growing oil and gas producers Russia and North America are spending billions of dollars on pipelines and port facilities to supply energy to Asia, intent on grabbing a bigger share of the world’s fastest growing fuel market from Middle East suppliers. China's surge in consumption has kept prices supported despite a rise in North American shale output and a weak economy in the West.

- Mehul Choksi, chairman of jewellery retailer Gitanjali Gems (GTGM.NS)

ISSUE 01

Moscow. FinEx has announced the launch of the FinEx Physically Held Gold ETF (FXGD), the first fully regulated gold exchange-traded fund in the European Union. The ETF, which has been listed on the Irish Stock Exchange and cross-listed on the Moscow Exchange, is backed by physically held gold bullion in vaults in London. It tracks the price of gold calculated using the London Gold Fixing Price set in US dollars on each trading day. “The centre of gravity shifting east is becoming a reality.”

"As supply is very scarce, we have moved to diamond jewellery, which uses less gold content."

Singapore. Blackstone Chief Executive Officer, Blackstone Group LP (BX:US), the world’s biggest manager of alternative assets, will seek more investments in Southeast Asia following the opening of an office in Singapore seven years after entering the Asia-Pacific region. Blackstone, led by Schwarzman, has more than USD $5 billion of Asian assets, of which more than half are in real estate. Singapore will be the firm’s second office with treasury functions after New York, according to the company, which manages about USD $248 billion worldwide.


FEATURE

Most Wanted We at Investment Life believe in balance. It’s important to maximise your investments, diversify, spread risk and identify opportunities. However, at some point you have to wonder "What’s it all about, when you get right down to it, what’s the point?" That’s when you take your hard investment returns and go shopping. We’ve seen some great stuff over the last month and we’re gathered it together in this handy guide of the most wanted stuff in the world – or at least our offices, enjoy.

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NOVEMBER / DECEMBER 2013

Ⓐ EAR YOU GO

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New-York based Woo Audio, known for products that strike an impressive balance between design and technology, has done it again with the release of their WA7 headphone amp. Powered by 2 vacuum tubes and sporting a buil t-in 32-bit/192kHz USB DAC, it’ll make the music in your headphones louder, warmer, and clearer, like you’re hearing it live. The dedicated port for in-ear-monitors carries a full range of volume controls ensuring minimal noise. Despite its incredibly compact size, “Fireflies” is a powerhouse with the capacity to drive almost any demanding audiophile headphones.

Ⓑ HOME ON THE RANGE

Once owned by legendary Hollywood actor Steve McQueen, the Pioneer Moon Ranch is an outdoorsman’s mecca, and it’s for sale. The Great Escape star´s former home is as epic as you would imagine, spread over 500 acres of land in Hailey, Idaho, the property sits at the foot of the Pioneer Mountains and is defined by the Big Wood River that flows the length of the property for a mile and a half. Plenty of water and green surround the property, you´ll also find an array of wild life including moose, elk and deer roaming freely around the property. Composed of a main house and guesthouse is the perfect home base or weekend getaway - if you have USD $7.4 Mil to fork out.

Ⓒ WHAT’S THAT NOISE?

The Jaguar E-Type´s 50th anniversary was in 2011, and many still admire the stunning lines of the car. Swedish design firm Visualtech, is one of those admirers and decided to create an E-Type for the 21st century. The result is the Growler 2011 Concept. The concept is clearly inspired by the famous Jaguar, but the observant will note certain lines reminiscent of the Chevrolet Corvette. Visualtech decided to build a very short series run of the cars. If you have USD $1.4 million then one of them can be yours.

Ⓓ GOLDEN GIRL

Keep up appearances with the KollagenX 24K Gold Collagen Mask The 99,9% pure gold treatment reduces fine lines and wrinkles thanks to its pure nano gold technology. When applied to the skin, the mask immediately forms a protective layer, which instantly reacts to the skin’s natural chemistry and helps replace the collagen that decreases with age. KollagenX three gold masks pack is priced at $76,999.

Ⓔ CAFFEINE FIXER

At USD $8,000 the genuine Italian Astoria dual espresso machine is a caffeinated dream. Recalling the classic column espresso makers first invented in 1901, this commercial-grade dual espresso maker from Italy is the same kind trusted in fine restaurants worldwide to brew coffee for hundreds of customers every day. The internal brewing mechanism has an advanced microprocessor that automatically adjusts the water amount relative to the serving size for perfect water-to-grind ratio whether making one cup or 40 (water levels are also manually adjustable). A built-in water softener ensures optimal water quality for the best cup of espresso possible. Touchpad controls allow four different coffee dosage selections for different brew strengths, even within a single brewing cycle. The ornate copper dome is handmade in Morocco and topped with a brass eagle, while the frame is 18-gauge galvanized steel with highly polished copper and stainless steel steam wands and panels, and a 12-quart boiler.

Ⓕ DRINK UP

If you missed out on the world's most expensive bottle of whisky – the 64-year-old Macallan in Lalique Cire Perdue which was just auctioned off at Sotheby's for a record breaking USD $460,000 – not to worry: for USD $1.5 million you can elevate yourself to stratospheric levels of pampered luxury and fine whisky appreciation. The Robb Report is offering the ultimate single malt experience in conjunction with The Macallan as part of this year's Ultimate Gifts offerings, featuring a journey to the the Macallan estate in Scotland to select eight extremely rare single malt Macallan whiskies barreled during each of the last eight decades for your personal collection. The experience begins with a firstclass flight to Paris and a two-night stay in the Presidential Suite at the ultra-luxe Four Seasons George V, during which you'll take a chauffeured Bentley to meet with the crystal artisans at Lalique to create the custom decanters that will house the whiskies. A private jet and helicopter will then take you to the Macallan estate for a two-day consultation to select the whiskies from barrels dating back to the 1930’s. Once the decanters are completed they'll be filled with the

precious elixir and delivered in a bespoke cabinet from royal furniture maker Viscount David Linley. David Cox, Macallan's director of fine and rare whiskies, calls it nothing short of "a liquid history of Macallan," noting, "You'll be drinking whiskies distilled by The Macallan before the Second World War, each with quite a distinctive style."

Ⓖ COSTLY CUFFS

Jacob & Co‘s Emerald Cut Canary Diamond Octagon cufflinks are crafted from 18-carat white gold, with a centerpiece made up of 20-carat and 21-carat canary yellow diamonds, surrounded by 10.76 carats of additional white diamond baguettes. In addition, they also feature a diamond encrusted whale flip-back closure. Priced at USD $4,195,000, these super glamorous links come courtesy of celebrity jewelers Jacob & Co, famed across the globe for creating lavish and sensational designs for some of the world’s most high profile entertainers. Not a bad choice for special occassion bling.

Ⓗ SMOOTH OPERATOR

If you have great hand eye coordination, an appreciation of exceptional craftsmanship and USD $30,000 to spend on personal grooming equipment, then you may want to take a look at what Hommage has created for people like you. Known for their men’s range of luxury personal grooming products, Parisian company Hommage certainly lives up to their reputation with the Damascene Razor. The name comes from the Damascus steel used to make the blade. While the technique for making the True Damascus encountered during the Crusades has been lost since the 1700s, modern pattern welding techniques have produced similar blades. The 128 layers of steel in the Damascene Razor produce a rose and torsion pattern much like those seen in True Damascus blades. The blade isn’t the only expensive material used to make this extravagantly crafted straight razor. The razor’s sheath is platinum plated and it comes in a lacquered gift box of Tanzanian Anigré wood.

Ⓘ PLAYING FOR HIGH STAKES

Geoffrey Parker, London-based self-professed “maker of the finest games on the globe”, is offering the world's most expensive poker set for USD $7.5 million. The bespoke set comes housed in a genuine alligator skin case finished in any color the client chooses, fitted with 18k white gold combination locks and hardware. The case' suede lining features an 18k gold and diamond frame holding 384 18k white gold chips, each inlaid on both sides in shagreen (stingray skin). The chips can be in any currency and denomination the client desires; the display set features chips marked €100,000 – or about $140,000 at today's rates. The edge of each chip is set with precious stones – white diamonds for the white chips, sapphires for the blue, rubies for the red, emeralds for the green and black diamonds for the black.


FEATURE

The dealer button is be a larger 18 karat white gold chip set with two rows of diamonds to the edge. The set will feature an estimated 22,364 stones in all, totaling 1,012 carats. Finally there are four platinum-plated decks of poker cards. Orders are now being taken with an expected delivery time of six to nine months.

Ⓙ CLICK CLICK

Ⓝ NOT FOR THE KIDS

The USD $1,223 Cupcake - the most expensive in the world The “Golden Phoenix”, as the name itself suggest is no ordinary cupcake. The exotic item was unveiled at the official inauguration function of the Dubai Mall. The cupcake commands a staggering price tag of USD

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Ⓛ TICK TOCK

A watch worth £75,000 (USD $152,435) must be made from something unique. A Swiss jeweler is now offering watches, which have been made from the hull of the doomed Titanic. The metal has been mixed with contemporary shipbuilding steel to make the casing of the timepieces. The black dials have been made by mixing the recovered coal burned in the Titanic’s furnaces with ceramics. The watches dubbed Titanic-DNA will be made in a limited run of 2,012 as a reference to the 100th anniversary of the disaster in five years’ time. So, the £75K tag a bit

Ⓟ ALMAS TOO PRICEY

Peckish? Almas caviar comes from Iran making it extremely rare and extremely expensive. The only known outlet is the Caviar House & Prunier in London England’s Picadilly that sells a kilo of the expensive Almas caviar in a 24-karat gold tin for £16,000, or about $25,000. Coincidentally, it is also where you can find the most expensive meal in Britain. The Caviar House also sells an £800 tin for those on a budget. The word Almoas means diamond, a fitting name for the world’s most expensive caviar. This Beluga caviar is white in appearance. Beluga caviar is composed of pea-sized, gray eggs. In general, the lighter the color, the more expensive it is. The grades are: 0 (darkest color), 00 (medium toned), and 000 (lightest color). The 000 grade is the most expensive and is sometimes referred to as “royal caviar”. In terms of texture, royal caviar is often described as rich and silky.

NOVEMBER / DECEMBER 2013

Ⓚ ZZZZZZZZZZ

Tired out after a full day of watching the market? You need the Vividus. This bed - made by Hastens—is the most expensive bed in the world. Its name is Latin for “Full of Life.” Sleeping on the Swedish designed Vividus bed has been described as “sleeping on a cloud.” All that sounds great and saves on the sheep counting before you can nod off, until you see the price tag of USD $59,750 which may give both you and your bank manager some sleepless nights.

Ⓞ COOL:

Meneghini is an Italian company which has developed a fridge called “La Cambusa.” It is like armoire with width of 8.2 feet. Its storage capacity is 26.6 cubic feet. The wood frame and its paint with one of 500 colors of your choice costs $26,000. But when equipped with freezer, fridge and temperature-controlled pantry units increase its cost to maximum of $41,500. This fridge has another unique feature that it can also be equipped with a flat TV screen. The Meneghini La Cambusa can be furnished with range of gizmos like ice-maker and coffee maker.Its main features are summarized as unit which includes wooden exterior, Miele coffee system, flat-screen television, Termperature controlled pantry, storage space, Liebherr refrigerator and freezer system, Miele microwave oven and steam oven.

Camera type: Interchangeable lens digital camera Lens: E-mount lens Image sensor: 23.5mm x 15.6mm (APS-C format) CMOS Total number of pixels: Approx. 24.7 megapixels

Ⓜ KEEPING IT SAFE

Investment paid off? Need some quick cash? Need that special timepiece for the gala dinner? Keep your most valued possessions safe from criminals with Doettling’s luxury creation – “The Fortress”. The bespoke German luxury safe manufacturer Doettling has created what is billed as the world’s safest luxury safe, the Fortress. The Doettling Fortress which comes upholstered by hand with its signature quilted calfskin, impressively introduces us to the new era of security. Available in the certified security classes VdS/EN 3 to advanced VdS/EN 5, it’s ready for connection to a burglar alarm including a ‘silent alarm’ function, a special configuration that easily provides certified insurance coverage of $1 million. The craftsmen at Doettling designed the interior of this high-security safe, of which only a limited edition of ten per security class exist. The Fortress includes 8 watch winders individually controllable using specially designed software. And in addition to an infinite adjustable number of rotations, it’s also possible to set the rotation’s direction. Inside the Fortress, there’s also a humidor crafted out of original Spanish cedar, with an electronic humidifying system. Further, Wempe’s hygrometer and barometer provide information about air pressure and humidity. Impressively, the Fortress’s upper section integrates a Colosimo two-door safe, offering additional space for 6 luxury timepieces.

ISSUE 01

The USD $6,995 Hasselblad Lunar Mahogany Camera. Hasselblad is known for creating cameras of the highest quality. This one transcends functionality to become a work of art. Combining traditional skills, the development of special techniques, and a passion for perfection, the Lunar is born from exceptional quality.

on the high side? Don’t worry as the Titanic watches range in price from £4,500 to £75,000 depending on the material used, such as steel, silver or gold with diamonds.

$1223.32. The luxurious and expensive cupcake was presented on a Villari 24 carat gold plated antique tea trolley along with another 24 carat gold painted cake stand to eager sweet lovers. Bloomsbury prepared it by utilising the finest chocolate and wrapped it up in luxurious 23-carat edible gold. The unique ultra-luxurious dessert boasts of edible gold sheets, Doves organic flour sourced from the United Kingdom, Rachel’s organic butter, Premium Amedie Porcelena cocoa shipped from Italy and gold Ugandan superior quality vanilla beans.


LUXURY INVESTMENT INDEX

NOVEMBER / DECEMBER 2013

Passion and

Performance

ISSUE 01

Can alternative investments be a useful way to spread risk?

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A

ccording to the Knight Frank Head of Rural Research and Wealth Report Editor, Andrew Shirley assets which have been traditionally viewed as being at the fringe of traditional asset classes, such as art, wine, classic cars and coins can certainly insulate a portfolio against a volatile equities and traditional investment markets. “The performance of the Knight Frank Luxury Investment Index (KFLII) shows that investing in a broad range of collectible assets can be a useful way to spread portfolio risk,” said Shirley.

BY ST EV E MA LLA CH Watch returns A signed Patek Philippe rare and unique 18k white gold perpetual calendar was sold at the first auction held by Christie's on mainland China in October 2013 for USD $257,317. Image courtesy Christie's Images Ltd.

Although these investments should not be seen as a substitute for a more sober approach to achieving long term returns, or even maintaining the value of a portfolio the figures that have been released by Knight Frank are certainly enough o provide the more adventurous and risk-tolerant investor with food for thought.

The gold standard for many investors when evaluating returns is the property market. However, the Knight Frank report clearly shows that the recent upturn in the performance of classic car investment, and the nothing less than stellar performance of investment grade wine has matched the increases in the value of property in prime central London. Investors should compare this to the performance of gold – which has fallen by 23% since June 2012. The FTSE has performed slightly better, rising by 12% in the same period. When the performance of the alternative assets is aggregated over a 10-year period the difference is marked. Over the last decade an invest-


LUXURY INVESTMENT INDEX

40% said they would be increasing spending on wine, while 41% would be investing more acquiring collectable watches.

NOVEMBER / DECEMBER 2013

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Stamps and coins continue to deliver returns and are now recognised as bona fide investment asset classes, furniture on the other hand, especially antique styles have declined in popularity with homeowners. However it is worth noting that recent auction activity recorded at the more specialised, niche auction houses indicates that furniture with a combination utilitarian / investment value may be becoming more popular, with pieces from the 60’s and 70’s achieving some record prices. It appears that the recent global economic downturn has turned certain investors away from strictly decorative furniture pieces and towards pieces that are both aesthetically pleasing and functional.

Wine is a popular alternative investment 1 Double Magnum Chateau Lafite Rothschild Vintage 1982 USD $89, 268. Christie's China Auction October 2013. Image courtesy Christie's Images Ltd.

If there is one learning that investors can take away from a review of the Knight Frank Luxury Investment Index it is that investing in a broad range of collectible assets can insulate a portfolio from the vagaries of a rapidly changing market. There is a caveat to investment in collectables or the so called ‘investments of passion’ – many of these asset classes can be extremely volatile and subject to the vagaries of both the market and the individual tastes and activates of wealthy ‘market makers’. The preferences and behavior of these individuals, as well as the ubiquitous effect of fashion trends can inflate and deflate prices in wildly unpredictable boom and bust cycles. In recent history for instance a certain well known French wine estate saw bottles of its most highly prized vintage suffer an enormous decrease in value due to the actions of a single individual who divested himself of many cases due to unforeseen financial circumstances. The result was a shock wave that was felt throughout the rarified atmosphere of the investment wine community. Indeed it led to some of the more established estates taking a more ‘nuanced’ approach to allowing their products to be aggressively marketed as investment class assets – the threat to the ongoing value of the next seasons wines and the subsequent affect on the value of the estates themselves was judged unacceptable. Another aspect of investing in these asset classes that should give the investor pause is that often the investment decision will revolve around the purchase of a single item from the particular asset class that resonates with the emotions and preferences of the individual. There are very few (although there are some) who will have either the interest or financial resources to purchase a wide variety of art, or a warehouse full of classic cars. The result is that the individual piece may not track the performance of the asset class as a whole and therefore a trend analysis of the performance of the asset class can be extremely misleading. Shirley notes that many experienced investors avoid the potential pitfalls of a volatile and emotionally driven marketplace, ‘“As collectors become more knowledgeable they are also driven more by their own expertise and tastes rather than the latest “trends”. From an investment point of view this is important as bubbles can arise – as seen in certain French wines and Chinese stamps – when too many people invest in a particular segment of a market.”

ISSUE 01

ment in a weighted bundle (if this were possible) of the collectible assets included in the Knight Frank report would have delivered a 174% return. Although over this longer period gold would still shine as a mainstream asset performer (+273%). Perhaps the most important aspect of investment in collectibles is that the investment decision is very rarely based on a simply evaluation of balance sheet performance. The return on investment is most often balanced with the aesthetic and emotional appeal of the collectable or specific luxury investment. It is therefore rare to find an investor who will take a balanced view of the opportunities provided by these assets, in most instances investors will concentrate on only a few of the opportunities. The performance of the assets as a ‘basket of goods’ can therefore be slightly misleading. A closer examination of each of these asset types is required in order to fully understand the risks, and the rewards for the investor willing to take the path less travelled. The wide variation in performance of the various assets in the KFLII is apparent over both the short and long term. Classic cars for instance have remained sterling performers, rising 21% over the past six months (until June 2013) – and when viewed in terms of long term performance (the last decade) the classic and collectible automobiles have returned a staggering 430%, outperforming both property and gold by a significant margin. After a period of extreme volatility the market for fine wines underwent a correction in 2011 and 2012, however prices are now on the rise again. Fine wine is a particular favourite of Asian investors and some of the recent prices seen at auction indicate that there is a renewed interest in wine as an investment. The art market remains extremely volatile. Certain artists retain their cache and continue to deliver returns at auction, while there are younger artists, especially in Asia who are beginning to see their works achieve significant prices (for more information please see the Christie’s article later in this publication). Art is the number one passion investment amongst Asian investors, whereas wine – even taking into account its recent stellar performance is only rated number three. According to Knight Frank’s Shirley “Acquiring beautiful objects and building prized collections has been a trapping of the wealthy for millennia. Given the recent surge in wealth creation across Asia Pacific, it therefore comes as no surprise that the region is now home to some of the world’s most voracious collectors.”


LUXURY INVESTMENT INDEX

Knight Frank Luxury Investment Index 12 MONTHS

5 YEARS

10 YEARS

-19%

-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%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

Antique furniture

ISSUE 01

NOVEMBER / DECEMBER 2013

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

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Asian art investment Zeng Fanzhi - Bicycle. Signed and dated 2005. Oil on canvas was sold for USD $1,525,609. Image courtesy Christie's Images Ltd.

In fact both wine and art, favourites among High Net Worth Individuals as alternative investments are more volatile than the FTSE 100. The investment mindset of the Asian luxury asset investor is changing. Along with an increased number of luxury assets going under the hammer in China and increasing levels of disposable income there are other factors at play. The changing investment habits of Asian HNWI’s has not escaped the notice of Knight Frank, according to Shirley; “What is interesting though is how collecting habits are changing. As High Net Worth Individuals in the region gain more exposure to the west – either through their own business dealings, or very often through the education of their children overseas - their tastes are becoming more catholic. “While collectors remain very patriotic, investing heavily in Chinese art for example, they are now prepared to look further afield for their inspirations; with a significant number building carefully curated portfolios of classic European cars or watches.”

A survey of investment trends and attitudes amongst Asian investors by Knight Frank, as revealed by a wide variety of financial and investment advisors shows the extent of this change in focus. Fine art is more popular than ever amongst Asian HNWI investors. 45% of those surveyed said that they would be increasing their investment in fine art during 2013. Watches and wine were also extremely popular – 40% said they would be increasing spending on wine, while 41% would be investing more acquiring collectable watches. When asked their opinion about which investment of passion is growing the most quickly these investors overwhelmingly chose fine art, being least impressed by the possibilities offered by collectible coins. Tellingly 7% of the Asian HNWI’s surveyed said that they would be increasing their spending on passion investments, while 14% would be further increasing their holdings of property. The most popular investment for increased spending by a fairly wide margin was equities at 38%.

The popularity of the asset classes outlined in the Knight Frank Luxury Investment Index is by no means anywhere near that of other, more traditional investments. In Asia, corporate bonds make up 16% of the average portfolio of high net worth individuals; property investment accounts for 21% of investments with equities are also extremely high on the list - making up around 14% of the average portfolio. Investments of passion, which can include art, classic cars, and wine account for only 3% of these portfolios. As equities come under increased pressure many investors are turning to these investments of passion as a way to both cushion their portfolio from shocks and to enjoy the emotional experience of owning a one of a kind piece or a reflection of their own taste. In this feature Investment life will examine the trends and underlying causes of the increasing popularity of alternative asset classes and collectibles, as well as historical performance when compared to more traditional investments.


LUXURY INVESTMENT INDEX

Alternative Investment Classes

A key diversification tactic BY D A N I E L K I E R N A N

ISSUE 01

NOVEMBER / DECEMBER 2013

ASSOCIATE DIRECTOR, INTELLIGENT PARTNERSHIP, LONDON

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T

he focus of the Investment Life feature is investments of passion and collectibles which hold both an aesthetic and emotional attraction for High Net Worth Individuals. However, prior to delving deeper into these asset classes, an overview of alternative investments in their entirety should provide readers with insight into the value of diversification across many classes of alternative investments. The flow of macro-economic news since the crash of 2008 has shaken consumers' faith in traditional stock market based investments and investors are now increasingly considering putting their wealth into directly held alternative investments - tangible assets that provide diversification away from property and the stock market and often promise high returns.

Definition As there is no official definition of alternative investments, it’s a term that can be open to widely different interpretations that can encompass everything from Hedge Funds to Stamp Collections. With this in mind, perhaps the most sensible starting point is to define alternative investments by what they are not. Alternative investments are not the more commonly held assets that we have been familiar with over the years such as stocks, shares, cash, property funds, bonds or fixed income products.

Alternative investments are: directly held non-regulated investments into tangible assets.

Benefits of Alternatives Actually, alternative investments are nothing new and both institutional investors and high net worth individuals have long had access to alternative markets. In fact a recent report by Cap Gemini and Ernst and Young estimates that the rich put 10% of their wealth into alternatives. There are two reasons why they do this: diversification and performance.

Diversification Diversification is the strategy of spreading your wealth across a range of assets to reduce the risk of being over exposed in one area. If the majority of your wealth is in the property market or the stock market and these markets do badly, it will have a big impact on your financial wellbeing. If your wealth is spread across several asset classes, a downturn in one area can be offset by strong performance in another. A more common way of thinking about diversification is “don’t put all your eggs in one basket”. What many investors came to realise after the market turmoil in 2008 and subsequent recession was that a lot of the assets they held were correlated – when one market performed badly, they all did. For example, many people’s wealth and assets are allocated like this:

A Shares and bonds (most pensions are invested this way) B Property (home ownership) C Cash (savings in bank accounts and short term fixed income products from banks and building societies) In the crash of 2008, all of these investments performed poorly at the same time. It’s clear that for many people, further diversification is needed - and alternatives are the perfect tool. Just how Important is Diversification?

“Hurricanes” Picture Miami Beach and you probably think of balmy temperatures and year round sunshine. However, Miami is occasionally hit by hurricanes, sometimes of a once-in-a-generation severity. So when you build in Miami, you don’t just build for the sunny weather – you build in order to be able withstand hurricanes. When it comes to constructing an investment portfolio, the same principles apply. Just like the weather, the market suffers occasional hurricanes – we lived through a big one in 2008. As the chart below shows, the 1910s, 1930s, 1940s and 1980s all had periods of significant volatility as well. So any portfolio should be built to withstand these unsettling periods. See ‘Standard Deviation of Monthly Stock Returns" Table One of the most well-known and most dramatic periods of volatility was the 1987 ‘Black Monday’ crash. The crash began in Hong Kong and spread to Europe and the United States: See ‘FTSE 100 Index (197 – 1988)' Chart


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By the end of October, stock markets around the world had fallen by around a quarter! What is perhaps most worrying is that to this date the reasons for the crash have never been fully explained, with the crash being attributed to a number of including programme trading, overvaluation, illiquidity and market psychology. Unfortunately we are still grappling with these issues and still suffering from sudden market falls 25 years later.

Standard Deviation of Monthly Stock Returns from Daily Returns in the Month, 1885-2011

The Impact of Volatility An example can help clarify the damaging impact of such sharp falls. Compare the returns for portfolios A & B. Some investors might anticipate that the higher returns Portfolio B achieved in years 1 and 3 would more than offset the loss made in year 2 and that Portfolio B performed just as well as Portfolio A. YEAR

PORTFOLIO A

PORTFOLIO B

1

6%

30%

2

6%

-20%

3

6%

8%

FTSE 100 Index (1987-06-19 through1988-01-19)

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A simple average gives a return of 6% in both cases and seems to support this. (Add up the returns and divide by three) But investment returns don’t average, they compound:

Cumulative Return RETURN

£106

£106 + 6%

£112.36

£112.36 + 6%

£119.10

Total Return Annualised Return

19.10% 6%

PORTFOLIO B

RETURN

£100 + 30%

NOVEMBER / DECEMBER 2013

£100 + 6%

PORTFOLIO A

£130

£130 - 20%

£104

£104 + 8%

£112.32

Total Return Annualised Return

12.32% 4%

The Impact of Volatility Investors’ seek to reduce their overall portfolio volatility by diversifying into a range of assets that are not correlated.

and emerging market stocks and bonds. But in our globalised world, international stock markets are becoming increasingly correlated over time. Furthermore, correlation increases in periods of market distress. During the down markets of the last two decades, not only did these traditional asset classes move in the same direction, they moved more closely together – their diversifying effects broke down just when they were needed most. The chart below shows how correlation has been steadily increasing, and increased sharply in the crashes of 1987 and 2008.

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So it actually takes a much bigger gain or a longer period of gains to recover from a big loss. This is why it is important to try and reduce overall portfolio volatility. The objective is to have something in your portfolio that is doing well at any given time, in any kind of market.

Correlation is a measure of how two different variables move in relation to each other. Assets that are highly correlated will move in the same direction together. Assets that have no correlation have no relationship and assets with a low correlation will move in opposite directions. So in other words, the lower the correlation, the greater the diversification benefits. For decades, investors’ would seek diversification by investing across a range of traditional assets such as domestic, international


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Average Correlation Between 45 Equity Country Benchmarks

See "Average correlation between 45 equity country benchmarks”

Examples of How Alternative Strategies Work We’ve carried out our own research looking at the more recent crash in 2008. According to our figures, over the ten year period to 2010 a portfolio with a 20% allocation to alternatives would have achieved an annualised return of 6.6% and a total return of 89% compared to a standard portfolio annualised return of 4.5% and total return of 55%. See ‘Performance Table SOURCE

J.P. MORGAN EQUITY DERIVATIVES STRATEGY

Diversification Conclusions The benefits of diversifying a portfolio to reduce overall volatility are clear, but traditional diversification strategies are becoming less and less effective. Alternative investments can provide solutions here and investors and their advisers and intermediaries should consider the benefits of adding an allocation of alternatives to a portfolio of traditional assets.

Spot Gold Price in USD

Alternatives also hold out the prospect of enhanced returns. Alternatives such as gold, forestry or farmland have outperformed the stock market and the vast majority of managed funds over the last 10 – 15 years. See ‘Spot Gold Price in USD'

Level of Return

FIGURE 2.

Performamce

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Performance

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█ Blended Portfolio █ Standard Portfolio

Much retirement planning is often based upon achieving an annual compound return of 7%. If we assume 3% for inflation and costs of 1.5% (management fees, trading fees, etc.) this means we need a real return of about 11.5% a year. Is this possible? Well, we would expect the highest returns to come from equities as the riskiest assets within a portfolio. According to MSCI, the annualised l return including dividends for the ten years to 1st October 2013 on their All Country World Index (approximately 85% of the global investable equity opportunity set) index was 5.54%.The returns are similar for most developed markets and only investors who are prepared to venture into the emerging markets such as India and China see double digit returns for the same period – but these markets are more volatile as recent price falls have demonstrated. And this is just for the portion of the portfolio that is allocated to equities. According to Andrew Lapthorne, Society Generale’s quantative ana-


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lyst, the implied yield on a traditional balanced portfolio comprising a mix of bonds, equity and cash is now below 3% per annum. So if a return of 11.5% a year is at best optimistic and at worst unlikely, investors planning for retirement have to change some of the other assumptions in their model: A Work for longer B Increase their contributions C Earn higher returns

Issues to Consider Alternative Investments – The Good

Alternative Investments –The Ugly

The ‘goldilocks scenario’ of steady growth, stable interest rates and low inflation we had prior to 2008 is over and the property bull run has come to an end. Today’s economy is characterized by low growth, low interest rates, high inflation, volatile stock markets and fears of another shock to the system. Investing in this environment is very difficult for ordinary folk who want to preserve their capital, save for retirement or earn a respectable income from their assets. The combination of inflation and low interest rates is especially damaging to savers who would normally feel that ‘cash is king’ and choose to keep their wealth in cash until things improve. Many alternative investments are investments into sectors that do not rely heavily upon economic growth, such as agriculture or renewable energy. They can offer stability and inflation beating returns in an unstable world.

Risk of Alternatives By their very nature as uncorrelated, less widespread investments, alternatives can have different characteristics to more commonly held assets. Alternatives can be less liquid then cash and mainstream stocks and shares; it can be harder to determine their true market value and an independent valuation might be needed; when it comes to en-

Farmland and Agriculture: Strong Fundamentals Demand for land and soft commodities is being driven by strong macro trends, most notably the increase in global population which hit 7 billion at the end of 2011 and is predicted to reach 9 billion by 2050 – an increase of 75 million people each year. In addition, as Asian counties such as India and China grow richer they are eating more meat, which in turn requires more grain to feed the livestock – it takes 7 pounds of grain to produce one pound of beef.

Stability and Diversification Farmland is a classic defensive investment and store of wealth, providing regular income in recessionary environments. Whatever else happens in the wider economy, people still need to eat! Farmland has a low correlation to other asset classes and has outperformed traditional asset classes over the long-term. In 2008 when many stock markets were down by over 40%, farmland values increased by over 15%

Under-owned Asset Despite the strong fundamentals supporting farmland investment, it is still an under-owned asset. In many cases the barriers to entry and costs of transaction are prohibitively high and many institutional investors have been constrained from investing in the sector by their benchmarks and investment memorandums. Widely reported food price spikes in 2008, 2010 and the summer of 2012 are testament to the growing mis-match between supply and demand for agricultural produce. And the activity of state backed investment funds, such as the Chinese government-run Heilongjiang Beidahuang Nongken Group which purchased over 800,000 hectares of land in Argentina, demonstrate how seriously the issue of food security is being taken.

Forestry: Diversification and Performance Returns from forestry have outperformed stock markets and traditional investments over the

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Investors’ understandable desire for high returns is not helped by unscrupulous ‘advisors’ and product providers taking advantage of the unregulated status of some alternative investments. In this unregulated corner of the market many products are quickly put together opportunistic projects designed to take advantage of the latest fads in the investment world. Much of the marketing material is heavy on the benefits on light on the associated risks of the investment and many of the people promoting these

Alternatives and Investing in Today’s Economy

Categories of Alternatives

NOVEMBER / DECEMBER 2013

However, it is this quest for returns that I feel often leads investors into poor asset allocation decisions. Excited or tempted by the prospect of high returns, they naively over-allocate to alternative investments. They can then find themselves over-exposed to unconventional, unregulated investments that leave their financial planning in tatters if they fail. They are also exposed to liquidity risk, as directly held investments are of course much less liquid then conventional investments.

One of the key benefits of alternative investments is that they are directly held assets – the investor owns something tangible with an intrinsic value that can never fall to zero, such as a piece of land, property, personal property such as wine or collectibles or gold bars. This eliminates counterparty risk; the value of the investment cannot disappear overnight as it can do when we see major company failures or stock market crashes. Alternatives are also an opportunity for consumers to invest according to their personal interest: perhaps into green or ethical sectors or perhaps into a concept they really buy into. Investing in alternatives can be a lot more engaging than considering the latest managed funds.

Alternative Investments –The Bad

Other Benefits of Alternatives

tering an investment, there may only be limited historical data available to help assess the opportunity; there can be high transaction costs, as well as on-going costs to consider; the exit from the investment can be vague or undefined. Investors must be aware of and consider all of these factors before investing.

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So bearing the points above in mind, there is a good case for some alternative investments to form part of a portfolio: A Directly held tangible assets can provide a strong hedge against inflation and bond market defaults – something tangible always retains some value and minimises counter-party risk. B Alternative investments are also a powerful diversification tool as they are uncorrelated to the wider markets and so provide some protection against further market volatility. C Finally, alternative investments offer potentially high returns and often offer defined returns – getting investors closer to the level of returns they need in order to achieve their targets.

opportunities are non-regulated, commission hungry agents who are driven by the need to achieve sales rather than provide good advice.


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long term, returning an average of 6.5% over the last century. In addition, forestry has historically performed well when markets have fallen – it has a low correlation to traditional asset classes. Forestry is also a classic hedge against high inflation: not only is forestry a tangible commodity, but as the trees grow their value should increase in line with inflation. Biological tree growth tends to offset any depreciation in timber prices.

Supply and Demand The global timber trade is valued at over £372 billion a year with estimates that demand for timber will increase 60% by 2030 (United Nations Food and Agriculture Organization). This growth will be driven by both economic and population growth in India, China and the rest of Asia. However, there are new constraints upon supply. Governments and international NGOs are legislating to prevent both illegal and unsustainable logging, which taken together account for as much as 70% of timber sold.

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ENERGY

Energy has been a long-standing classic defensive investment, but the drivers for investment are starting to change.

“Peak Oil” It’s not just oil actually – all of our reserves of fossil fuels are dwindling. According to BP, at the current price and using current technologies we have about 46 years of oil reserves left, 58 years of gas and 118 years of coal. Activities such as recovering oil from tar sands or deep-water drilling are now more commonplace, but are also more dangerous and expensive – witness the £24billion cost to BP of the Deepwater Horizon disaster in the Gulf of Mexico.

Global Demand

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At the same time as supply is reducing, demand is growing, driven by the growth of China (which accounted for over 70% of the growth in consumption in 2011), India and other emerging markets. Shell estimate that energy demand will double by 2050. There are short term surprises on both the upside and the downside – such as the shale gas ‘bonanza’ in the US or the withdrawal of support for nuclear power after the Fukushima disaster in Japan – but the broad trends are pretty clear. The contraction of supply and increase in demand is likely to

have a profound effect on availability and push up prices. Companies that can benefit from this will be attractive investments.

Environmental Concerns and New Opportunities As well as being non-renewable, fossil fuels are also pollutants that contribute towards climate change. Global carbon emissions are approximately twice as high as they were in the 1970s and governments are seeking to legislate to reduce pollution. The best-known target was agreed as part of the Kyoto Protocol in 1997: 20% of energy from renewable sources by 2020. The UK, EU and many other governments signed up to this commitment, although both the US and China were notable abstainers. Nevertheless, the search for clean, renewable sources of energy to replace fossil fuels is driving a new phase of investment, and unsurprisingly this is where the alternative investment market has focused.

PRECIOUS METALS Store of Wealth Many investors are turning to precious metals as an alternative store of wealth. Disillusioned with negative real returns on cash, depreciating currencies, the possibility of future inflation and volatile or moribund markets in other assets, finding a sensible store of value is difficult. This has certainly been one of the factors behind the rise in the gold price over the last 10 years. Investors of all kinds, from retail investors to central banks and sovereign wealth funds are seeing gold as a secure store of wealth and the currency of last resort. Some investors are also choosing to store wealth in silver and diamonds – taking the view that rare tangible assets provide some security from inflation and financial repression.

Industrial Demand There is very little industrial demand or utility for gold – its value lies in its function as a store of wealth or currency. Silver is a half-way house – it has some value because it is recognised as a tradable store of wealth but it is also used in the electronics industry and industrial demand accounts for over half of total silver fabrication. Diamonds split nicely into two – there is a huge amount of industrial demand, but this is met through the production of synthetic diamonds. Gemstone diamonds are mined and are much rarer, and therefore do have some value as a store of wealth.

Rare earth metals are at the other end of the spectrum to gold – they are valuable only because they are rare and in demand for use in high end electronics, clean energy and defence applications. Other valuable industrial metals include platinum, palladium and copper, but these are considered to be more of a commodity style investment and there are no directly held alternative investments into these metals.

Speculation? There has been a lot of speculative investment into precious metals. Steep rises in the gold price make headlines in the mainstream media, drawing further investor interest – and raising concern that it is moving into bubble territory. Silver also attracts speculation from more adventurous investors and a smaller minority of investors have also tried to speculate on the price of diamonds and rare earth metals. Obviously speculation can drive prices higher, but it also highlights the key issue with these assets – it is very difficult to know when they are over-valued and a sudden change in sentiment towards them could lead to steep price falls. Of course these assets do not provide any income.

PROPERTY

Property is of course the best known alternative investment and is now so widely used as a diversifier in traditional portfolios that perhaps today it is more mainstream than ‘alternative’. Of course, many investors are familiar with the idea of property as investment as they already have purchased their own homes and the property market receives a lot of coverage in the UK. The residential buy-to-let markets and commercial property in particular are well established; more alternative property investments would include care homes, hotel rooms, student accommodation, self-storage and car parks.

Diversification Real estate allows investors to spread some of the risk in a balanced portfolio over the long term, mainly because the returns from real estate have a low correlation with those from equities, bonds and other com Stability of Income Income from real estate takes the form of rental yields paid by tenants. Real estate yields over the last 30 years have been consistently higher than most fixed interest securities and the dividend yield available on equities. Meanwhile, the relatively long-term nature of rental contracts can provide stability of income.


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Performance Real estate has provided excellent returns over the medium and long term, outperforming the stock market) and delivering returns Inflation Hedging Real estate has typically provided returns over and above that of the rate of inflation. This is important as it can protect investment capital from the erosive effects of rising prices.

Other Considerations Of course not all property markets and property assets are equal and locations, sectors and individual propositions need to be carefully looked at. And the heady days and get rich quick stories of the pre-2008 bubble are now well behind us.

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LAND

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Land has been a directly held alternative store of wealth for the very rich for centuries. There are now more opportunities for retail Note that this is not land used for agriculture or forestry – these have their own categories. This is focused on the concept of land as an alternative store of wealth or as a speculative investment aimed at achieving capital growth.

Tangible Store of Wealth Land represents the oldest store of wealth we have as a society. Whatever else happens in the wider economy or markets, land will always be needed and always have an intrinsic value. Furthermore, land values tend to keep pace with inflation, helping to retain the purchasing power of the investment.

Uncorrelated Performance Depending on the intended use of the land, it can offer the prospect of returns that are not correlated to stock markets and the wider economy, thus fulfilling the role of a useful diversifier and reducing overall portfolio volatility.

Speculation and Other Considerationse We feel that achieving strong performance and uncorrelated in this sector is highly dependent upon selecting the right project: land that it either fairly valued and therefore represents a sound store of wealth; or for more speculative investments land that realistically has some unrealised utility that means that it is currently undervalued but likely to rise in value significantly in the near

future. These projects do exist – land in rapidly developing markets can shoot up in price as the demand for housing, shops and hotels grows. In the developed markets retail investors will be up against commercial developers who require large land banks and can afford to own undeveloped land for long periods and wait for the correct planning permissions or the right time to build. Investors must also be wary of very speculative land banking schemes being promoted by boiler room operations – selling poor quality land at overinflated prices on the basis that it will obtain planning permission for a change in use and see a dramatic rise in value. Needless to say, the planning permission never comes.

COLLECTIBLES

Collectibles include classic cars, fine wines, fine art, stamps, furniture, antiques, watches and jewellery. They are not really investment products – they are stores of wealth that have a value due to their status as highly desirable items.

Personal Interest Without doubt the best way to invest in collectibles is to have a strong personal interest. This will help people develop the experience and expertise necessary for successful investing and provides a great insurance poli cy in the event that the investment is not successful – presumably the investor will have derived a great deal of personal benefit from owning these kind of items, regardless of any returns generated!

Diversification These items are also physical, tangible stores of wealth that may well provide uncorrelated returns and protection from ‘financial repression’ –high inflation, currency devaluation and increased taxes that all erode the values of other kinds of saving. Collectibles are not likely to be directly affected by stock market crashes or monetary policy.

A Play on Luxury? Many of these items derive their value from their status as highly desirable, luxury items that are increasingly in demand from merging Asian consumers whose purchasing pow-

er is increasing. Some investors feel that this new area of demand will drive prices higher in this sector.

OTHER ESOTERIC INVESTMENTS

There are a number of other directly held alternative investments in the market place that are not easily sit in any particular category. These include: carbon credits, forex trading, film rights, sports media, traded life policies, shipping containers, burial plots, recycling and land fill as well as others…

Unique The key characteristic of all of these investments is that they are unique opportunities that are not available through any of the traditional investment channels. They may well play into investors personal interests and can be interesting and entertaining areas to learn about and be involved with.

Speculation or Diversification? These investments are certainly diverse and they are unlikely to be correlated with mainstream assets. They also potentially offer very high returns. However they also tend to be very speculative. For many people, they are too speculative to even be considered as useful diversifiers - so perhaps they are best viewed as an interesting way of taking a punt on something, rather than a core holding within a portfolio.

CONCLUSION

In summary, the interest in alternative investments is growing as consumers seek tangible alternatives to volatile stocks and shares, a depressed property market and an uncertain economic outlook. Alternatives offer a opportunities for diversifying a portfolio and earning higher yields, but do bring additional investment risks and must be considered carefully. The above article was supplied exclusive ly to Investment Life courtesy of Intelligent Partnership in London, England. As part of Intelligent Partnership’s mission to provide advisers with the content, education, tools and support they need to evidence whole of market understanding, broaden their investment propositions and help their clients make informed decisions.

More detail can be found by downloading the Alternative Investment Report 2013: aireport.co.uk/ or reviewing the sector specific reports available from Intelligent Partnership: research-hub/reports/


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Take a Seat Why antique furniture keeps on delivering

B Y AL E X AN D ER KN I G HT

12 MONTHS

5 YEARS

10 YEARS

-19%

-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%

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Antique furniture

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Stamps

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

The Value of Investing in Antique Furniture Television shows like ‘Pawn Stars’ and the ‘Antiques Roadshow’ have had a significant impact on raising awareness around the value that can be found when buying and selling antique furniture. However, investment experts are still sceptical as to whether this is a viable investment option. Auction houses on the other hand believe that there is money to be made from this type of investment as long as the buyer or seller has some knowledge of the antique furniture market and, as is usual with the so-called ‘passion investments', does not let their heart rule their head and miss opportunities to profit from market and trend cycles. Emotional attachment to these types of alternative investments due to the aesthetics of the piece can end up costing an investor dearly.

Supply and Demand Most antique furniture buyers purchase furniture items as part of a collection, as a hobby or just because they appreciate the craftsmanship and beauty of the antiques, and not as part of an investment. The bulk of the sellers on the other hand are looking to profit from pieces that they have either inherited or purchased for resale with no intent on keeping or collecting the items. Due to this buying and selling model and the fact that the popularity of the market has increased, supply can often outweigh demand resulting in furniture pieces being sold below their value. While this is good news for collectors, it does not bode well for investors. However, this does not mean that there isn’t money to be made. Certain rare items that are in good condition appreciate in value faster than more common pieces. Knowledge of what is rare, collectible and in high demand is therefore essential to make a profit in the antique furniture market.

Factors Affecting the Value of Antiques There are many different criteria that are used in determining the actual value of specific antique furniture items. All of these factors need to be taken into account before buying or selling. AGE Older furniture pieces are generally valued at a higher price than newer items. However, other factors such as the condition of the furniture will play a greater role in the evaluation criteria.


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Note on Chinese antiques: Since June 2009 the People's Republic of China has legally prevented the export of anything earlier than 1911 (the end of the Qing dynasty). In the PRC, the penalties for smuggling 'Cultural Relics' are severe and include lengthy imprisonment, and even execution. In Taiwan, anything 100 years or older cannot be exported. So if it looks to good to be true, check the provenance and the bona fides of the dealer very carefully.

Caring for Antique Furniture Passion Purchase

A 19th century satinwood, painted and parcel gilt Pembroke table. Structurally sound with minor damage – will not provide investment grade returns, but certainly attractive as an investment of passion. Purchase price around USD $1,600 in the UK.

Due to the lengthy period of time that it takes for antique furniture to increase in value, special care needs to be taken to ensure that the condition will not affect the value. Should the item need any restoration or repair, only top professional restorers should be used. Be aware of the specific care requirements for antique furniture items before making an investment.

Current Market Trends or natural catastrophe are also in higher demand and therefore fetch higher prices. Provenance also plays a role here where antique furniture that has a story attached to it will increase the value.

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WHERE YOU BUY OR SELL Most antique furniture stores are well-versed in the art of valuing antiques and pieces bought at or sold to these stores are likely to reflect their true value. It is unlikely that a rare treasure at a bargain price could be found at one of these stores. Flea Markets or antique shows are a great place to pick up good deals. But visiting the markets can be arduous and there is a risk that fake or overvalued items may be sold. Auction houses provide a far more reliable buying and selling platform. All items will be appraised before going on auction and the price could be driven up by bidders in the audience. There are risks attached to selling antiques at auction and it is advisable to use one of the larger auction houses where the furniture pieces will be advertised to attract the right collectors and buyers.

Strangely, it is not the antique furniture pieces from earlier centuries that are currently popular but items from more recent decades. Retro furniture from the sixties and seventies are in great demand but there is an even greater call for American folk and craft pieces from the eighties. You just need to look at the latest fashion trends that seem to be moving back to eighties to understand the sudden popularity of pieces from this era. Sotheby’s now has an entire department dedicated to this genre of antique furniture. Experts in the field are at odds as to whether furniture from such a recent decade can be classed as antique or purely vintage. Taking into consideration the recommended amount of time a piece should be kept before resale, furniture from the eighties becomes a viable investment. Like most luxury investments, it is knowledge and a passion for antique furniture that could mean the difference between making a profit and losing money. It is essential to weigh up the risks before taking into account the rewards that could come from investing in antique furniture.

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RARITY Antique furniture items, where only a limited number were crafted or manufactured, are rare and therefore more valuable. In the same way, antique items that managed to survive a specific era such as a World War

The longer an antique item remains off the market for resale, the greater the profit margins are likely to be. Experts recommend that antiques should be held for anywhere between 10 and 25 years before they are likely to be profitable. While there are rare instances where a quick turnover is possible, investing in antique furniture is generally not for the short-term investor.

CRAFTSMANSHIP AND PROVENANCE Antique furniture created by master craftsman fetch higher prices than pieces from regular carpenters or items where the origin is unidentifiable. Any documentation supporting the craftsmanship as well as the past ownership of the item can add to the value. This is referred to as the provenance of the item and antique furniture that has been owned by someone famous is likely to be valued higher than the same item owned by a commoner.

Long Term vs Short Term Investment

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CONDITION Items that are in their original condition and have not been restored in any way are by far the most valuable as these are very rare. On the other hand, antique furniture that has been damaged will have a lower value while some wear and tear could actually increase the value. Before restoring any antique furniture items for resale, it is recommended to get an expert opinion as to how this will affect the value. Interestingly enough there are bargains to be had on furniture that has some damage, but that is otherwise structurally sound (see image and caption on this page). It should be emphasised that this furniture is in most cases nowhere close to ‘investment grade.' However, there seems to be a trend towards owning furniture with historical provenance that still has a utlititarian value. For those collectors who want a working piece of furniture investment in these pieces may provide a return in terms of aesthetic value. Restoration work should only be undertaken by expert restorers and even then these pieces will not deliver the same returns as antiques in pristine condition.

You may be able to attract a larger crowd by selling or buying antiques over the Internet, but this method has its own risks attached especially when purchasing the items. The Internet is flooded with misinformation and you don’t know what you have bought until it arrives on your doorstep.


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Time is money

Investing in collectable watches BY ST A FF WRIT ER

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T

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Time Warp Cartier lady's platinum asymmetrical wristwatch. Sold by Christie's at the inaugural Shanghai auction for USD $44,715. Image courtesy Christie's Images Ltd. Limited.

here is an old business cliché that you can recognise a mans station in life by his shoes and his watch. The high visibility of watches make them ideal icons for the demonstration of wealth, power and privilege. There is however another side to purchasing iconic, highly sought after timepieces – this is as an investment. As the high tide of the global financial crisis ebbs it seems that many high net worth individuals are turning their attention to investments which can both diversify their holdings, mostly based on stocks and bonds (with property thrown into the mix). The latest edition of the Knight Frank Wealth Report indicates that alternative investments are by and large affairs of the heart. Buyers are usually motivated to purchase a particular alternative investment like fine art, classic cars and Chinese ceramics due to a combination of aesthetic appeal and emotional resonance. The same criteria apply to fine timepieces. The fact that these types of investments are currently delivering superior returns (see Knight Frank asset performance chart) is also in no small part responsible for the resurgence of ‘passion investments’. A luxury timepiece is valued according to three simple criteria – these are rarity, complexity and condition. Of course the fact that the watch is designed and produced by one of the preeminent watch brands that fact will also contribute significantly to the value of the watch and the returns that are possible over the medium and long term. According to Geoffroy Ader of Sotheby’s demand is highest for the best known names. "Most demands are based on the brands …the two ‘star’ brands are Rolex and Patek Philippe." The marketing department and ad agency for Patek Philippe should take a bow as the ‘tagline’ for their advertising campaigns “You never actually own a Patek Philippe. You merely look after it for the next generation” is as solid a summation of one of the value drivers behind the purchase of a fine timepiece as ever was written. A watch that can be seen as a legacy investment will usually deliver superior returns on investment.


LUXURY INVESTMENT INDEX

12 MONTHS

5 YEARS

10 YEARS

-19%

-15%

-19%

Watches

4%

33%

83%

Chinese Ceramics

3%

43%

83%

Jewellery

2%

51%

146%

Antique furniture

3%

182%

-6%

12%

183%

Coins

9%

83%

225%

Stamps

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

31 www.investmentlifenews.com

Data sourced from Chrono24, indicates that the gorillas in the timepiece sandpit are building on their strong reputation for delivering both quality timepieces and a string return on investment. The aftermarket prices for brands such as Rolex , Patek Philippe, or Audemars Piguet are stable and command a premium over other brands (for the most part – rarity can still have an enormous effect on collectible watch prices). There is a growing number of smaller brands with a limited output when compared to high-volume manufacturers that are delivering significant value to owners. Brands like DeWitt, F.P. Journe, Richard Mille, or Moser et Cie. from Switzerland, Antoine Martin, Sarpaneva, Christophe Claret or Greubel Forsey are leveraging a reputation for rebel-

NOVEMBER / DECEMBER 2013

3%

Art

Wine

liousness in form and function and combining this with the exclusivity of extremely limited numbers to provide investors with significant value as wearable collectibles. Those wishing to invest in timepieces from these smaller manufacturers should be aware that the limited availability of track records does not allow for the evaluation of trends and historic prices. Investing in these brands could be viewed as highly speculative – not every one of them is going to perform. In the eyes of many some of the lesser known brands are more likely to perform than others. Timepieces from manufactures such as Richard Mille or DeWitt have been identified as having the potential to keeping their present value and even increase in value in the medium and long term. Many are hoping that some of the models are sleepers and will deliver value like the Rolex 1019 Milgauss that retailed for around USD $300 in the 1960’s, and today sells for USD $25,000. ` The most valuable attribute for any aspirant, or even experienced watch collector must be patience, with tenacity running a close second. Collectors are advised to look at the numbers of a particular model and the sales cycle time, such brands do sell and due to small quantities, the value will be kept or will even go up. Many watches are have limited editions and are very rarely sold. These are the champion timepieces that return value over long periods of time. Regional interest in collectible timepieces is also evolving. As with other investments of passion Asia is waking up to the fact that not only are watches an individual reflection of style and position, but are also able to deliver superior returns on investment. More and more flagship stores for brands such as Rolex and Patek Philippe are opening across the region and online trade originating from both the Middle East and Asia is more brisk than ever before. In Asia, German brands like Glashutte Original or A. Lange & Sohne are highly desirable reflections of success, as well as being solid investments. The timepieces from manufacturer Hublot are aso attracting interest with the brand changing from being an underdog to more mainstream avant-garde. As with any investment of passion, the key to investing in collectable timepieces is to balance aesthetics and personal taste with return on investment. Those who are happiest with this particular alternative investment are usually the aspirant and high net worth individuals who take pride in wearing their investment on their wrists. Realising profit through an auction is a secondary consideration.

ISSUE 01

In the case of historically noteworthy or rare pieces the buyer should ensure that the watch is an investment that is worth the purchase price and will continue to grow in value over time. In this regard the importance of provenance cannot be over emphasised. Warren Buffett, the world’s greatest moneymaker, once said: "Never invest in a business you don't understand." Sounds like sensible advice one should follow, however even the most fervent investor with a day job simply does not have the time to become an expert in a single type of collectible. In the best selling ‘Outliers’ Malcolm Gladwell introduces the "10,000Hour Rule", and claims that the key to success in any field is, to a large extent, a matter of a total of around 10,000 hours to the task. It is unlikely that a high net worth individual would be able to devote this sort of time to collectibles of any kind – this is why we rely on experts for guidance. In the case of collectible timepieces these experts are found at reputable auction houses such as Christies or Sotheby’s. These professionals will ensure that the watch is has a proven history and origin. Of course there are a number of smaller, specialist auction houses and extremely reputable specialist watch dealers who will also provide the buyer with verifiable information on the provenance of the timepiece. Investing in the right vintage watch will not only provide a useful diversification option for moribund or vanilla portfolios it will also act as a buffer against financial turmoil and fluctuating markets. Even during the recessions that have plagued the world economy fine watches have demonstrated a track record as solid investments. Firms such as both Knight Frank and Capgemini, both of issue wealth reports on a regular basis and reviewing these reports show a strong, exponential growth of investment in these assets coming from Asia, in particular mainland China and Hong Kong. However it is not just the super rich that can become involved in collecting examples of this particular investment of passion. According to the experts its less about how much you spend (within reasonable boundaries), but more about the care that is required to find a watch that is both in good condition and totally original. Of course one of the best ways an investor can ensure that their investment is going to pay off is to look at the brand, as mentioned above. This is as important for contemporary watches as it is for those with historical value – an established brand name is the best guarantee of an above average return on investment.


LUXURY INVESTMENT INDEX

Investing In

Chinese Ceramic Art

ISSUE 01

NOVEMBER / DECEMBER 2013

B Y E L I S E K RA USE

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32

Mythical Beasts Rare Cobalt blue and Iron red stemcup. Period of Xuande. Lot sold: USD $10,2 million. Image Courtesy Sotheby's.

12 MONTHS

5 YEARS

10 YEARS

-19%

-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%

Antique furniture

Stamps

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

C

hinese ceramic art covers over 8 000 years of culture and history, the earliest of which include the army of terracotta warriors found in the tomb of the First Qin Emperor circa 210BC. Different techniques were developed through the centuries, each depicting a different era in history. Most of the ceramic products were created to have a practical use, from bricks and construction materials to dishes used in everyday life. However, the ancient Chinese appreciation for beauty and the subtleties of taste and application that were possible through the various baking methods, glazes and other finishes incolved in the making of quality ceramics soon transformed these common, workaday items into highly desirable signs of affluence and social standing amongst China’s ruling class and sociatel elite.

Today, these artworks are worth millions of dollars with the main investors in the ceramics being from mainland China, where a combination of national pride and ever increasing levels of wealth, combined with a personal interest and understanding of the subtlties of the artform are driving prices ever higher. The Chinese ceramic art market is mired in corruption with many replicas and fakes being passed off as antiques worth thousands of dollars. A lack of knowledge, which can only be formed by the love of ceramic art, increases the risk of purchasing fraudulent art, which may be the main reason for the lack of foreign investment. The lack of prevenance for many pieces of art continues to be a problem, as does the ever increasing sophistication of forgers. Both Sotheby’s and Christies continue to stake their repuation on the authenticity of the pieces that they offer on auction. SOURCE ECA INTERNATIONAL


LUXURY INVESTMENT INDEX

A fine and rare lime ground Famille-Rose teapot and cover. Sold for USD $1,7m Superb white-glazed Anhua Flower Bowl (Top Right). Sold for USD $237,000 A rare conical herbaceous bowl (Bottom). Sold for USD $299,000.

For many foreign investors it is the age, along with the condition of the ceramic art that determines its value, the rarity and the use of the object also contribute significantly to the value of the ceremic piece. In the case of the latest Sotheby’s Ming dynasty bowl its provenance, indicating that it was personally used by a Chenghua king certainly added to both the mystique surrounding the piece and the eventual price at auction. Alonside Chinese interest, foreign demand is also increasing and according to the Economist Magazine, China’s art market is now the third largest in the world. Although for the moment the main buyers of antique ceramics are still of Chinese origin, much of the art now resides outside of the borders of China.

was used mainly to replicate metallic items and used in burial rituals. Once again, few pieces remain that are open for sale on the art market.

INVESTING IN A DYNASTY

The six dynasties marked a period of political unrest where China was ruled by multiple dynasties and saw the introduction of Buddhism which had an impact on how pottery was formed and shaped. Yue celadon, pottery produced at high temperatures became far more popular and the designs of the pottery had greater variations, from very intricate designs to utilitarian items. Although paintwork had still not made a comeback, the introduction of iron oxide resulted in ceramics with greater variations in colour. There are a great number of common items from this period, still mainly uncovered in grave sites but rare, beautiful ceramics provide a better investment opportunity.

The Six Dynasties

NOVEMBER / DECEMBER 2013

33 www.investmentlifenews.com

The Bronze era, circa 1000 B.C., produced mainly utilitarian pottery ware. However, these pieces still reflected beauty and paintwork that were unique for that period. Pieces from this time are very rare as they were not produced in great quantity and few have survived the centuries. Most pieces are housed in museums and it is difficult to find works for investment. The discovery of metals changed the face of Chinese ceramic art in the Neolithic era. The art of painted earthenware was replaced by stamped or etched pottery that

Larger quantities of ceramic art have survived from the Han Dynasty, mostly excavated from grave sites. The ceramics from this era continued the tradition of copying metallic items for use in burial. Low temperatures were still used to fire the ceramics with a coppery or olive glaze with designs incorporated into the pottery rather than painted. While there are a larger amount of items available for purchase from the Han Dynasty, most pieces are uniform and very few rare or valuable pieces are available.

Bronze and Neolithic

The Han Dynasty ISSUE 01

In October of 2013, a Sotheby’s auction of Chinese ceramic pieces and artwork held in Hong Kong featured a blue and white palace bowl from the Chenghua period in the 15th century. This piece sold for USD $18 million. The bowl, bought by local Chinese ceramics dealer William Chak, is the second most expensive piece of Ming porcelain ever sold at auction. The record is held by a blue and white Meiyingtang vase sold by Sotheby’s Hong Kong for over USD $20 million in October of 2011. Chak, a ceramics collector, said, "I think this is one of the best Chenghua palace bowls in the world. One of the best, so it is important. The Chenghua king personally used this bowl, according to the Ming record. So that’s the most important thing." Chak also says he’s pleased that the bowl is staying in Hong Kong after such fierce international bidding. The same auction also saw extremely strong interest in a Qing imperial porcelain vase, which was also under the hammer. Meanwhile, Sotheby’s Asia’s Deputy Chairman, Nicholas Chow says Ming porcelain is still big in demand. Chow remarked, "We were thrilled with the price of the palace bowl. It’s the second highest price for Ming porcelain ever and it’s in a field that is very, very classic. We had participation from American buyers, European bidders, and of course Asian. I think it’s in a field of collection that is very international and I think that it’s an extraordinary price."


LUXURY INVESTMENT INDEX

ISSUE 01

NOVEMBER / DECEMBER 2013

The Tang Dynasty

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34

There was a radical change in ceramic art in the Tang Dynasty, moving away from utilitarian purposes to decorative items. Pottery was intricately shaped and modelled into figurines that were coloured using bronze, iron, lead and amber. During this significant era in ceramics, these figurines were not only highly prized but were also used to grace the graves of wealthy or influential people. Today, these antique figurines are very popular and investors keep an eye out for unique and rare items. But the utilitarian ceramics should not be overlooked as porcelain first became used during this period resulting in much more refined pottery which are also regarded as valuable by many art investors.

The Song Dynasty For the first time, ceramics became an expression of art and the items became valued by the actual population of the time. The quality of the ceramics were unrivalled and inventiveness in techniques, shapes and expertise took the lead in production. Today, these items are still valued although their monochromatic colour schemes make them less popular than ceramic art from other dynasties.

The Yuan Dynasty Porcelain production became far more refined in this era, allowing for images to be painted, stamped or etched before the glazing process took place. The blue and red underglaze, which epitomises Chinese ceramic art, was used for the first time allowing for the production of far more aesthetically pleasing works to be completed. These designs vary greatly from highly intricate to quite simple. The simpler pieces

may still be considered of value, but it is the intricate ceramic art destined for the homes of the wealthy that are really sought after and have the greatest value.

perial Porcelain Factory and its counterparts which could have meant the end of porcelain production in China but for the appreciation of the art form by the Qing Empire. Soon factories were rebuilt and production resumed, incorporating colour glazes that created some of the most stunning ceramic art to date. These pieces are highly valued for their aesthetic value, and as each piece was hand crafted, unique and rare qualities. Some of the rarest pieces from this era fetch higher prices than even the oldest Chinese ceramic available for sale today.

The Ming Dynasty

Where To Buy

This is probably the most well known of all the dynasties for producing ceramic art. The establishment of the Imperial Porcelain Factory provided enough supply to meet a worldwide demand, and for the first time, ceramics became a valued export. Unfortunately, this did not bode well for the future value of these art works as the sheer volume of ceramics produced lowers their value. A popular quote states that the Ming Dynasty created enough ceramics to cover the floors of every ocean. And indeed, ceramics that were destined for foreign ground are still being extracted from shipwrecks littering the ocean floor. This does not however mean that there is no investment value in the Ming Dynasty ceramics as unique pieces were created that were for private appreciation rather than export. These pieces are where the real value lies for investors looking for ceramic art from this era.

The best place to purchase investment quality Chinese ceramic art is through reputable auction houses. Verification of the value as well as the period when the item was created is far more reliable than using independent dealers. Recently, Christie’s sold a pair of extremely rare Pagodas for the impressive price of USD $1,809,451. Sotheby’s currently has lots in excess of USD $22 million that include other significant Chinese art other than the array of ceramics. When using independent dealers, it is advisable to first get outside verification of any pieces before money changes hands. Reputable dealers litter the whole of Asia but antique ceramic art can be purchased reliably worldwide. While supply to dealers and auction houses alike relies mainly upon the sale of items in existing collections or held by private owners, an effort is being made to locate more of these sunken treasures. This will increase the supply to the art market and should create a greater demand for Chinese ceramic art in the near future.

Variation A variety of Chinese Ceramics from Sotheby’s Hong Kong Autumn Sales in 2013. The blue and white “Palace” Bowl (third from left), period of Chenghua, sold for USD $18 million Images courtesy Sotheby's.

The Qing Dynasty This is the last of the eras that were significant to antique Chinese ceramic art. The fall of the Ming Dynasty saw the destruction of the Im-


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LUXURY INVESTMENT INDEX

High fashion or great investment value?

ISSUE 01

NOVEMBER / DECEMBER 2013

B Y E L IS E K R A U S E

www.investmentlifenews.com

36

Jewellery

T

he recent global recession has led to a rising trend in jewellery investments rather than more traditional avenues of investments. The planet’s largest white diamond (The Magnificent Oval Diamond at 118.28-carats) sold for a record breaking USD $30.6 million at a Sotheby’s auction just a few weeks ago, beating the previous record of USD $27.6 million for a 101.73-carat diamond. At a Christie’s auction in Geneva, the world’s largest orange diamond is set to fetch over USD $20 million at a Christies auction in Geneva. But does this trend really reflect the true value of investing in jewellery? Experts are at odds as to whether this type of luxury investment can be lucrative due to a number of factors involved in judging value. The most significant factor is that people purchase jewellery items for sentimental reasons or as fashion statements rather than for their investment value. Most of these jewellery items will only ever be worth the value of precious metals or gems that create the piece.

12 MONTHS

5 YEARS

10 YEARS

-19%

-15%

-19%

Watches

4%

33%

83%

Chinese Ceramics

3%

43%

83%

Jewellery

2%

51%

146%

Wine

3%

3%

182%

Art

-6%

12%

183%

Variables: Precious Metals

Coins

9%

83%

225%

Antique jewellery and items with historical value have always been thought to hold greater value than modern pieces. Traditionally, gold set the standard for jewellery items and a consistent rise in the gold price over the last few decades still makes it a sound investment choice. Selling gold jewellery that is more than a few years old could turn a profit, new gold items will sell for the current gold price, less a dealer’s fee. At a current asking price of USD $1,280.90, it could be more profitable to invest in gold.

Antique furniture

Stamps

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

Platinum jewellery only became popular in the sixties in Japan, followed by European markets in the seventies and eighties, with the USA and China joining the trend in the nineties. During the eighties, an overall increase in the value of all precious metal prices caused a greater demand for platinum as an investment product. Over the last decade, despite some short term ups and downs, the platinum price has managed to maintain an overall growth. SBG Securities have recently tipped a rise in the platinum price and shares over the coming six to 18 months from the current price of USD $1,377.00. Titanium, traditionally used in aircraft and aerospace, only become popular for use in jewellery in the 90’s. The hypoallergenic qualities and lightweight but tough nature of the metal made it seem like the ideal element to craft beautiful jewellery. However, titanium has yet to reach the same level of popularity, in the jewellery market, that is being enjoyed by the platinum industry. Prices keep falling due to the majority of the metal still being destined for the aerospace and aircraft industries that have lowered their demand for this metal. One of the latest elements being used to create jewellery is Tungsten. It has the same hypoallergenic properties as Titanium and is considered to be virtually scratch-proof. However, myths and misinformation regarding Tungsten has caused a setback in this type of jewellery becoming valued as an investment. The main problem seems to be that there are only a handful of jewellers who craft true Tungsten Carbide rings without adding Cobalt which decreases the overall quality and therefore the value.


LUXURY INVESTMENT INDEX

Finding That Gem

The carat, or weight of the gem, is also relevant to its value. Bigger really is better and larger stones sell for more.

Fashion Value

37 www.investmentlifenews.com

Fashion trends can impact the value of a jewellery item. While diamonds may still be a girls’ best friend, many couples are opting for other gemstones as the focal point of their engagement or wedding bands for sentimental reasons or purely due to a preference for a certain gem or colour. It seems that the best bet in purchasing jewellery items is to ensure that they fulfil aesthetic, and emotional requirements first, with investment value a very close second, a golden thread that is shared by most passion investments.

NOVEMBER / DECEMBER 2013

In early October a white diamond the size of a small egg has sold for USD $30.6 million at an auction in Hong Kong, smashing the world record for a jewel of its kind. The flawless, 118-carat oval diamond was sold to an unidentified Asian collector, whose winning bid came at the lower end of the $28 million to $35 million estimate set by auction giant Sotheby's. It was the largest diamond ever sold at auction. The previous record for a white diamond was set in May at Christie's in Geneva when a pear-shaped jewel sold for USD $26.7 million. David Bennett, chairman of Sotheby's Jewelry Division for Europe and the Middle East, said that diamonds could be bought as an investment or simply for the love of a beautiful and rare object, so called passion investments.

When buying jewellery from a dealer it is necessary to obtain an international certification, providing details of the authenticity of the piece as well as the value of the item. Rarer jewels and gems often fetch higher prices than their certification value states as collectors and investors often bid on these at auctions where the value is determined by the bidders. While it is possible to pick up a rare article at a steal at an auction, it is probable that rare jewellery will cost more than its actual value at auction. Choosing dealers with a well-known name or brand can increase the value of jewellery. Ranked in the top five are Cartier, Harry Winston, Van Cleef and Arpels, Tiffany & Co. and Piaget. All five of these jewellers have been practising their craft for over a century, except for Harry Winston which was founded in 1932, and offer quality assured workmanship. Antique jewellery should only be bought or sold through recognised dealers or auctions houses with expertise in the field to establish their true value. The history as well as the age of the item will add value which may not be recognised by ordinary dealers. Specialised collectibles can also be handled in this way to best determine their value.

Passion and Price combine

Choosing a Dealer

ISSUE 01

In general, all precious gemstones increase in value over time, although there are other factors that must be taken into account when choosing a gemstone as an investment, whether as part of a piece of jewellery or on its own. The vast amount of factors are simply mind boggling for most investors but can be broken down into 4 categories – the colour, cut, clarity and the carat of the stone – also referred to as the 4 C’s. Cut and finished gems are valued at a higher price than rough gems and gems set in jewellery items actually hold the highest value. The cut of the gem can also play an integral role in evaluating the investment value of a specific gem. The type of cut used for a specific stone varies not only according to the type of stone but also factors into the grade of the stone and the setting. Unusual cuts or settings can also affect the value; for example the Millenium Sapphire which is carved to depict historical images is valued at a staggering USD $180 million. The colour of the gemstone is also significant. Some gems go up in price the deeper their colour while in other gems the lighter are more valuable at lower colour intensities. In the case of diamonds, the addition of a colour can improve the value. The carat, or weight of the gem, is also relevant to its value. In this case, bigger really is better and larger stones sell for more. However, the price per carat for a specific gem can vary when taking into consideration the clarity, colour and cut. One diamond can cost anywhere between USD $2,000 to USD $60,000 per carat according to the Gemological Institute of America. One misnomer that is regularly used by gem dealers is the term ‘investment grade’ to describe certain types or classes of precious stones. According to Don Clarke, President of the International Gem Society, the term has no meaning and the actual grade of the individual gem must be taken into account. While many people believe that rarer gems may have greater values, investors often prefer to purchase gems of a low to moderate grade as these can appreciate faster and are often easier to liquidate than their rarer relatives.

"Asia has rapidly in the past 20 years become our most important sector of the buying public. They account for more than a third (of buyers)."


LUXURY INVESTMENT INDEX

Seeing Red

Why do fine wines excite the imagination of investors? In Vino Veritas - “In wine there is truth” First written by Pliny the Elder in Naturalis historia B Y S T EV E MA LLA CH

T 12 MONTHS

5 YEARS

10 YEARS

-19%

-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%

ISSUE 01

Antique furniture

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38

Stamps

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

here are many cultures that laud the ability of wine to cloud judgement and thus prevent the utterance of lies. Today investment in the pressed and fermented grape is surrounded by what could charitably be called half-truths. The ability of fine wine to deliver exceptional returns for those investors willing to play in a volatile market is undoubted, as is the ability of the market to exhibit worryingly steep declines. So is an investment in fine and collectable wine one that can offer significant return on investment in the medium and long term? At Investment Life we look at the real story behind the recent prices that have been impressing those who would like to believe that the grape is the balm that soothes all investment worries. Fine wine investment has seen some astonishing returns in recent times. Investment class wines have significantly out performed many other investment indices – including the FTSE 100 – for as long as three decades. When the financial chips are down, such as when the credit crunch hit in 2008 the value of fine wine also dips – however it is noteworthy that the bear market for fine wine very rarely lasts for a significant amount of time, the good times roll around pretty quickly. Given the resiliency of wine this is yet another investment that will reward a long-term view, rather than a speculative approach. Wine is generally rather less volatile than stock market linked indices, and investors enjoy the security of owning a tangible asset. There is a strong argument to suggest that investment in wine has a low correlation to equity or fixed income indices, and therefore affords sensible diversification. Wine is certainly a very liquid market (if you’ll excuse the pun),

and realising one’s investment is much more straightforward than, say, property. Consequently, one might very reasonably take the view that investing in wine is less risky than other ‘alternative investments’. Generally, investment in wine is tax free as it regarded as a wasting asset so doesn’t attract Capital Gains Tax (However, seek profesisonal advice prior to taking this for granted) and if you keep the wine in bond, you also avoid paying VAT and Duty . “As collectors become more knowledgeable they are also driven more by their own expertise and tastes rather than the latest “trends”. From an investment point of view this is important as bubbles can arise – as seen in certain French wines and Chinese stamps – when too many people invest in a particular segment of a market.” Andrew Shirley Head of Rural Research & Wealth Report Editor, Knight Frank LLP. Wine occupies a strange place in a ‘through the looking glass’ economic landscape. This makes it perfectly suited to strange people with strange and unusual buying habits. Wine is what is known as a Veblen good. Some types of luxury goods, such as high-end wines, designer handbags, classic cars and art are Veblen goods, in that decreasing their prices decreases people's preference for buying them because they are no longer perceived as exclusive or high-status products. Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable. In layman’s terms fine wine is one of those strange commodities whose demand is proportional to their price; a reversal of the law of demand. In other words the higher the price, the higher the demand.


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flooded with high quality product and the prices tanked. Supply and demand proved yet again to be a cruel mistress. Nevertheless, wine investors can take solace from the fact that their investments have performed better than most other assets and indices. In December 2008, the Liv-ex 100w as down by 12% on its position at the start of the year. In contrast, the FTSE 100 was down by 33% while the Nikkei 225 had plunged by 46.3% in the same period. As noted in the Knight Frank Luxury Investment Index the last two decades have seen fine wines perform admirably – in most cases (excuse the pun) outperforming equities, bonds and other traditional asset classes. For long term investors (as opposed to shorter term speculators) a well chosen and balanced wine portfolio should provide annualised returns of around 10-12% per annum. In fact, since 2001, when Liv-ex began its 100 Index, wine has significantly outperformed the leading equity indices in western markets with an average annual return of 16%. By comparing other pieces of research it is also possible to look at fine wine returns since 1950. Again the results are extremely positive and remarkably consistent. Since, 1950, the average gross return is 15% and is 17% if you start in 1960. The law of supply and demand has remained true, bolstered in fact by the keen appreciation for Veblen goods in the fastest growing market for fine wines in the world – China. Demand nearly always outstrips supply when it comes to the ‘traditional’ markets of Europe and North America, however there are new players in the game. Pan Asian investors are currently fixated on wine but there is one market that is powering the phenomenal performance of wine in recent years- China. From 2008 to 2012, the number of Chinese wine bidders of Christie’s auction house has increased 1,550 percent. Wine sales in China made global headlines in 2010 by setting a world record in price that still stands at a Sotheby’s wine auction held in the Mandarin Oriental Hong Kong. Three bottles of Chateau Lafite Rothschild 1869 with an estimated value of HK$40,000 (USD $5,159) a bottle sold for HK$1.8 million (USD $232,000) each. Robert Sleigh, head of Sotheby’s Wine, Asia, attributes the current strong wine sales to demanding Chinese wine buyers. “We normally sell 80-90 percent of our HK wine auctions to China,” said Sleigh.

Old World VS New World Wines The term ‘New World’ wine is used quite literally to describe wines coming from New World wine producing countries, such as the United States, Australia, New Zealand, Chile, South Africa or Argentina; essentially all wine producing countries outside of Europe. The rationale being that these New World countries only started producing wine in the fifteenth, sixteenth or seventeenth centuries, following European exploration or colonization. In contrast, wine has been made in Europe and along the Mediterranean for several millennia. The underlying principles of wine investment boil down to the laws of supply and de-

mand, aside from the Veblen Goods effect as mentioned in the opening paragraphs of this article. On the supply side, there are relatively few investment grade wines from estates that have the capacity and knowledge (and pedigree) to produce fine wines on an annual basis, giving them a track record of vintage success that makes them favourites amongst theinvestement community. For instance many of the Bordeaux and Burgundy estates produce wine in very limited quantities, increasing the net worth of the product tremendously due to the all pervading supply and demand economy that governs fine wine investment. This is in fact why many estates are loath to aggressively promote their wines as investment grade assets. There is simply too much risk that an investor could simply dumpy his or her holdings onto a highly volatile market and send prices for the produce of a particular estate plummeting. On the demand side, there are a growing number of aspirant and high net worth individuals around the world in the market to own and/or drink these wines. However, when there are a surplus of sellers over buyers – as occurred at the end of 2008, prices will inevitably fall. Investment grade wine is also an improving asset. As fine wines mature they become more desirable and therefore more valuable. At the same time, as the wine ages and comes into its drinking window, it begins to be consumed making it even more rare, which in turn adds yet more upward pressure on prices. Fine wine has seen some astonishing returns, particularly from the end of 2005 to the summer of 2008 when the Liv-ex 100 Index rose from 120 points to a high of 264 points. This came after a period of several years in which prices were generally drifting without the market showing either steep downward or upward trends. This state was never going to last and in 2008 the world economic crisis slammed into the fine wine market like an express train. Traitional equities and investments took a pounding, the credit crunch deep and with falling ROI’s affecting the cash flow of many aspirant and high net worth individuals something had to give. After disposing of surplus assets (which in many cases were worth nowhere near book value) individuals were forced to look for alternatives in order to realise profits. The fine wine market was

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The Veblen effect is named after economist Thorstein Veblen, who first identified the concepts of conspicuous consumption and status-seeking in 1899 - therein lies wines’ attraction for many people. There is a certain cache to obtaining the very best investment class fine wines. Rarity certainly plays its part, however this is a purchase where emotion overcomes reason – wine is one of those assets where returns are not powered by intrinsic worth – but by emotion. This makes wine a classic passion investment – an investment class which is powered by the intangible forces that drive trends and the cyclic nature of style. The problem with these investments is that they can plummet without warning, relying not on market fundamentals but on the whim of an investment community and self appointed experts. However, there are ways to ensure that should you wish to dip your toes into the barrel you are protected from the worst excesses of a fickle market. Prior to evaluating the market forces and fundamentals it is important to note that the trends exhibited in many of the charts on this page are aggregate trends – they do not reflect the performance of individual estates, cultivars or even vintage outliers. Someone who filled their basket with the produce from a single estate (which is the flavor of the month) might be doing very well, while someone heavy on a particular region and spreading risk across a number of estates might not be doing as well. The opposite is obviously true as well. Once we begin to stray from the classic ‘fine wine market’ into investment into ‘New World’ wines the contributing factors become even more complex.


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Given that there are extremely limited quantities of quality investment grade wine to go around the changing wealth dynamic in China has caused prices to go through the roof. It is noteworthy that the Liv-ex Fine Wine 100 Index, which is billed as “the industry’s leading benchmark (representing) the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market” presents many of its most important charts on its website http://www.liv-ex.com/ in Chinese It seems that everyone wants to get into the wine game and this is causing some significant changes in the way that high net worth and aspirant buyers are treating their investment. The increasing number of wine linked stocks and funds that are now available is also increasing the correlation between the price of wine and stock market performance. This has led some investors to question whether wine is losing its allure as an alternative investment. In the past, the fact that fine wine was not highly correlated with equities (as mentione din the introduction to this article), made it extremely attractive to investors looking to diversify a portfolio, however the increased tracking of wine with the equities market may be changing the reality of investment in fine wine – or at least the attraction of fine wine as a long term investment.

2013 market summary Fine wines were quick of the starting block in 2013, with the Liv-Ex 100 adding 10% to its value. Lately the market for fine wines as reflected on Liv0ex seems to be pausing to draw breath, but if fine wines stay true to the trends established during the last decade then many expect prices to take off like a scalded cat. This period o drawing breath is a time for investor to consolidate gains and perhaps have a close look at their portfolio and evaluate their positioning going into 2014. The chart below highlights the Compound Annual Growth Return (CAGR) for fine wine over various periods – from two to ten years. The oft quoted truism when investing in wine is to consider a minimum of three years as the time needed to make be fairly sure of seeing a profit. Five years is a more realistic timeframe however, as all wine pricing data shows that there has never been a five year period when fine

wine has been worth less than the price paid at the outset. The key colours to focus on are green and blue. Even talking into account the substantial bear market that ran from June ’11 until October ’12, you can see that returns are almost entirely positive over any three or five year period you’d care to mention. It is only when investors look at a two year hold that volatility is such that returns are difficult to predict safely. This chart should provide enormous comfort to investors who currently hold wines valued at less than the price they paid for them. The lessons are clear – holding fine wine for an extended period should (caeteris paribus – all things being equal – i.e. no Earth shattering market upsets) allow investors to realise profit even if their stick is currently worth less than the original purchase price. The advice of experts:

hold on to your stock, extend your window for returns to upwards of three years (preferably five) and you should see a healthy return on investment. It’s also worth noting that the wines that are achieving extraordinary prices at auction at the moment (such as Petrus – see the Christies article elsewhere in this magazine) are the products of a French region dominated by small appellations such as St Emillion (home of Cheval Blanc, Angelus and Pavie) and Pomerol - where Petrus, Le Pin and La Conseillante, amongst others, are produced. These operations tend to have smaller production levels, and an almost boutique approach compared to the vast properties of the Medoc region, North of the town of Bordeaux. This scarcity means that collectors are willing to pay extraordinary prices for the right wines,


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Point taken — It’s not only Old World

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Interestingly even the high spending Chinese Billionaires who are leaping feet first into fine wine investments are also taking an interest in ‘New World’ wines. “They (Chinese wine buyers) enjoy investment-grade wines for their high quality and blue-chip status. Wine knowledge is growing rapidly and collectors are broadening their tastes from top Bordeaux to Burgundy, Champagne, Rhone as well as top California, Spanish and Italian wines,” said Robert Sleigh of Sotheby’s. Those in search of investment quality wines are urged to evaluate some of the excellent new world wines that are now achieving

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Wine industry experts expect severe shortages of fine wines to cause rising prices in 2014.

Wine Trade

record prices at the auction block. For instance A 12-bottle case of 1982 Petrus, (as mentioned above - a top winegrower from Bordeaux' Pomerol region on the right bank of the Dordogne), sold for HK$479,700 (USD $61,900) at an Acker Merrall & Condit auction in Hong Kong. Signs of increasing demand for a broad range of California, Bordeaux and Burgundy wines drove prices at the Acker Merrall & Condit Hong Kong sale. A rare case of Cabernet Sauvignon from the inaugural 1992 vintage of Napa Valley grower Screaming Eagle fetched HK$442,800 (USD $57,100), Acker said in an e-mailed statement. Six bottles of 1966 Chateau Haut-Brion, a Bordeaux first-growth producer, sold for HK$108,240, above its presale estimate. The event comes after six months in which recent vintages of top Bordeaux growers have struggled to generate buying interest as collectors have sought wines from alternative regions. Wines from leading producers and ready-todrink vintages in France, Italy and the U.S. are attracting more bids both at auction and in the broader wine investment market. Many investors have neither the will, nor the time, not indeed the expertise to choose from

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and in the last twelve months right bank average prices have increased dramatically, increasing on average by around 12% compared to low single digit growth on the left bank. For those who might want a little bit more information, the main river in Bordeaux is the Gironde; two smaller rivers, the Dordogne and the Garonne, feed into it. If you're standing in Bordeaux facing west, toward the ocean, the "Left Bank" is south of the Garonne and Gironde rivers, and the "Right Bank" is north of the Dordogne and Gironde Rivers. (The area in between is known as EntreDeux-Mers.) While red Bordeaux wines are blended together from Cabernet Sauvignon, Merlot, Malbec, Cabernet Franc and Petit Verdot grapes, the Left Bank vineyards are dominated by Cabernet Sauvignon, while the Right Bank ones focus more on Merlot. There is evidence to indicate that the premium prices for wines such as Petrus are dragging the rest of old world market upwards. Some might say that these prices are unrealistic, however, the limited supply and the Veblen Goods effect are certainly playing their part, as is the undoubted quality of these wines.


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Old World

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Much of the investment grade fine wines come from French estates in regions pictured here.

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the myriad of investment class wines that are today available. In fact many investors across the globe have no desire to actually drink any of the great bottles in their portfolios, preferring that they remain in a professional, temperature-controlled storage facility that can keep them in pristine condition, and thus protect their value. Although many consultants bemoan the fact that a limited number of estates produce investment grade wines (while celebrating the fact that rarity equates with value) the purchase of wine can simply be left to professional fund mangers or consultants. For many of these investors participation in an investment wine fund that pools investors' capital is by far the preferred method of enjoying the potentially high returns of the market for investment class wines. These investors are not necessarily interested in wine per se, but rather wine as an asset class. In fact according to many wine fund managers wine enthusiast are the worse wine investors in the world – they simply drink up their investments. Wine funds offer would-be investors a way to buy into a collection of hundreds or even thousands of cases of wine. And the initial investment is relatively small; it can be as little as USD $20,000.

A word of warning Although investment quality fine wine still commands excellent prices potential investors need to be aware that many pundits are saying that the glory days of wine investment have passed and that investors need to hold tight and (as mentioned previously) extend their ‘ROI horizons’. In June 2013 Andrew Davison, founder of the Vintage Wine fund, a Cayman-based investment vehicle once boasting as much as €110m in assets at its 2008 peak was decidedly pessimistic about the current state of the

investment wine. Admittedly his statements were made publicly as his fund was being wound down at after being hit by dismal performance, forced sales and a spate of redemptions, but even tinged with regret his comments shine a light on what other investment experts have said. “The wine market is dead. It could take years for this market to recover,” said Mr Davison. “I think you have to ask whether openended structures are suitable for these sorts of illiquid investments. There’s also a danger that wine funds can get too big. When you allow investors to come in and exit on a regular basis, you get huge outflows when things go bad.” Conduct Authority again announced that wine funds – which are unregulated collective investment schemes – ‘must not be marketed to retail investors of limited means’. So, some wine investment funds have taken a hit in recent years as top-tier Burgundies and Bordeaux have slid down in value

but wine funds aimed at middle-tier labels are providing investors with very acceptable returns. Despite the doomsayers, for the time being funds focusing on wines that are perceived as a level below the heavy hitters from the old world seem to be holding their own, and in some cases punching way outside their weight class in the investment stakes. So, Some truisms remain when it comes to investment in fine wines, bith Old and New world - even if the allure of wine as a diversifciation tactic is fading, it still remains one of the most attractive lifestyle investments. The tired old cliché ‘in hard to times, if all else fails you can still drink your asset’ remains true whatever the market conditions. To paraphrase the words of a savvy investment professional, the market is volatile and the rewards can be huge, however your losses can be significant - but it's the only investment class that actually rewards mistakes with a convivial evening. Cheers


LUXURY INVESTMENT INDEX

Wine Investment

— is it a rich man's game?

BY DAVID COLEMAN

|

CEO, Rubicon Reserve Wines

Investment Life asked David Coleman – CEO of Rubicon Reserve wines in Singapore about his take on investment wines and the approach that everyman can take when it comes to identifying which wines might provide value for the novice.

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For more visit: www.rubiconreservewines.com.sg

The one of the most important realisations for any novice investor is that not all investment wines comes from France. While France is the traditional market for fine wine and has a long history, the global market for investment wines is today far wider and deeper. There are new world wines that are attracting immense interest and providing investors with superior returns. Markets such as Australia, South Africa, North and South America have all been producing wine for over two hundred years and there are some fine investment grade wines coming out of new world vineyards. Like stocks and bonds there are different types or grades of wine that have different attributes relating to price, liquidity and risk. These wines fall into three commonly accepted categories, Blue Chip, Emerging and Cult. Blue Chips are your safest bet and they have a long history of returning on investment but commonly these returns are safe but not necessarily spectacular. Emerging wines are those that have entered the market and have been showing good returns for a number of years but don’t have the history of Blue Chips. They offer the investor the opportunity to enter the market at a lower price and achieve a higher liquidation price when demand increases for the product. The risk of course is that future vintages fail and the brand never reaches those heights. Cults on the other hand are hard to pick but when they hit the market they take it by storm and prices can

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nvestment wine comes with its own arcane language, aseemingly accessible and understood by a closed inner circle of those that are in the know It can be extremely intimidating to hear talk of En Primeur, left bank, right bank and perfectly pronounced names of French chateaux. By and large this is a linguistic facade, the terms and references are easily understood by even the novice investor in fine and high growth wines. One of the first things you have to sort out before you embark on your quest for a return on investment is what style of investment suits you? There tend to be three categories of wine investor all wanting to achieve financial gain but all doing it in rather different ways. The first is the True Investor, this person may not even drink wine, but invests purely to achieve a superior return. The second is the 'break even investor' who loves their wine but may not have the budget to be drinking the more pricey examples of the vitners art. As such they buy their investment, drink some and use the appreciation on the remaining assets to pay for the pleasure of their chosen lifestyle. The third investor is seeking to buy wine today that they want to drink tomorrow without paying tomorrow’s lofty prices. Once you have worked out what type of investor you are the next thing to do is destroy a few more myths. The first, investing in wine is not black magic and the rules that apply to buying any sort of stock apply to investment wines - buy low and sell high.

rocket over night with huge returns to be made. Entry prices on cults can sometimes be ridiculously low compared to future trading prices, but be warned, these wines are few and far between and very difficult to find unless you really know your stuff. Like shares you have to buy into the investments that suite your budget and also have realistic expectations on when you expect to liquidate the investment to realise the profit. The rules of price, supply and demand still ring true for investment wines. And unfortunately this is also where many investors run into trouble with French blue chips. Not many investors have the initial cash to buy into the investment to start with and they purchase very few cases or even bottles so their investment is all in one basket. The answer may be to look at an range of wines which spreads the risk across different categories. As with all investments research your product. The die-hard Francophile will argue that French wine, especially Bordeaux has a hostory and track record that is accessible. true enough, however we are living in the information age and there are thousands of web pages on every region in the world and almost every vintage. Use this information to check up on what your broker is telling you, research prices in other markets and read columns by independent wine experts. Finally use the information to look at market trends, e.g. the increasing popularity of wine as an investment (both new and old world) in Asia and the styles that are being consumed as this tip might just help you find that cult wine that will put you in front of the pack not following behind. Wine investment is truly one of the opportunities for the average salary earner to invest side by side with high net worth individuals, as well as simply drinking some of the world’s best wines.


LUXURY INVESTMENT INDEX

Art Class

Is fine art an indulgent symbol of investor self-expression, an unpredictably volatile investment or simply supply and demand gone mad? Perhaps it’s all three. B Y A L E X A N D E R K N I G H T

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A

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lternative investments as classified by the Knight Frank Luxury Investment Index usually share a single very important attribute – they are by and large investments of passion. Art is no exception – and as a passion investment the art market is an opportunity for the educated and prudent and a potential morass for those who would enter into the fine art market wearing glasses rose tinted with emotion. This is a market where thinking with your heart can land you in all sorts of trouble. Fine Art is perhaps the most volatile of all the passion investments. Whereas other investments in this nascent class may be ruled by the economics of supply and demand Art is different. The market for fine wine is also governed by supply and demand, it is however also subject to one of the most deadly of the seven sins – avarice. Both wine and fine art are Veblen Goods meaning that they are part of a class of goods that include high-status items such as luxury cars, expensive shoes or pricey watches. These goods remain appealing to certain consumers as long as prices remain high or increase. A decrease in the price of a Veblen good could cause it to become less exclusive, which may reduce consumers' fondness for it. So if there is a limited supply fine wine from a particular estate the price will go up – classic supply and demand. However this price increase is accompanied by an ever-shrinking market due to the fact that the goods become more and more expensive. Finally a very select group of hyper wealthy consumers are purchasing single bottles of wine for ludicrous sums – all due to the simple fact that the act of buying is an affirmation of their status. Armchair psychology aside imagine if you will a product that confounds the general theories surrounding supply and demand economics due to the fact that there is only a single example of a particular good, this is the concept of Veblen goods gone wild. Welcome to the world of fine art.

Diversify Although the global recession, which reached crisis levels in 2008 and today seems to be tapering off has wrought financial havoc in an unimaginable scale, it undeniably did prove many of the investment consultants and fund managers as well as some farmers absolutely right. These experts, albeit from very different background said the same thing over and over again – don’t put all your eggs in one basket. If investors had realized just how precipitous the financial cliff was they might have paid a lot more attention to the repeated advice to diversify portfolios.

As investors scrambled to apply the financial equivalent of duct tape and super glue to their rapidly disintegrating portfolios many began to realise that alternative asset classes might hold the key to smoothing out the bumpy equities ride. Unlike the traditional assets, the non-traditional could withstand the market volatility, thanks in part to the fact that the underlying assets simply did not move in lockstep with the markets for stocks and bonds. With this in mind, investors then started employing these assets as a bulwark against volatility. A few of these alternative asset classes captured the imagination of both the public and private investors due to the


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But even the asset specific investment appetite amongst high net worth individuals cannot shield fine art from the storms of global financial disruption forever. There comes a time when even this seemingly robust asset class will provide investors with some reasons for concern. Such was reflected in the Art Market Report conducted by The European Fine Art Foundation (TEFAF) during the darkest years of the economic downturn. During this period, total sales in the global market for fine and decorative art logged over EUR €42.2 billion (USD $57.5 billion) in 2008, down 12% from its record high sales of EUR €48.1 billion (USD $85.5 billion) during 2007. This slid further by about 26% to EUR €31.3 billion (USD $42.6 billion) in 2009 as the impact of the meltdown took its toll on both investor confidence and the positive cash flows of high net worth individuals. Nevertheless, the sales volume logged during this year was still relatively higher than ‘any year of the arts market’s history before 2006.’ The report stated that the size of the decline was due was in part due to the heights reached in some sectors of the art Sandstone Stele of seated Buddha Dated to the 17th day of the twelve month in the first year of the Huangjian period (corresponding to AD 560, Northern Qi dynasty). Sold for HKD 1,840,000 (USD $237,000)

market during 2006 and 2007. In other words the higher you climb, the further there is to fall – especially when an asset’s worth is not based on an annuity income nor the a utilitarian value of any kind – but rather on trends, the fickle influence of taste and the ever cyclical nature of style. When other asset classes had their proverbial and hypothetical backs to the wall fine art kept investors hopeful and confident that their portfolios could withstand the bumps in the road (and there were some fairly hefty bumps) during a global economic crisis. With its impressive performance despite those challenging times, it would hardly be surprising if fine art was not recognised as a mainstream asset class sooner rather than later. At the moment it certainly has reputation for being a diversification mechanism of choice. Although it should be noted that by and large it takes a very brave financial advisor indeed to recommend that a client hold above 3% of their portfolio in alternative investment classes, fine art included. The 3% threshold seems to be about the tolerance of most advisors. ‘Art is definitely becoming more of a bona fide asset class than it was even five years ago — when people would have raised an eyebrow about that claim’, he added. “I wouldn't say it's a mainstream asset class yet, but over a very short time, art has gone from zero to a very serious topic’, said Bob Rice, managing partner at investment firm Tangent Capital Partners LCC, during a recent interview with InvestmentNews.

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unprecedented returns on investment which grabbed headlines in the form of auction prices that seemed frankly outlandish. One of the most high profile of these asset classes was fine art. Proof of the ability of fine art to absorb the shocks that cause equities to swing wildly can be found in a report from Artprice a website that tracks the results obtained by various classes of fine art at auction. The report states that ‘art market can fare reasonably well despite volatility in the stock market such as happened from January 1997 through May 2004 when the average quarterly fluctuation in the Artprice Global Index was two to three times smaller than the same statistic for the Dow Jones Industrial Average and the S&P 500’. Although to be fair this information is based on the performance of fine art over a decade ago the underlying fundamentals remain the same. Various reports from the depths of the economic crisis also point out how this particular alternative asset class can contribute significantly to the returns obtained through a diversified portfolio. Amidst a great wailing and gnashing of teeth from investors all over the globe fine art was providing returns of roughly 6% while others asset classes were flat lining or worse. Moreover fine art is reported to have provided investors with a record-level return of around 11% in 2011, which is more than any investors could probably hope for in the midst of global economic turmoil.

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Fine Art returns gather pace amongst HNWI’s Return on investment in fine art is today being driven be the huge amount of interest from Asian collectors. The European Fine Art Foundation has identified China as the ‘driving force behind the recovery’, outdoing the US for the first time in 2011as the ‘largest art and antiques market worldwide’. Chinese interest in fine art has showed no sign of slowing at all in recent years. As for the idea that fine art pieces are Veblen Goods (the more expensive the more desireable) J.P. Morgan’s recent survey of wealthy individuals showed that ‘almost 50% of the respondents own fine art and on average, art makes up nearly 4% of the average HNWI’s total wealth’. It also added that the ‘buy-side’ of the art market is primarily comprised of HNWI and collectors while the other buyers were art dealers, corporations and museums. ‘The art market can be an interesting place to invest, particularly if you already have a spread of assets in shares, property and savings. Choose wisely and buy what you like and you have an asset which can give you a great deal of pleasure’, said Nick Curnow, Managing Director of Edinburgh auctioneers Lyon & Turnbull.

And now for the bad news

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In each story of success and gritty determination to beat the odds it seems that there is a downside. The success of Fine Art even when faced with the pressures of an increasingly turbulent global market and the attendant shrinkage in the liquid assets of HNWI’s across the Western World (at least for now – China seems to be blithely sailing along for the moment) has not led to unfettered acceptance of the bona fides of fine art as an asset class. In fact fine art has a highly conspicuous warning label reading ‘unpredictable investment’. While the art world and the man on the street are exposed to ever increasing auction

But is it art? “The Physical Impossibility of Death in the Mind of Someone Living” created by Damien Hirst. It consists of a tiger shark preserved in formaldehyde in a vitrine tank. Approximate sale price: USD $8 million.

prices for art ranging from ceramics, to sculpture and classic oils the fact of the matter is that while many auction houses are loath to admit it art is built on a house of cards. The returns that are obtained by even savvy investors depend on being able to spot and follow trends and analysis an extremely fickle market. The key to a good return on investment seems to be to hold on to a piece of art with the tenacity a barnacle clinging to the bottom of a ocean liner. Many experts recommend keeping hold of fine for at least 10 years. After which, it can be delivered to either Sotheby’s or Christie's for the much-awaited profit. As illogical as it may sound fine art is the victim of the individual pieces and their rarity. There is after all only one Dali of or one Picasso of a particular type (etchings and limited edition prints notwithstanding). Although selected pieces go under the hammer and are purchased for enormous sums it is rare to see them on the auction block very frequently. If they were regularly auctioned it is almost inevitable that the value of the individual pieces would suffer. Still the aspirant investor might fancy his or her changes. A careful analysis of the trends that indicate value over time would indicate that fine art is an investment that delivers class-leading return on investment. However, further examination will reveal that the prices for fine art are highlighted in the press and via auction house press releases due to the fact that they are exceptional. In fact the exact percentage of returns cannot be gauged accurately because various

reports claim that at least 50% of transactions are done privately. At least half of the overall art trades are made through private channels, creating a less transparent market.. Furthermore, art is also sensitive to changes in taste or trends. A hugely popular piece, in vogue today may not even arouse the slightest interest tomorrow. Then there are the expenses involved when investing in art. Beside the 25% purchase and resale fees due to auction houses (and these figures are simply a guideline – the actual figures may be very different), there are also insurance premiums, storage cost, appraisals, and numerous other costs that will be incurred should your piece not reach its reserve at auction. For these reasons, any reputable advisor would caution investors to do their homework before going to town on art as a foundational component of any portfolio. As the founder of The Affordable Art Fair, Will Ramsay, puts it: ‘It certainly doesn't really work trying to flip it quickly. As a collector you don't get respect from galleries and dealers if you do that. It's much better to hold onto it, not only to help develop the artist but also so you can enjoy it’. Also as many investors in fine art quickly realise the investment in a piece of art can only be called a success if someone is willing to buy it. Although fine art shows resilience in the face of challenging economic times, as soon as the chips are down and safe havens are required many HNWI’s will choose one of two routes. One they will divest themselves of several pieces of art by the same artists or sculpture, in effect flooding the market and depressing prices, or they will simply ride out the bumpy market conditions. As with all alternative and the so-called investments of passion the key to maximising return is to simply enjoy your investment. And art, for all its weaknesses as an investment still cannot be beaten for simple aesthetic value.


LUXURY INVESTMENT INDEX

A Sea Change BY ST A FF WRIT ER

RedSea Owner Chris Churcher.

A changing gallery clientele and new areas of interest may be the hallmarks of a uniquely Southeast Asian take on art as investment.

NOVEMBER / DECEMBER 2013

47 www.investmentlifenews.com

IL Singapore collectors thank you for taking the step, as I’m sure do many regional artists. Can you give the readers an insight into how the clientele has changed over the years? CP We’ve definitely noticed a few changes in the people who are interested in both regional and international art. From 2002 - 2007 the huge majority, around 95% of our client base was expatriate. Since then the ratio is 50/50 and I'd be inclined to say that if anything there may even be a small majority of Singaporeans.

IL “Morning Chris, thanks for agreeing to chat to us. Can you give our readers a bit of background on the gallery?” CP The gallery I think had it’s start in the fact that I'd grown tired of my previous career in Foreign Exchange trading and so, at the age of 35 in 2001, I finally made the sea change. I had a passion for art, I knew I could sell and there was a huge gap in the Singapore art market at that time. So the analysis and soul searching led to action and the process of setting up the gallery began in 1999. After the usual challenges of sourcing great art and finding some exceptional international and local artists, as well as finding exactly the right space we began operations in April 2002.

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s the owner and curator of the RedSea Gallery in Singapore’s Dempsey District, Chris Palmer (CP) has financial cycles run their course and his background in financial services has given him an insight into what makes a good investment. He has also seen fads come and go and tastes in investment art change over the years. However, the changes in the demographics of buyers may be signaling that the perception of art as a perfect balance of passion and prudence is changing in Southeast Asia. Investment Life (IL) spoke to Chris to get his insight into the evolving nature of art investment in the region.


LUXURY INVESTMENT INDEX

IL Are there any particular trends / types of art that have remained favourites ever since the establishment of the gallery? CP The type of art we show at the gallery has changed over the years, so it's difficult to talk about trends. From the very beginning we have represented artists from around the world, and this still remains the same. Even the artists we represent have changed, some have focused on particular areas of strength while others have expanded their offerings or even changed styles completely.

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IL So we’re seeing an evolution in the type of art that drives consumer interest, in light of that, what are the most popular types of art that are today sold at the RedSea Gallery? CP Sculpture remains strong as do paintings. We have our first photographer on board and customer reaction to the new artform has been extremely positive. He produces photographs on brushed aluminium. Very different from the run of the usual approach involving other mediums and we’ve seen good success early on. The collectors do seem to be predisposed to various interpretations of modern contemporary art which is well represented at the gallery.

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IL Have the types of people and the cultural backgrounds of buyers changed over the years? CP Well, I suppose the answer is both yes and no. The vast majority of the buyers who

purchase original art are still professional people, but we’re now seeing more architects, doctors, lawyers then we did previously. The financial people, I wouldn't say have diminished but before it was this sector which contributed to a major proportion of our sales. Professionals from the finance industry are still avid purchasers, but the other professions that I mentioned have now grown so it's not so obviously one sided. Maybe this speaks volumes about the state of the financial industry, more than changing tastes. As for different cultures, as I mentioned there seem to be far more Singaporeans and people of Asian origin buying across the board. Maybe there’s a growing realisation that the art that is available in the region is just as good, and perhaps sometimes even more exciting than can be found in galleries across the globe. IL Has there been a change in the attitude towards art as an investment? CP I’d say definitely, without a doubt. However before we get into this 'investment' thing I must make it clear that although fine art has

Flights of fancy In just eight years, 26-yearold Russian artist Anna Berezovskaya has seen the value of her artworks soar more than a hundredfold.

increased in value over the years, along with other traditional investment tools such as real estate and equities, I would rarely suggest to a client that they should buy this in preference to other asset classes or that art is some sort of magic ingredient in the formula for exceptional returns. I prefer people to buy art for its intrinsic value, for the love of what they see and experience. The investment or the increase in value is an end result of the enjoyment of a product that has historically proven itself as an excellent way to combine sheer sensory enjoyment with great returns should a collector, or even a casual buyer care to sell. So investors are looking for some sort of balance and often art can provide that balance between passion and investment return. Given the unpredictable nature of the 'investment world', especially in light of recent global events which started in 2008 – yes, it’s not surprising that we have seen more people in the last few years looking to buy art as an investment. These aspirant and high net worth individuals most likely still invest in property and assorted other financial products, but art has certainly become an alternative investment class, which can be found in many people's investment portfolios. I would strongly recommend treating art as something completely different to the normal types of investment. If you do invest in art make sure you don't have all your eggs in that one basket, diversification is the name of the


LUXURY INVESTMENT INDEX

Aluminations Manolo Chrétien, who has produced some spectacular images of Concorde - printed on the original design templates from plane itself.

game for experienced investors and it should be a guiding principle for novices as well. Real estate and equities will almost certainly provide good returns - but as always it depends at which level you enter the market. Nothing ever goes up in a straight line and stays there.

IL Do you have any advice for those who are looking to purchase art (of any type) as an investment in Southeast Asia? CP If there is one piece of advice I would give investors it’s to be very careful of who you purchase from – either gallery’s or auction houses. I believe even the auction houses can't always guarantee authenticity.

NOVEMBER / DECEMBER 2013

IL Are there any particular challenges to collecting art in Southeast Asia – do the materials used require any special care? CP Of course storing art or having art on your walls in Southeast Asia can be a challenge with the humidity we experience.

IL Can you single out a particular style or an artist (who have exhibited at RedSea Gallery) who has delivered excellent returns over the past decade? CP Yes I can. We have a young prodigy from Russia. Anna Berezvoskaya, who is only 26 years old but producing some outstanding work. Over the last four years the value, or I should say, her prices achieved at exhibition with us have increased by over 100%.

IL Do you see any trends in the purchase of various types of art at the moment? CP Well the trend which I feel may be tapering off somewhat is the buying of Chinese art – it’s been at the forefront of every investors list for some time. Indonesian artists are changing what seemed like a monopoly for many years.

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IL What, in your opinion is the most popular type of art in Singapore at the moment? CP Well, I think that it’s more and more about the various styles that can be found across the globe today. As countries mature and people are exposed to the outside world through both leisure and business travel their horizons expand, as does their appreciation of different types of art. More and more people are now looking further afield to art from countries outside of Asia. Of course Asian art is still big, but as Singapore and other countries in the region expand as global economic players, so does an appreciation for art across a broad spectrum of styles expand.

IL Are there any particular local artists that you would advise any potential investors to take a good look at with a view towards long-term investment? CP Local as in Singaporean? I'm afraid I cannot. Strangely enough Singaporean artists don't seem to be as successful as artists from other countries. I would welcome the opportunity to represent local artists and then perhaps if I were asked this question again in the future my answer would be different. We’re always open to new talent and would welcome the chance to evaluate Singaporean artists.

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LUXURY INVESTMENT INDEX

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A temperature-controlled environment is required at all times to ensure the dreaded mould stays away. Again - if you are buying art and spending a large amount of money make sure you know who you are buying from. It's all about relationships, just like any other business.

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IL Are the forms of regional art, for example Balinese, that you find people responding to extremely positively? CP We don't carry Balinese art as such at RedSea Gallery. Our Indonesian art comes from artists in Java. They may be Balinese artists by birth, but they studied and live in central Java. Bali has become the commercial centre for tourist art. Java is the cultural centre. But yes, regional art remains extremely popular. IL Are there other countries where RedSea Gallery is sourcing art – and why? CP We bring art in from around the world. Singapore is a cosmopolitan country and so I decided long ago that I wanted people from the USA, for example, to see Asian art and people from Asia to see European art. IL Would you compare the Southeast Asian art scene to that found anywhere else in the world? CP It goes in phases or cycles. What is hot today may not necessarily be hot tomorrow. Asian art has been the darling of many art buyers portfolios or collections for the last ten years, but we are now slowly seeing them focus again on non Asian art. It's a mixed bag. I'd say the art in South East Asia is as sought after as art from anywhere in the world for both aesthetic and investment value.

Anna Berezovskaya A painting costs between $30,000 and $150,000 aeight years ago, it was just USD $500.

IL Can you give those starting an art investment portfolio some hints as to how to maximise return, minimise risk and increase their enjoyment of art? CP It's difficult to talk about returns as there are no guarantees. Art generally appreciates at a much a slower rate than other investment tools or commodities. However, it also devalues at a much slower rate if there is an economic slowdown. Of course, if you want some sort of guaranteed return you should really be looking at the Picassos and the Van Gogh's of this world. The so-called blue chip artists. However not everybody has a spare USD $100 million dollars lying idle. If you are serious about starting a collection with the hope it will be an investment, first of all build a relationship with a few gallery owners. Check them out first. If they are honest and knowledgeable professionals then you will be ahead of the game. Remember they have a reputation at stake. If they tell you everything they sell is a rock solid investment - I'd keep well away from them. If you find somebody you can trust then take time to develop a strong and trusting relationship. When your art dealer then finds an artist or an artwork with great potential it's you he/she will come to first. As I said before its all about the relationship. Artists need to be followed. Look at their track records. If they don't have one then the price should reflect that.

IL Can you tell us a little more about some of your past exhibitions and what RedSea has in store for both the casual and serious art collector / investor in the short, medium and long term? CP When we started exhibiting we would concentrate on our trusted artists. Those who were the focus of investors and collectors over a number of years. Aesthetically pleasing artists - proven sellers. Now we still exhibit artists who sell well, but their style is not necessarily for the mass markets. Our Russian artist for instance is an acquired taste. Even though her exhibitions sell out she’s not everyone's cup of tea. In November we have an exhibition of a French photographer who prints his images onto brushed aluminium. For the solo exhibition he has produced images of the Concorde on the actual metal plates taken from the decommissioned Concorde planes themselves. This in itself will offer collectors the rare opportunity to acquire a one-off photograph on a piece of history – an unusual and attractive prospect. In the New Year we have an exhibition of original etchings by the great man, Salvador Dali. It's a collection owned by the Argillet family in France. On show will be the collection which Dali and Argillet produced together, all personally signed by Dali along with some of his original drawings. IL Many thanks for taking the time to chat with us Chris, we appreciate your efforts to give our readers some insight into both the local art scene and the investment potential of some of the pieces that have been exhibited at the RedSea Gallery. The Dali exhibition is certainly going to be a highlight on the Singaporean art scene calendar for early 2014.


LUXURY INVESTMENT INDEX

Heads you win Head or heart - how do you decide on your gold coin investment strategy? B Y S T A F F W RIT ER

10 YEARS

-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%

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

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The South African Krugerrand In 1970, South Africa controlled nearly 80% of the global gold market, if the USSR is ignored, as it was not selling its gold on the open market at that time. This unassailable position allowed South Africa to (for all intents and purposes) dictate the market prices for gold.

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Stamps

NOVEMBER / DECEMBER 2013

5 YEARS

-19%

Six of the best The coins listed below fulfill each of the requirements listed above. When buying newly minted coins personal preference is probably the most important factor. Gold bullion coins straddle the border between a pure passion investment, like fine art and an investment made purely in order to realise a profit. Although gold bullion coins are undoubtedly attractive many investors rely on the inherent value of the gold contained in the coins to provide a tangible asset that will diversify a portfolio heavy on equities and other financial holdings.

12 MONTHS

Antique furniture

Demand should be high: An active secondary market of buyers for the gold bullion coins is essential in order to assure the investor of a fair price. Gold bullion coins should be aesthetically pleasing: Even though gold coins derive all of their value from the gold contents, aesthetics make a world of difference to value. ISSUE 01

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here are two distinct routes to take for those wishing to invest in coins – investing in bullion coins and investing in the socalled treasure coins. For those investors who want coins that closely track the price of gold then an investment in bullion coins is preferable. The investment potential for rare, historic and collectible gold coins, collectively known as numismatic gold coins conforms to another set of rules entirely and the market forces that act on those coins is more closely tied to historical value, as well as the precious metal content. Those in search of quality coins should build their collection on the following foundations: Gold coin purity should be at least 22k: The higher the purity of the gold coin in question, the lower the amount of alloys it has in the form of copper or silver. While 24k gold coins are preferred by some investors these coins are easily damaged and can rapidly lose value if not cared for properly. Coins containing some copper are less prone to the damage that can occur with frequent handling The coin should be in wide circulation: Obscure gold coins that aren’t widely available end up turning into numismatic coins which although attractive to specialist collectors do not have the ready market that makes gold bullion coins such a highly liquid investment. The coin brand should be established: One of the reasons behind minting gold coins was to establish some trust and consistency to gold. Gold coins turn a perfectly homogeneous commodity into something having a reputation, legitimacy, and a level of expectation when it comes to value. The best gold coins assure the buyer of peace of mind in terms of purity, weight, and quality.


Anticipating an end to the Gold Standard, the Rand Refinery (the world’s largest gold refiner at the time) began manufacturing modern bullion coins for public consumption. In 1968 the first modern 1 troy ounce gold bullion coins were manufactured and in 1971 the South African Rand Refinery was proved right and the gold standard was abolished, leading to a surge in demand for gold bullion coins. During the 70’s, South Africa monopolised the production of gold coins. In present day, the role of South Africa in gold production is much less prominent, with only 8% of yearly mining production attributable to them. Still, the Krugerrand is still highly valued. The long history of the coin means that it is still the most common modern gold coin in circulation, constituting roughly 20% of all gold bullion coins produced since 1970. The Krugerrand derives its name from Paul Kruger, the President of the South African Republic from 1883 to 1902. From 1970 to 1979 only the 1 oz coins were made, but since 1980 three other sizes (1/2 oz, 1/4 oz, and 1/10 oz) have been introduced. Krugerrand gold bullion coins are 22K and are instantly recognisable thanks to the portrayal of a springbuck (a type of antelope) on the back of every coin.

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LUXURY INVESTMENT INDEX

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The Canadian Maple Leaf The Canadians were the first to recognise the huge popularity of the Krugerrand and were motivated to improve on the highly successful South African gold bullion coin formula. In 1979 the Royal Canadian Mint introduced the Maple Leaf gold bullion coin. It was the first ever 24K bullion coin of the modern era (99.9% purity), with the gold content even further increased in 1982 to 99.99% and 99.999% in 1998. It is today the most popular 24K gold coin in the world with nearly 40 million Maple Leaves in circulation. While the 99.99% 1 oz variant is the most popular Maple Leaf coin (around 55%), other coins such as the 1/2 oz, 1/4 oz, 1/10 oz, 1/20 oz, and 99.999% 1 oz Maple Leaf coins are also available.

even more valuable. Although all things are possible and the current Chinese dissatisfaction with the US dollar is extremely transparent we at Investment Life aren’t holding our breath for a gold backed Chinese currency anytime soon. The American Eagle The American Eagle gold coin was launched in 1986, in four different sizes (1 oz, 1/2 oz, 1/4 oz, and 1/10 oz) at 22K purity. The 22K purity (mixed with harder alloys) makes it tougher than other coins with a higher gold content. This coin it seems is quite ready to serve as an alternative currency and is designed to stand up to the rough and tumble of daily use. The 24K American Buffalo coin was introduced in 2006 as an alternative for those buying gold coins in the USA. The US gold coin market is among the biggest in the world and the United States has the largest officially reported gold holdings in the world, making the American Eagle a popular choice even outside its geographic borders.

The Chinese Panda China got into modern gold bullion coin production in 1982, with the China Gold Coin Incorporation (CGCI) introducing the 24K (99.9% purity) gold Panda bullion coin in 4 sizes: 1 oz, 1/2 oz, 1/4 oz and 1/10 oz. They expanded the offering to include 1/20 oz and 1 g versions in 1983, at the time a world first. Perhaps the biggest novelty however, was the decision to a have new design on the reverse of the coins each year. This transformed the Panda coin into a hybrid between coins valued for bullion content and true collectibles. China is now the world’s largest gold producer with ambitious plans to accumulate as much gold as possible. China does not officially reveal the extent of its gold reserves, but they are rumored to rival the United States’ reported holdings of 8,133 tons. If the ongoing rumours that China is dabbling with the idea of establishing itself as a reserve currency candidate backed by gold are true then Chinese Panda could become

The Australian Kangaroo Australia started producing modern gold bullion coins in 1987 through the Perth Mint. The 24K coins boasted a purity of 99.99% and were initially labeled the Australian Nugget coin and until 1990 sported a different nugget design in each one of its 4 sizes (1 oz, 1/2 oz, 1/4 oz, and 1/10 oz). Since 1990 the Australian coins have featured a Kangaroo on the reverse, although the name only changed to the Australian Kangaroo in 2008. Similar to the Chinese Panda, the Australian coins have featured a different Kangaroo design on the reverse side each year since 1990, making it a prime target for collectors and investors alike. In 1996, the Perth Mint launched the Australian Lunar series featuring a new design each year based on the Zodiacal calendar. The Lunar coins are issued in more different sizes (nine) than any other gold bullion coin on the market and quantity is limited to further increase collectability.

The Austrian Philharmonic First minted in 1989, Austria’s Vienna Philharmonic coin is a relative newcomer, however the creativity involved in the design of the coin is without doubt world class. The coin design portrays a variety of instruments and is considered by some to be amongst the most beautiful coins ever made. The coins


LUXURY INVESTMENT INDEX

Global Bullion Gold Coin Sales 5M 4.5 M 4M 3.5 M

TRO Y O U NC ES

3M 2.5 M 2M 1.5 M 1 Million 500,000

2002 2003

2004

2005

2006

SOURCES

United States Mint, Royal Canadian Mint, Vienna Mint and Rand Refinery (South Africa)

2009

2010

2011

2012

53 www.investmentlifenews.com

is. Although that piece of advice is as old as the hills, the hype surrounding sunken treasure can cause even the most hard-hearted of investors to lose sight of the long term goal, which is an acceptable return on investment. Counter intuitively the more hype you see surrounding a sunken treasure coin sale, especially when it comes to a famous lost treasure ship, the more likely it is that the coins will actually decrease in value over time. It’s all about perception, with a side order of greed. When sunken treasure coins see the light of day after spending hundreds of years on the sea bottom the event can create a media frenzy. Although usually more sedate even hardened collectors can get caught up in a combination of academic interest and good old-fashioned gold fever. In some cases lots of new material comes on the market, giving the collector, or would be investor a chance to get a coin that completes an unfinished collection or a rare specimen that has suddenly become affordable due to the large numbers that flood the market.

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Sunken Treasure For those investors who crave the excitement of the highs seas and want to vicariously enjoy the life of a buccaneer, albeit at the historical remove of several hundred years then collecting numismatic coins can be a satisfying hobby. However, there are some simple rules to avoid the shoals that can sink the unwary treasure coin collector. Firstly, beware the bargain. If a deal sounds too good to be true then it probably

2008

are 24K (99.99% purity) and are available in four sizes with the 1 oz being the most popular followed by the 1/10 oz, 1/4 oz, and 1/2 oz. The gold Philharmonic is the most popular gold coin in Europe.

2007

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In cases like this common sense needs to prevail and stepping back from the scene of the excitement, at least for a moment is probably the best course of action. The investor needs to ask some simple questions; are the prices being inflated temporarily by all the hype? Are the coins selling at a higher price due to the fact that Blackbeard supposedly held them in the palm of his gunpowder stained hand? Will anyone care when you finally want to realise your investment? When lots of new specimens of a rare coin hit the market, the value of the coins will fall – it’s simple supply and demand doing away with the rarity value. At first, the dealers will probably sell at a price close to historical highs, in fact there may be some Blackbeard fanciers who will reckon that the coins should command a premium price. However, over time market economics will reassert themselves and the values of the coins will fall. Treasure coins do not have a good history of holding their value based on treasure status alone. Another thing to consider with sunken treasure coins is their condition. In common with most things, coins that are underwater for extended period of time are damaged, some worse than others. Bronze coins are not lovers of extended period of immersion in salt water, which is why pristine Bronze treasure coins are a rarity. Silver coins likewise, although a lot can depend on the purity of the silver. High gold content coins usually survive mostly unscathed, unless they are damaged by wave action or similar physical phenomena. Look at sunken treasure coins carefully before buying, and assess the coin's value based on its grade without its accompanying sunken treasure provenance If you are buying treasure ship coins as an investment, keep in mind that only the highest-grade coins will offer a significant return on investment. Many sunken treasure coins are not in pristine condition and promoters often sell off the lower-grade material in fancy boxes. Remember you’re buying the coin, not the packaging. When making your decision, evaluate the coin on its own merits. Look at the coin, determine the grade, look up the value, and make your decision based on tangible factors, not the mythos surrounding the coin. You can always wait for an opportunity to purchase the coin on the secondary market at a deep discount some time in the future.


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Under the Hood Classic cars delivering exceptional alternative investment returns 12 MONTHS

5 YEARS

10 YEARS

-19%

-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%

Antique furniture

Stamps

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

T

here is a certain beauty to the lines of classic automobiles that is perhaps only now being rediscovered by automotive designers. The appeal of the classic automobile ranges from the elegance of the classic, to the fusion of aesthetic appeal and muscle car presence embodied by the 50’s corvette. Some would say that certain Ferrari models exemplify the epitome of the synergy between passion and investment with the 250 GTO and the Dino mentioned again and again. In fact both these models have achieved noteworthy prices at auction recently. A concourse condition (only 33,000 miles on the clock) 1973 Ferrari Dino 246 GTS with an estimated value of USD $350,000 – USD $425,000 was sold by Gooding & Company, a well recognised Santa Monica, California automotive

auction house for USD $506,000, significantly above the original estimate. Ferraris have, without doubt seen the greatest price appreciation of any classic automobile. Even this is small potatoes in the rarified atmosphere of investment grade Ferrari’s. Bloomberg reports that a 1963 Ferrari 250 GTO racer has become the world’s most expensive car, selling for USD $52 million. The red competition car, formerly owned by the Greenwich, Connecticut-based collector Paul Pappalardo, was acquired by an unidentified buyer in a private transaction, The car has been owned by a Spanish collector, the car website Barchetta said. The price is a 49 percent increase on the record achieved last year for another 250 GTO. Values of classic cars, particularly Ferraris of the 1950s and 1960s, continue to


LUXURY INVESTMENT INDEX

FIGURE 2.

HAGI TOP Index 2009 - September 2013

240 ISSUE 01

220 200

• NOVEMBER / DECEMBER 2013

180 160 140 120 100 31/12/08

19/07/09

04/02/10

23/08/10

11/03/11

Note: Index is market cap weighted, 31.21.2008=100

Most valuable classic cars are located in Europe and North America because the infrastructure for maintenance is there and there are no legal barriers for ownership. Many countries even offer favourable tax conditions for to classic car owners." These attributes make investment in classic automobiles a highly attractive diversification option for high net (and ultra high net) worth individuals.

27/09/11

14/04/12

31/10/12

19/05/12

05/12/13

55

© HISTORIC AUTOMOBILE GROUP INTERNATIONAL (HAGI)

It’s not only Ferraris that are achieving stratospheric prices. Other European marques such as Alfa Romeo, Bugatti, Aston Martin and Porsche are all achieving new highs on the auction block. The evergreen Mercedes Benz variants are also receiving a lot of attention and the price reflects this. American manufacturers of automobiles with established classic and historical value have seen their automobiles reach new heights as well.

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grow, attracting new enthusiasts, investors and speculators, for instance a 1967 Ferrari 275 Spyder was sold in Monterey, California for (a then record) USD $27.5 million in August. “Today the GTO is considered the top car to own,” the California-based dealer Don Williams of Blackhawk Collection said in an interview. If you have a GTO, you have a great collection.” According to an index of classic cars compiled by Historic Automobile Group International (HAGI), valuations rocketed by 25 percent year-on-year to the first quarter 2013. Since 1980, HAGI's index of collectible Ferrari's has grown on average more than 15 per cent every year. London based Historic Automobile Group International (HAGI) founder, Dietrich Hatlapa gave Investment Life some insight into both the market and the psychology of an investor in classic automobiles, “Within the segment of tangible assets classic cars have been a strong performer for various reasons. This has to do with the lifestyle that comes with classic car ownership. There are many attractive events especially in the US and Europe and the cars are the entry ticket for participation. It is also related to the changing role of the automobile. Modern cars are hi-tech items whereas classic cars are almost completely mechanical and represent a return to simplicity. Classic cars are not as mobile as art but the market is certainly global.


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David Gooding, president and founder of auction house Gooding & Co., has sold thousands of classic cars over the years. He says the beauty, mystique and history of these cars are what make them so valuable and coveted by collectors from around the globe. Gooding says 75% of classic car buyers are based in the U.S. but there has been growing interest from new collectors in Asia, the Middle East and South America. Speculation in the classic car market does not seem to be a large concern at the moment (anecdotal evidence indicates that most owners hand on to their automobiles for a number of years) and scarcity is driving demand ever higher. Although the market is without doubt more active today than it has been in the past, a feeding frenzy for classic automobiles to provide portfolio diversification does not seem to be driving value. Classic cars have all the attributes of an alternative investment driven by passion. The classic passion investment is driven by both aesthetics, emotion and in some cases the mythos that surrounds a particular asset or class of assets. There is absolutely no doubt that sales of Porsche 550 Spyder’s (both originals and indeed non investment replicas) are heavily influenced by the fact that James Dean drove one and was tragically killed while driving his ‘Little Bastard’ as he called the ill fated 550 Spyder. The same passion applies to the machines from the factory floor of the Prancing Horse. Ferrari’s carry some heavy designer emotional baggage. The cars are forever associated with the joie de vivre of the Italian lifestyle of the 50’s and 60’s as immortalised in classic and modern film. The continued high visibility of the cars in the playgrounds of the rich and famous, as well as its legendary Scuderia Ferrari competition drivers have also been responsible in no small part for the mystique that surrounds the marque. Would Aston Martin have been what it is today without the help of Ian Fleming’s Bond? Would the collectors of classic Jaguar models still have the same affinity for the beloved ETypo if it was not for the ethos of the swinging 60’s? The point is debatable – there were certainly other factors at play, however what is not debatable is the fact that the mystique behind these marques contributes significantly to their value, as it does with all passion investments. A return on investment is most often only a peripheral factor for those who invest in these machines. However, the allure of

Dietrich Hatlapa HAGI's founder, in a 1960 Porsche Spyder

‘trading up’ or expanding a classic car collection should never be underestimated. Supply side economics dictate that many of the cars that are currently languishing in garages and lockups across the world, or are indeed simple runabouts may be the mobile version of the legendary El Dorado. There are some who have raised some cautionary flags as regards the classic car prices and the possibility that a sort of Classic Car Bubble’ is forming which could at some point conceivably cause a crash – with catastrophic consequences for investors. Take the latest price for the Ferrari GTO – USD $52 million is a lot of money – a LOT of money, to pay for a collection of vulcanized rubber, electrical wiring, steel and chrome – no matter how prestigious the badge. When Investment Life asked Dietrich Hatlapa of HAGI to provide his take on classic car investment, he qualified his positive assessment of the current state of the market with a note of caution, "The HAGI Top Index for rare classic cars has risen strongly this year and the Monterey auctions in California in August have shown that business is certainly healthy at the moment.

Most recently we have see a correction in the market for all our indices. We do not think that this year's growth rates are sustainable Long-term rates even for the classic Ferrari sector are below 16% per year on average. It remains to be seen if the correction will continue.” Investment Life is happy to provide a loose interpretation of Mr Hatlapa’s comments. i.e. You have been warned. However, the fact remains that the long term track record of investment in classic automobiles as it stands at the end of October 2013 is impressive. Still, the numbers don’t lie. Ferrari sales from the '50s and '60s skyrocketing - rising around 15 percent annually for more than 30 years - the GTO has caught the attention of wealthy investors looking for an appreciating asset; yet eventually, there’s going to be a leveling off as the prices hit a simply unsustainable plateau. Experts predict that the popularity of the GTO amongst investors may in fact be the direct cause of a precipitous drop in the auction price of classic and collectible automobiles. It’ll simply reach a point where someone will refuse to pay some vast sum of money and that will be the tipping point. The contagion effect might affect the prices and ROI performance across the entire collectable car market.


LUXURY INVESTMENT INDEX

FIGURE 2.

HAGI F, classic Ferrari Index 2009 - September 2013

260 240 220 200 180 160 140 120 100 31/12/08

19/07/09

04/02/10

23/08/10

11/03/11

Note: Index is market cap weighted, 31.21.2008=100

14/04/12

31/10/12

19/05/12

05/12/13

© HISTORIC AUTOMOBILE GROUP INTERNATIONAL (HAGI)

• NOVEMBER / DECEMBER 2013

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through our support of the Ferrari or McLaren F1 Teams. Or is there another way to enjoy the benefits of the market, albeit without the levels of passion that are part and parcel of the ownership of an actual classic car. If you don't have a few million lying around under the sofa cushions and want to get in on the classic automobile action then there is another option. There are a number of investment funds have been set up in the past couple of years which focus on classic cars. These funds will not be appearing regularly in a financial daily near you, and to be honest they don’t have the best track record. However if you’re keen to get your motor running in the classic car alternative investment market and want to take a slightly risky gamble in order to diversify your portfolio then this might be just what the doctor ordered. "You're more likely to take the fund route if you possess the enthusiasm and recognise the mild sex appeal of the sector, but don't know what you're doing and don't have the time," explains Martin Emmison, a partner at London law firm Goodman Derrick. Two funds have been around for some time. Ray Bellm, a Monaco-based World Sportscar champion and former British Racing Drivers Club chairman, started IGA Automobile. Bellm joined up with property fund manager and car enthusiast Grant Tromans to raise $150m from classic and collectable

ISSUE 01

It’s noteworthy that like any investment of passion these collectables can be subject to market forces that lie beneath the surface of the sector. These forces can act on the prices of classic automobiles in the way that a thrown pebble can disturb the stillness of a pond. One change in investor mood or sentiment, or a news report about the increasing price of crude on the open market, or yet another disturbance in the Middle East and the market for these collectibles may be adversely affected. The fact of the matter is, aside from undoubted supply and demand economics the value of these assets is in the eye of the beholder. The cars themselves are an investment of passion and is quite simply not based on any sort of objective valuation. But what investment of passion is? Van Gogh’s ’15 Sunflowers in a Vase’ has no strictly utilitarian value at all (inflation adjusted price: USD $74.5 million), neither does the 101-Ct. 'Perfect Diamond' sold recently at Auction by Christie’s for USD $26.7 million, other than to look pretty. At least with a Ferrari GTO you get to have some fun with your top down. However, there are those whose passion for classic cars is not matched by a bank balance which allows for the indulgences of the super rich. For many of us owning a classic automobile is a goal worthy of striving towards – at the moment we will live vicariously

27/09/11

car enthusiasts. Nick Lancaster, who once ran luxury car dealer HR Owen, and Pink Floyd drummer Nick Mason, were also involved. The concept was, at least on paper a sound one, and the possible returns are backed up by the growth in value of collectable and classic automobiles shown by the HAGO fund (see elsewhere on these pages). The fund was based on the purchase of a selection of extremely desirable marques, which have a track record of performance in terms of ROI. Unfortunately for them, the launch coincided with the so-called Arab Spring, so oil money for investment in the asset class never materialised. Small investors were simply unable to subscribe to the Guernsey-registered fund due to a minimum subscription of USD $500,000. Regulatory restrictions meant that American investors were in effect barred from participation. Institutions also needed convincing. They wanted two years of fund management by the team before they'd invest, so Bellm started the smaller IGA Classic Ltd (which started trading in January 2013) to provide proof of concept and a track record. It's currently showing some strong performance. According to Ray Bellm, who is now Chairman of IGA Management Limited, “We understand the metrics of our marketplace and know that an ever increasing demand coupled with a finite and long-finished production supply generally can mean only an upward pricing trend. We strongly believe our fund will not only deliver healthy returns to investors, but also will not suffer from the extreme volatility of the financial markets. Investors will also have something quite unique, which an investment in a stock or bond can’t give – a share in a collection of some of the world’s most iconic and rare automobiles.” The Classic Car Fund (TCCF) was started soon after IGA went public. Run by Italian fund manager Filippo Pignatti Morano di Custoza, it has offices in Liechtenstein and Switzerland, but is based in St. Vincent. Initially, it set a minimum subscription of just €100 (USD $160) and listed in Hamburg. The fund fell off the radar for a time and returned as an unlisted private fund and asking for investments of at least €10,000 (USD $16,000). Here’s the rub. Passion investments cars don't produce any sort of income, and it’s the rare investor who is going to let a third party lease his or her car for any reason – so these investments can a return on investment through capital appreciation over a long pe-


LUXURY INVESTMENT INDEX

FIGURE 3.

HAGI MBCI Mercedes-Benz Classic Index 2012-September 2013

150 140 130 120 110

ISSUE 01

NOVEMBER / DECEMBER 2013

100

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90 31/12/11

09/04/12

18/07/12

26/10/12

Note: Index is market cap weighted, 31.21.2008=100

riod of time – and then only if the market continues to flourish - a state of affairs which is by no means certain. Given that the performance of this market is based entirely on a perception of value – rather than an investment that delivers an annuity returns (or any other regular income) there are significant problems in valuation of the underlying assets. In fact it may be simply impossible to gauge an accurate net asset value. If the company that you invest in makes a single type of widget then you can be pretty certain that widget A is going to be similar to widget B (given the vagaries of quality control and some other issues – you can only make a simple analogy go so far). Each classic and collectible car is different and will change in value over its lifecycle - get enough of them together as the basis for a fund and valuation is going to approximate herding cats - extremely combustible and inherently unstable cats. To return to the already stretched widget analogy – the company that manufactures widgets usually has an order book, at least in

03/02/13

14/05/13

22/08/13

30/11/13

© HISTORIC AUTOMOBILE GROUP INTERNATIONAL (HAGI)

our fictional widget driven economy. Cars have no guaranteed buyer and around 30 per cent of those that go under the hammer go unsold. Many that are sold are on the cusp of their reserves and some without reserve have a nasty habit of missing their estimates by a mile. The flip side of the coin is also that the fund could be severely undervalued if the assets outperform estimates – here are two solid examples: A Positive - Despite a pre-sale estimate of £812,000, Prime Minister David Cameron's 1971 Fiat 500 raised over £18,000 (USD $28,900). B Negative - An armour-plated Rolls-Royce Silver Shadow used by Princess Diana on a 1985 visit to the White House was expected to make USD $2m. It eventually sold on eBay for USD $122,300. Here’s another thought to ponder before putting your nest egg into classic cars. This is also an investment that will actively be re-

moving money from an investors bank balance - subscription fees, management fees to intermediaries, insurance, maintenance and storage. These are assets that like nothing better than to fall apart at the seams, especially when idly parked in a warehouse. That makes it hard for a fund to produce year-on-year results. IGA, for instance, was prepared to use up to 3 percent of the fund’s reserves just to pay commission to introducing agents, or fixers. As well as a 5 percent subscription fee, TCCF also charges an administration fee of over £13,000 (USD $20,900) a year. That’s just to start, there are other fees on top of that, such as a substantial a management fee and a garnishing of profits if the fund’s net value reaches a certain high water mark. No problem if the market stays buoyant – but boyoh-boy are these fees going to hurt if the market plateaus. ABe prepared to wait for up to five years to realize your investment. B Have passion, have fun – don’t view your classic car in terms of dollars and cents. C Buy a beautiful car – but don’t take out a second mortgage. DBuy your dream car if you can. Even if the bottom falls out of the market you’ll still look and feel great in that car. E Acquire knowledge - check auction results and trawl the Internet. F Know the car's history. G When in doubt phone an expert or an auction house – but don’t fall for their hard sell. Last word "If you're interested in cars, but know nothing about them, and think you'd like to learn and kick some tyres then have fun in owning something," says Mr Hatlapa of HAGI. "And, of course, there's the benefit of having a car in the garage that dinner guests will want to sit in and listen to. It's a kind of return for someone because they derive pleasure from it."


LUXURY INVESTMENT INDEX

Tales from a

BiG Country

E

arly in 2013 a survey conducted by the US based Association of Foreign Investors in Real Estate showed Brazil ranked first as the most attractive emerging market country for commercial and residential real estate, topping China for the first time in three years. However, a surging middle class hungry for homes and social unrest in major cities finds potential Brazilian investors in two minds. Could investors be looking in the wrong places for investment property in this vibrant South American investment destination? Is the real investment action in regions outside of Brazil’s traditional urban hotspots? Investment Life investigates.

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© STEFANEDBERG / FLICKR


LUXURY INVESTMENT INDEX

Brazil –

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Looking for investment value in the hinterlands

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M

ention a trip Brazil in any conversation and the immediate reaction will inevitably revolve around the bright lights, fabulous costumes, mega floats and riotous excitement of Carnival, that hedonistic festival of colour and excitement that has become synonymous with the Brazilian ethos and the ability of the country's citizens to embrace any opportunity for fun. However, recent street level protests have seen teachers join a growing list of disgruntled government employees and consumers protesting low wages and the spiralling cost of living in Brazil’s major cities, providing tourists with a less welcome example of exuberance powered by dissatisfaction with the governments efforts to control the spiralling cost of living in Brazil's major urban centres. So what the underlying reasons behind this wave of protest action? In part the focus of the government on preparations for the FIFA World Cup Soccer tournament and the infrastructural investment that this has entailed are seem by many in civil society as consuming govern-

ment funds that would be more equitably used for the remuneration of underpaid civil servants. The placards held by protestors and numerous news reports have also indicated that many believe these finds would be better employed in correcting some inefficiencies (in infrastructure amongst others) that are causing spiraling cost of living increases in Cities such as Rio and Sao Paulo. A recent New York Times article gives some insight into the financial challenges faced by the average Brazilian, including the costs associated with property rentals. According to the NYT renting an apartment in an upmarket area of Rio has become more expensive than in Oslo, the capital of oil-rich Norway. If one looks outside of Brazil’s larger cities the mood is by no means as militant, however many of the same cost of living pressures are still present, even in smaller towns. Given this state of affairs are there opportunties for the savvy property investor to obtain value by looking outside of the major urban areas of Rio and Sao Paulo? Investment Life took a look up and down the extensive coasts and along Brazil’s major waterways to find out.

The economy: Only two years ago Brazil, as the largest economy in Latin America was widely touted as the land of opportunity for property investors, in part due to a housing market boom caused a long run of declining interest rates. From a high of 26% in 2003 The Central Bank, Banco Central do Brasil’s Selic rate has fallen to 7.25% in 2012. Mortgage rates have fallen in lockstep with this interest rate decline, standing at 10% to 12% during the first half of 2013. This decline has caused a focus on property from both foreign and domestic buyers, however today there may be dark clouds on the horizon for those hoping to cash in through rentals based on the low barriers to entry into the market based on competitive mortgage rates. The central bank has re-examined its monetary policy during 2013 and raised the benchmark interest rate during two consecutive meetings to 8% in May 2013 in order to rein in inflationary pressures. It remains to be seen if the recent increases in the benchmark interest rate and diverse macroeconomic challenges will dampen the enthusiasm of investors who seem to still have great faith in the potential of the Brazilian market. There is however cause for optimism. The Brazilian President, Dilma Rousseff


LUXURY INVESTMENT INDEX

Manaus: Manaus is the largest city in the Amazonas region and home to approximately 2.5 million people. The city is a major port located on the Rio Negro, a few miles before it meets the Rio Solimoes and combines to form the Amazon River proper and has been attract-

Niteroi: Although a relatively unknown city by tourists who tend to congregate around the bright lights and undoubted attractions of Rio de Janeiro, Niteroi may be an undiscovered gem in the crown of Brazil’s property investment crown. Known as ‘The Smile City’ this pocket sized metropolis (it is home to around 500,000 people) boasts the high-

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Although foreign investors have been focused on Rio de Janeiro and Sao Paulo, there are other metropolitan areas of Brazil which may offer real value for the savvy property investor. These regional centres may be less affected by the euphoria and attendant property price contagion caused by the upcoming Olympic and Soccer World Cup megaevents that will be hosted in Brazil and may therefore offer value when evaluated with a sober eye towards medium and even more importantly long term investment potential.

NOVEMBER / DECEMBER 2013

As previously mentioned the Brazilian property market has been attracting a lot of attention from overseas buyers in the last three years due to extremely robust growth. According Knight Frank’s Global Real Estate Index, released at the end of 2012 Brazil comes in at number one in terms of rising home prices. Outliers like Dubai and Hong Kong saw greater increases in prices, however neither of these is a country, and moreover both are subject to economic and market forces that should caution against using these data from these two examples as a basis for direct comparison with Brazil. The fact is that no other country has seen prices rise

On the fringes:

Trends:

as much as they have in the past few years as Brazil. Housing prices in Brazil rose 13.7% from the fourth quarter of 2011 to year end 2012. In comparison US housing prices rose by 7.3% in the same period. The lower cost of borrowing has certainly led to an increase in investment in various types of property in Brazil.

ISSUE 01

has taken bold steps to revive the economy by weakening the currency, providing tax breaks and putting in place measures that are aimed at not only controlling interest rates, but lowering them in the medium to long term. The President has also been extremely focused on the housing market, making federal subsidies and state bank loans available to developers and nearly doubling spending aimed at eliminating the backlog of affordable homes in the country. The plan to develop around 2 million of these entry level homes is on track and will be completed during 2014.

ing interest from both foreign and domestic investors for some time. The focus of investment has been the Centro, a region that rises above the river on a slight hill. Not coincidentally this is where most of the hotels and attractions are located. Over the past three years the city has steadily increased its profile as a viable option for property investors. Many of these investors are of the opinion that the traditional investment opportunities presented by both Sao Paulo and Rio may not be delivering. During the period of 2010 to the first quarter of 2013 property sales in Manuas have more than doubled, growing by 100.38%. During the last decade, a system of federal investments and tax incentives has turned Manaus and the region surrounding the city into a major industrial centre. The ‘Free Economic Zone of Manaus’ is today a thriving and opportunity rich environment. Whereas industry and commercial activity has traditionally been powered by rubber this industry is today in decline. Today raw materials such as Brazil Nuts and timber are still important sources of revenue for most commercial and industrial businesses. Petroleum refining operations and chemical operations also contribute to the regional economy and mobile phone companies like Nokia and Siemens have opened manufacturing plants in the area. A recent survey of the Amazonas region showed that consumers were particularly interested in three bedroom apartments and properties priced between R$100,000 and R$200,000. Properties in this price range accounted for around 44% of all sales in the region and units sold ‘off plan’ were particularly well received. This focus may represent an opportunity for foreign investors looking to get into the Brazilian market at price points that are significantly lower than the buy in required in Brazil’s major cities.


LUXURY INVESTMENT INDEX

est Human Development Index in the region and is home to some of Brazil’s highest earners. It also has a reputation as a much more laid-back alternative to the hectic pace of the capital city. Although popular as a vacation destination, foreign property investors may be attracted to the city due to the fact that the high level employees of Comperj, a petrochemical complex being built outside of Rio will undoubtedly be on the hunt for accommodation in Niteroi.

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The small capitals of the Northeast

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This is a region that will continue to grow and benefit from domestic and foreign tourism due to the completion of the BR-101 highway that cuts through Brazil from North to South through the coastal states. Foreign investors will be particularly interested in upmarket properties which offer between two and three bedrooms which both Brazilian and international property and investment pundits believe will offer superior value in the medium and long term. These are properties which will reward the patient investor with an eye out for a bargain. Properties in on Natal and Joao Pessoa may be amongst the many investment options in this area. These are you properties that may fit all the criteria of the savvy investor, for purchase and rental or as quickly appreciating assets that can be disposed of at a tidy profit in the short term.

The coast of Parana Increased job opportunities and development are powering the surge in interest in properties in this fast growing Brazilian region. Private investment in the region is at an all time high, but the savvy investor may still be able to ride the wave of development and renewed interest. Although regional growth has historically been driven by purchases by wealthy Brazilian sun lovers seeking a second coastal property this phenomenon was centred around the coast of Santa Catarina. Today infrastructural development in cities such as Antonina, Guaraqueçaba, Guaratuba, Morretes and Paranaguá have also attracted the attention of both foreign and domestic buyers in the market for rental income generating properties. These areas are seeing increased numbers of new launch-

es of upmarket developments which offer investors an easy entry into the Brazilian market, for a fraction of the cost of properties in the major urban areas of Rio de Janeiro and Sao Paulo.

Ownership restrictions: The good news for foreign property investors interested in the possibilities offered by a recovering Brazilian economy is that there are no restrictions on foreign property investments in Brazil. In fact the Brazilian government actively promotes foreign investment in the Brazilian real estate market, with foreigners enjoying exactly the same property rights as native Brazilians when it comes to those properties classified as within the urban perimeter’. Essentially a good rule of thumb is that if a property has access to municipal services such as water, sewage, electricity and a well established road network foreign investors should be able to enter into the market with little or no extra effort. One of the only restrictions is on the ownership of agricultural land.

Conclusion The soundtrack of the streets has changed from the Samba, to calls for financial and regulatory reform as Brazilians express their dismay at the high cost of living. Taking into account these latest protests and the Brazilian government’s ongoing effort to address systemic weaknesses in the economy, what exactly are the pros and cons of investing in property for rental income in Brazil’s outlying and secondary metropolitan areas. AAn economy that seems to be on the right track. BInfrastructure issues are being addressed. CLow cost of capital. DStable interest rates. ECurrent low inflation. FIncreasingly affluent middle class. GWorldwide focus may encourage interest in Brazil as a long term investment destination. HWide variety of property available at a number of price points. I Problematic tax structures are being addressed. JAccess to credit is improving. KNew initiatives to control criminal activity are underway. LGovernment focus on housing may pro-

vide additional incentives to purchase – resale opportunity. MIntegrated housing developments are becoming more popular. NIncreasing interest in smaller rental apartment units in urban areas provides investors with opportunity.

Areas of concern: ▶The macroeconomic issues of Brazil still require urgent attention from central government. ▶Threat of urban unrest and activism by consumers. ▶Crime remains an issue in urban areas. ▶A dysfunctional infrastructure. ▶Lack of government direction as far as macroeconomic policy is concerned. ▶Lack of disposable income affects resale (but may encourage rental). ▶Mega sporting events may have skewed property prices. Patience may be the name of the game. When all is said and done there is a limit to how much can be read into the current economic situation in Brazil and whether or not it will act as a brake to foreign investors seeking value in the Brazilian property market. Unfortunately the Brazilian government seems to lack a direction as far as macroeconomic policy is concerned. However, there is no doubt that there is a focus on addressing historical problems which threaten the positive international attitude toward Brazil as an investment destination. The major question on everyone’s minds when it comes to Brazil is whether or not the property boom is in the midst of a catastrophic meltdown. Many are of the opinion that the Brazilian property bubble has burst or is at the very least in danger of bursting. It is telling that one of the major Brazilian developers is on record as saying (during June 2013) that around 40% to 45% of apartments in Rio are today being purchased by investors rather than those seeking a permanent home. Although much investment activity across the globe is fuelled by the every present group dynamic, these investors do not appear to be slaves to the opinions of many economists. They clearly see value in Brazil.


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FEATURE

The Elevator Pitch ‒ Brazil

ISSUE 01

NOVEMBER / DECEMBER 2013

R

anked seventh in the world (and the second largest emerging economy) by GDP size, Brazil is the archetypal emerging country. It brilliantly passed the test of the major 2009 crisis, demonstrating the strength of its economic fundamentals and the maturity of its political institutions. But, the Brazilians’ legendary optimism has been sorely tested for the last two years: weak growth, loss of industrial competitiveness and, more recently, massive protests by a population that is becoming restive. The question is - can the Brazilian economic engine be repaired? Weak growth and the social tensions are the result of structural problems relating less to classical economic policies than to reforms affecting infrastructures and education, which need to be addressed urgently. On the one hand, businesses are benefitting from healthy household demand, but on the other hand, interest rates and the weakness of global activity are affecting their performance. The government is taking steps to address the macroeconomic issues that are negatively affecting the country. For the next three to five years the focus of investment will be on Brazil’s three pillar industries, oil and gas, infrastructure and consumer goods. Investment is a combination of public and private sector funding.

INVESTMENT NEWSFLASH - BRAZIL: A  In October Brazilian President Dilma Rousseff announced a plan to invest R$13.5 billion in 310 different infrastructure projects in 1,198 municipalities across Brazil. B  Brazilian President Dilma Rousseff announced an investment of 5.4 billion reals (USD $2. 4 billion) to expand the mass transit network

COUNTRY INFORMATION Official Name

Federative Republic of Brazil

Capital City

Brasilia

Currency

Real (R$) (BRL)

Language

Portuguese

Total Area

8,515,767 sq. km.

Population

201 million

Time Zones

BRT (UTC-2 to 04)

Dialing Code

+55

GDP

USD $2.396 trillion Ranked seventh in the world (and the second largest emerging economy) by GDP size

GDP per capita (IMF Estimate) Human Development Index

USD $12,079 0.73 (high) 85th

INVESTMENT BASICS

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in the country's largest city, Sao Paulo. The funds are part of a larger 9.6 billion- dollar package the government earmarked to improve public transportation in the city, following mass anti-government protests in summer against poor public services. C The participation of two Chinese stateowned companies in the consortium that won the bidding for the Libra field, the largest oil field found in Brazil, represents a "large opening" for investment by other companies from the Asian nation, Vice President Michel Temer announced in late October. Brazil auctioned off the rights to Libra on Oct. 21, with the winning consortium made up of France's Total, with a 20 percent stake; Anglo-Dutch supermajor Shell, which has a 20 percent interest; China National Petroleum Corporation, which has a 10 percent stake; China National Offshore Oil Corporation, which holds a 10 percent interest; and state-controlled oil giant Petrobras, which has a 40 percent stake in the project.

HIGHLIGHT

Rich natural resources

MAIN INDUSTRIES

Agriculture, mining, manufacturing, services

MAIN EXPORTS

Aircraft. Electrical equipment, automobiles, ethanol, textile, footwear, iron ore, steel, coffee orange juice, soybeans, corned beef

MAIN IMPORTS

Raw materials and intermediate goods, capital goods, consumption durables, oil, motor vehicles

TRADING PARTNERS

China, US, Argentina, The Netherlands, Japan, Germany, India

BRASILIA

SAO PAULO

RIO DE JANEIRO

SINGAPORE INVESTORS NOTE:

Many Singapore companies have been engaged with Brazil for some time now, initially focused on oil and and gas. Going forward, as the Brazilian market becomes more familiar Singapore's commercial engagement will deepen and diversify. There has been increasing interest from Singapore in the fields of infrastructure development, retail, engineering, electronics and financial services.

SOME RED FLAGS

Doing business in Brazil A Ranked 130 out of 185 countries by the World Bank in terms of ease of doing business B Complience is burdensome. C Takes 2,600 man hours for an average company to file and pay taxes vs 84 hours in Singapore and 347 hours in Mexico. D Wages can be higher than in other emerging markets.

Growth Last year, Brazil’s economy grew only 0.9 percent because private investment slowed down. Analysts expect the growth rate to recover to 2.5 percent this year, but that is still far slower than the 7.5 percent the country achieved in 2010.

Inflation Income inequality remains high. Inflation is taking a big toll on the poorest Brazilians. The country’s inflation rate was 6.09 percent in August, according to the central bank, which has raised interest rates several times this year.

Social unrest. “I’m concerned about Brazil,” said Joel Smolen, a hedge fund manager at Axion Capital Management in Larkspur, Calif. “I’m seeing recent social unrest due to political and economic issues as a serious risk going forward,” Smolen recently said to Forbes Magazine.

COST OF LIVING People living in cities like São Paulo pay more for food, housing and other basic goods than people in other comparable countries. One of thee reasons for high prices - the government has not built enough roads, railways, ports and other infrastructure to keep up with the economy’s growth. Brazil also imposes high import duties and taxes that inflate the price of many goods and services.


FEATURE

AT AUCTION

© FROM TOP: CARPETBEGGERS, DYNAMOSQUITO / FLICKR

Baba Yaga, in the Russian folk tale, provides Ivan the Fool with a flying carpet and assorted other magical gifts. In American literature, magic wishing carpets are used for instantaneous travel throughout Heaven in Mark Twain’s Captain Stormfield’s Visit to Heaven. The fascination with exotic carpets seems to be alive and well. As an alternative to traditional investment classes carpets are attracting some attention and not only for their intricate designs and undoubted beauty.

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F

lying carpets may be the stuff of legends; however investing in collectable Persian carpets is not a magical solution to reaching great heights as far earthbound investments are concerned. Rather, according to the experts what id required is an eye for aesthetics as well as a practical approach. References to flying carpets in both ancient and modern literature abound. In One Thousand and One Nights Prince Husain, the eldest son of the Sultan of the Indies, travels to Bisnagar in India and purchases a magic carpet.

Mention the word carpet, and it is inevitably linked with Iran, which has a long and rich history of carpet production. However there are centres of production spread across Asia, and each produces carpets which are unique to both region and particular production facility. Each classical centre of carpet production in what was known as Persia produces carpets with unique design characteristics that distinguish its products from those originating in other centres. For instance, Tabriz carpets (most well known for production between 1500-1550) often have a central medallion and quartered corner medallions superimposed over a field of scrolling vine ornamentation, usually with mounted hunters, single animals or animal combat sequences woven into the fabric of the carpet.

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BY VITT O R IO H E R N AN D E Z

PERSIAN CARPETS?

Do Persian carpets offer value to investors?

ISSUE 01

Rugs to riches

During the recent Oriental Rugs and Carpets auction held by Christie’s in London on October 10, 2013 a rare mille fleur ‘star-lattice’ carpet believe to originate from Kashmir, India, was auctioned for USD $7.7 million, double its expected selling price. One assumes that this carpet will not be used in the entrance hall of the purchaser, no matter how palatial their residence. The key to carpet investment, as with many other alternative asset classes is the rarity of the rug. In this case, the carpet, measuring 12.9 x 13.6 feet and dating back to the 17th or early 18th century, is one of 12 remaining mille fleur ‘star-lattice’ carpets from the Mughal era. The Mughal dynasty in India is known for having produced beautiful carpets during the 16th, 17th and 18th centuries. These works of art were used to decorate the palaces of not only Indian royalty but also reached royal courts and stately homes in The Netherlands, Portugal and other parts of Europe through trading companies. This particular carpet was owned by the family of American industrialist Cornelius Vanderbilt II for almost 100 years, before it was sold in 1977 to a French private collector, and later sold again in 1989 at a German auction for USD $718,700 and finally was placed on auction by Christie’s in 1995 where it was sold for USD $992,500. That auction included rugs from Persia (now Iran), Turkey and Central Asia, which fetched almost USD $8.7 million total. But the most expensive carpet sold on record was auctioned in Sotheby’s for USD $33.5 million in June 2013. It was an early 17th century Kerman carpet with a rare ‘vase’ technique set on a red background. It broke the previous record of another Kerman carpet sold in 2010 for USD $9 million.


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FEATURE

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Kashan (1525-1650) carpets are made of silk and often depict mounted hunters and their animal prey, while the Herat (15251650) carpets were made in Lahore, Pakistan or Agra, India and are characterised by a red field with scrolling vine ornaments and palmettes with dark green or blue borders. Finally, the Kerman (1600-1650) carpets have seven classes noted for its unique structure and were often used as garden carpets ornamented with formal gardens and water channels. Carpets dealers have developed a 70item classification for Persian carpets based on their design, type of fabric and weaving technique. For the aspirant investor it may not be necessary to memorise each of these characteristics, however a working knowledge of what separates a good specimen from a bad or fake production is the foundation for successful investment and even appreciation of these works of horizontal art. It should be noted that not all carpets are good investment pieces. Many are simply highly attractive home furnishing items with practical utilitarian purposes. However, as with most passion investments there are instances where it may be possible to combine both aesthetics and investment value. So when does a carpet become an investment piece?

EXPERT ADVICE

The first answer to that is the provenance of the carpet. Besides being made in Iran or nearby regional centre of excellence with a proven historical pedigree, it should also be a true antique, which means at least 100 years old, according to Jan David Winitz, president and founder of the Claremont Rug Company in Oakland, California. Winitz, in a lecture to a group of antique carpet connoisseurs, points out that the finest antique carpets were actually a form of ‘international currency’ during the era of Marco Polo. These valuable assets were traded for other goods in times where currency could, and frequently was either debased or entirely counterfeit. Marco Polo introduced the rugs to Italian aristocrats at the end of the 13th century, claiming that the carpets were from the Orient, which led to the blanket term ‘oriental carpets’. Despite the attachment of the word Persian, carpets produced in other regions were (and continue to be) considered investment grade if crafted as entirely individual artistic expressions. According to Winitz these car-

A good investment grade carpet must also use a harmonious palette of colours created exclusively from pure, natural dyes. Materials used must be of the finest quality. pets were made in city workshops as part of a regional cottage industry based in smaller towns and villages or even isolated nomadic camps. The common thread (excuse the pun) is that they are ‘virtuoso adaptations’ of the traditional designs, color palette and structure characteristic of a particular region. A good investment grade carpet must also use a harmonious palette of colours created exclusively from pure, natural dyes. Materials used must be of the finest quality. If it is made of wool the material must be lustrous, luminous, elastic and soft. Experts often say that a good carpet should feel as if it is made from a ‘living’ material. Of course, rarity and uniqueness (ideally the carpet should have the individual stamp of the master weaver) are the foundations of investment grade carpets. Straying into the poetic, which is extremely easy for products which feature designs based on an oral tradition for storytelling, myth and legend the carpet should possess aesthetic qualities such as ‘a stirring magnitude of artistry, a level of beauty that is literally breathtaking’. A test whether a carpet would pass those criteria is if ‘the viewer is silenced, in awe of something that emanates a profound level of balance and harmony’, Winitz explained. Obviously there are some less, shall we say ‘sub-

jective’ ways of judging whether or not a carpet represents an opportunity to realise a return on investment.

CHANGING DYNAMICS

Carpet experts, however, say there is no exact science to buying Persian carpets for investment because of the changing dynamics involved. The carpet website, A Candle in the Night, pointed out as an example the purchase by many rich Americans in the early 1950s of large floral pastel Persian Kirmans for their living rooms on the advice of rug dealers. The supposed high quality of the carpet would assure the owners of both longevity and a return on their initial investment. While many of the carpets did last three or four decades what changed were the sizes of homes. In the 1980’s and 1990’s a generation of Americans moved en masse from large landed houses to condominium units with smaller floor areas that obviously required smaller carpet sizes. The situation meant that then market was quickly saturated. The small number of buyers and large numbers of carpets meant that buyers and not the sellers dictating the prices. Simple market economics took over and sellers found themselves out of pocket. However, as with other passion investments there is a silver lining to even this ROI cloud. These investors enjoyed an aesthetically pleasing addition to their homes for an extended period of time. If they had purchased the carpets as pure investments it is likely that they would have chosen a sweet spot in the market and sold off the asset prior to being forced to do so by circumstance. The lesson that bears repeating over and over again is this; when it comes to passion investments, such as classic cars, fine art, or even carpets the buyer must be very clear in their own mind the purpose of their investment. Is it an asset that is purchased as a dispassionate investment, or is it an affair of the heart? Just as you shouldn’t name an animal that you are going to eat so should you not invite passion investments into your home – there’s the possibility that you’re going to fall in love and ignore opportunities to realise your investment. That being said, here are some Investment Life guidelines to provide a simple framework to purchasing an investment grade carpet. As with all investments – if you’re going to be parting with a substantial amount of money consult an expert prior to signing the cheque.


FEATURE

Let your taste be your guide▶ Buy only

carpets that you love. ‘Its real value is the pleasure it gave you. Any financial appreciation is incidental and a bonus’, according to A Candle in the Night.

Don’t be fooled by elaborate designs and numerous colours▶ These elements

Beware of silk▶ This material can be espe-

pointed out that machine-made rugs, which take only minutes to manufacture, are not real Oriental rugs. Real handmade rugs take at least 8 months to be completed. To distinguish a handmade from a machine-made rug, turn the carpet upside down and look at the back. An unclear pattern is the indicator that it is machine-made.

It must be of Asiatic origin▶ eBay named

Age▶ machine-made rugs often last for

only about 20 years, while high quality handmade carpets could last for 3 or 4 generations. When an Oriental rug reaches 50 years of age, it is considered a semi-antique, and once it reaches 100 years, it’s recognised as an antique.

Owners of genuine handmade carpets would be happy to know that the value of their rugs are expected to further rise because of recent developments in known carpet-producing countries. Iran▶ According to CarpetEncyclopedia.

com, 90% of Persian carpets are made in Iranian homes as a source of extra income by nomadic or village women. There are around 1.2 million weavers in Iran who produce Persian carpets sold in domestic and international markets. However, the trend is changing as more villages move to cities to find regular jobs. This has resulted in nomadic carpets becoming in short supply and more difficult to find, which contributed to the 600% increase

Other Countries▶

These developments are replicated in the other carpet-producing countries like India, Pakistan, Nepal and Afghanistan. CarpetEncyclopedia.com warned that within the next 10 years, ‘weaving carpets by hand will probably be marginalised and in some area die out’. Limited supply equals increased value and those with quality carpets in their possession are advised to be patient.

CONCLUSION

J.R. Azizollahoff, an Oriental rug consultant, in New Jersey, recently remarked that with fewer hand knotted rugs being woven, now is the best time to make your carpet investment. ‘Invest your discretionary, so-called ‘mad money’ in rugs, rather than commodities with no intrinsic worth.’

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Iran, India, Russia, China, Tibet, Nepal and Morocco as the sources of the authentic Oriental rug.

RECENT DEVELOPMENTS

Turkey▶ Like Iran and China, social and industrial progress led to the decline of carpet production in Turkey that most of rugs sold in Turkish markets are actually imported from other countries.

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It must be handmade▶ Rugs-oriental.net

Carpet sizes▶ Genuine Persian carpets are classified into 3 groups. The first, Farsh/Qali, are those that measure beyond 6x4 feet. The second, Qalicheh, which means small rug, are sized 6x4 or smaller. The third, Gelim, are the nomadic carpets, which includes pile rugs and flat weaves.

China▶ Many Chinese have given up the craft of carpet-making by hand, following the decision of the national government 18 years ago to remove assistance to carpet manufacturing as other products were deemed to be more profitable and China’s borders opened to foreign capital and industry. This has resulted in price of Chinese carpets increasing by a factor of five compared with two decades ago.

cially problematic because it does not wear well and cannot be restored to its original state by cleaning.

High Knot Count▶ one more mark of a quality Oriental carpet is the number of knots. The higher the knot count and the tighter the knot, the more valuable the rug.

in price of almost all types of Persian carpets in the past few years.

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do not necessarily make a carper better or provide higher value.

Classic Beauty A typical passion investment carpets buyers should judge their purchase on aesthetic value - rather than for a potential ROI.


LUXURY INVESTMENT INDEX

Going Postal Will China save a dying alternative asset class? B Y S T A FF WRIT ER

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12 MONTHS

5 YEARS

10 YEARS

-19%

-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%

Antique furniture

Stamps

7%

60%

255%

Cars

28%

115%

430%

KFLII

7%

40%

174%

Gold

-23%

68%

273%

PCL*

7%

27%

135%

FTSE 100

12%

11%

55%

*Knight Frank Prime Central London Residential Index Data for coins and jewellery provisional from Q4 2012

he use of stamps is becoming increasingly rare as the world turns to electronic forms of communication – however the humble sticky backed stamp is still producing some surprises as an alternative investment – and Asian investors are at the forefront of the move to stamps. There are two main components to the value of a stamp, the first is rarity and the other is the often-fascinating story behind how they reach the investment market. Probably the most famous stamp of all time, except for the well-known Penny Black is the 1856 British Guiana 1-cent stamp in black on magenta. This is not a stamp you would be placing on an envelope any time soon. It is estimated to be worth in the region of USD $3 million, but estimates vary, due to the fact that the stamp has not changed hands since 1980, when it went under the hammer for USD $950,000. Before any would be investors start reaching for their wallets to order the latest Stanley Gibbons catalogue* here are some sobering facts to consider. Although the price of British Guiana 1-cent stamp is estimated to have tripled in the past 30 years, the owner of the stamp, John E. du Pont, could have done better by putting his money in a run of the mill savings account. Here are the numbers. The stamp's growth in value represents a 3.9% compounded interest rate. Mr du Pont’s estimated return on investment is about 216% over 30 years (should he choose to dispose of the stamp, which after 30 years seems unlikely).

The bottom line – if this particular collector had invested in the S&P 500 he would have earned a return of about 1,000%, a step up from his paltry 216%. It seems, that John du Pont is a classic example of the collector of so-called ‘passion investments’ which are purchased in line with the collectors interests and emotional needs. This is in contrast to typical investments that are purchased as vehicles to supply a financial return. The flip side of the coin (or sticky side of the stamp if you will) is the fact that top tier stamps by and large do deliver – across the board rare stamps have risen in value by an average of 11 percent annually over the past 40 years, outperforming many equities and leading many to believe that these collectibles should be an asset class of their own. So the question needs to be asked – is emotion and the status of stamp collecting (philately - the study of stamps and postal history and other related items – ed.) the driving force behind indulging in a passion for collecting examples of what is soon to be a relic of the past? Or for those who are willing to part with large sums of money is stamp collecting a viable way to diversify a portfolio? Asian interest The new style collectors are not fixated on stamps from Britain or the stamps from Crown Colonies that formed the backbone of many collections over the years. Neither are they interested in the mega profits that can still be made from the rarest of the rare examples of both British and US stamps, which still reach auction blocks across the world.


LUXURY INVESTMENT INDEX

Penny Black B.P.A. Certificate 1972. One of the finest mint examples of the Penny Black Extant. Lot sold 21 September 2011. 180,000 GBP (Image courtesy Sotheby’s).

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* The very first stamp was issued in 1840, the same year that Edward Stanley Gibbons was born. 150 years later, Stanley Gibbons Ltd is the market leader in the stamp collecting market and the Gibbons catalogues and investment guides are considered amongst the best in the world.

certed effort to increase their profile in the Chinese market. A recent spate of auctions aimed specifically at Chinese high net worth individuals and in fact held on the Chinese Mainland are proof of these efforts (for more information please see the Christie’s interview elsewhere in this edition). The new push into China and Chinese collector interest is fueling a resurgence of interest in a hobby that only a few years ago was in danger of being relegated to a few dusty museum exhibits and of interest to a dwindling number of equally dusty collectors. “Some of the recent growth can be credited to Chairman Mao – but not necessarily for the right reasons – he banned stamp collecting as being ‘bourgeois,’ however, the Chinese, with newfound freedoms as well as wealth, are eager to reclaim their heritage” says Keith Heddle, Group Marketing & Investment Director at Stanley Gibbons. At least a third of the world's 60 million stamp collectors are now in China, and the number is growing rapidly, according to Stanley Gibbons. China, including Hong Kong, has also become a big stamp-trading hub, stamp shows have proliferated, drawing hundreds of thousands of buyers and eager onlookers at a time when similar events in other parts of the world are noteworthy only because of empty halls and extremely thin visitor numbers. Stanley Gibbons says Asian clients now make up 5 percent of the firm's investments in terms of volume—but almost 18 percent in value, as they spend more money, more often. These are Penny Black investors not penny investors. Three years ago, two sheets of the first ever-issued stamps for Formosa, the name

ISSUE 01

The action today is in Asia, especially China. Changing demographics and increasing wealth that is trickling down across social strata, as well as a growing fascination with pursuits and hobbies that were only a short time ago seen as exclusively Western pursuits is fueling a micro mania for stamp collecting. Some of the most exciting examples for both Chinese collectors and those outside of the country are those which were circulated during some of the most turbulent times in the growth of the country. Examples of stamp sets that are certainly making a new generation of collectors sit up and take notice is a set of 1967 stamps featuring communist leader Chairman Mao Zedong greeting crowds with quotes from his "Little Red Book" – worth a cool USD $53,000. A slightly worse for wear, faded orange hued stamp from 1897, known as the "golden dragon," which features a pair of coiled dragons along with Chinese characters giving the stamp's face value in the old imperial currency of "candarins." Adding significant historical interest is the fact that above the images is a black-ink marking in both English and Chinese that says "10 cents," a reminder that the British by that time controlled many of China's ports. Only 14 unused versions are known in the collecting world. In collecting rarity is the primary driver behind value – and this stamp is a perfect example with a sticker price of USD $151,000. It is anticipated that as Chinese collectors refine their tastes and as philatelists across the world are exposed to more examples of rare examples of Chinese stamps the price will steadily rise for good examples. It is readily apparent that auction houses like Christie’s and Sotheby’s are making a con-

of the island that later became Taiwan, sold to a Hong Kong collector for HK$10.4 million, or over USD $1.3 million. In 2011, a block of four stamps from 1968 called "Chairman Mao's Inscription to Japanese Worker Friends" sold for more than USD $1 million at a Hong Kong auction. The stamps, which feature Chairman Mao's handwriting declaring that the revolution would succeed in Japan, were printed but never saw the light of day, except through a small, nondescript post office in Hebei, China, which started selling them before they were canceled. A move which one assumes would have had serious consequences for the Postmaster of the town. Last year, a pair of 1941 stamps that featured Sun Yat-sen, the revolutionary leader who began the Republic of China in the early 20th century, sold for USD $709,000 at an auction in Hong Kong. Like many other expensive stamps, their value was due to human error: The text and the $2 sign were printed upside down. Chinese buyers tend to like alternative investments, from art to jade to Chinese Ceramics, coins, watches and fine wine. In fact the Chinese lead, or are close to leading investment in almost every alternative asset class contained in the Knight Frank Luxury Investment Index (see intro to this feature). Stamps are also a relatively cheap collectible for countries that have new and growing middle classes. A ‘lucky packet’ of hundreds of stamps, so beloved by thousands of budding child hobbyists only a generation ago can still be purchased for around USD $5 which makes it easy for new collectors to get started, and as they get wealthier, they delve deeper into the hobby. It seems the Chinese are going to be going very deep indeed.


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Cool Britannia Why is London still one of the hottest investment destinations in the world?

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t is noticeable that offshore purchasers of UK properties tend to look at an areas in the greater London metropolis that are home to many of the ‘new build’ properties . These investors tend to concentrate their attention on central London (zones 1, 2, and 3 are regularly mentioned), and preferably new build. In many cases, of course, there is good reason for purchasing newly constructed property in central London,. These reasons include some of the most cutting edge architecture to be found in any major city ion the world, excellent pricing compared to older, more established areas and an opportunity to enjoy ownership of an asset that steadily grows in value. However, those looking to make either a home or an investment in the heart of ‘Cool Britannia; might want to expand their focus to include properties which are not new build. The Pound Sterling is strengthening and forecasts for the recovery of the UK economy are conservatively optimistic. Investment in

prime London locations is viewed by many industry pundits as a low risk option in a volatile global marketplace, and is certainly at the forefront of prime property high performers in the UK, if not the entire European continent, given the macroeconomic wobbles that are still causing ripples in the property market across the English Channel. Interestingly, sales of GBP5,000,000+ housing correlate closely with movements in the gold price. In terms of the business of making and managing money, London is perhaps not the lone heavy hitter that it once was (it now certainly has some competitors in Asia nipping at its heels and it currently shares the honours with New York). It remains, however a financial heavyweight. Home to the Bank of England, London Stock Exchange, and Lloyds of London, most of the world’s top companies have their offices or headquarters in London, and there are more overseas banks on the High Streets of England’s capital than in any other international city.

London offers a diverse range of people and cultures and an immersive polyglot experience for those who call the city home. With more than 30 languages spoken across the city living, working and playing in London can be a uniquely global experience. Combine the sounds of the buzzing London street scene with world class cuisine (how times have changed), a vibrant fashion scene, a thriving and open minded attitude towards the arts and more than a smattering of history and you will begin to understand why London broadcasts a siren call to property investors across the globe. More than just a city of bricks and mortar, London is both a lifestyle and a mind-set. Mercers 2010 Cost of Living Survey ranked London as the 17th most expensive city in the world. Estimated 5 year property price growth, Gtr. London, 2011-2015 : 29%, and escalating. Now 17th on the list of most expensive cities to live in may be a dubious honour at best, however it bears repetition that the attractiveness of a city is dependant on the balance between cost


LUXURY INVESTMENT INDEX

Camden Road, London NW1 £880,000 PROPERT Y FOR SALE Bedrooms

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Brenda Broster Director, Phoenix Property Services, London

Gloria Stewart Property expert and award winning journalist based in the United Kingdom

71 www.investmentlifenews.com

‘ “We’re seeing a constant and sustained interest in the outlying areas of the capital city. These ‘satellite’ locations can represent both exceptional value and excellent returns for investors over the medium to long term.” Eric Schmidt, Executive Chairman of Google, is house hunting in Holland Park and Chelsea, for a mansion costing approximately £30 million. This is in order to oversee the new Google European headquarters being built near Kings Cross London.

NOVEMBER / DECEMBER 2013

The apartment is arranged on the first floor of this popular portered mansion block a short walk from the shops in Bond Street and Regents Street.

London, for Schmidt, as for other millionaires and billionaires from around the world, is a very solid place to invest money. Top bracket properties are snapped up every day of the week in Knightsbridge, Regents’ Park, Belgravia and Mayfair as Russian oligarchs outbid each other. In the last thirty years apart from an occasional blip, property prices in London have increased regularly. Anyone investing for the long term can be assured that their money is really very safe. Nor are there any restrictions on foreigners buying properties. If you have the money you can buy anything you please. For moderately wealthy overseas investors there is a huge amount of choice. Paperwork to purchase a place in London can be pushed through in less than a month if you find a good lawyer. It is even possible to instruct your lawyer to perform a hand search to ascertain whether the local borough council has any plans to build a railway or another road for example near where you are planning to buy a house or apartment. Suitably qualified people can obtain mortgages of 70-80%. This can be interesting if you want to buy a property and then rent it out. There are numerous buy-to-rent deals. Even in the more central parts of London properties in the ‘Goldilocks’ price range’ (not to much and not too little) are freely available. Both of these above properties would rent out well. There is a shortage of rental properties in London at all times. When the right rental price is placed on a property it will rent out within about three weeks. Gaps in rental income are few for the savvy investor. “When a man is tired of London, he is tired of life, for there is in London all that life can afford” said Samuel Johnson, a famous eighteenth century English writer. Today there is more of everything: theatres, museums, a zoo, Buckingham Palace, the Changing of the Guards, nightlife, jazz clubs. It is all available to be savoured in what remains one of the most vibrant cities in the world.

CON T R IB UTOR S

Regent Canalside

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and benefit. It seems that even at the start of the investment evaluation process our minds, often unbeknownst to us, are busily balancing a dip in the bank balance with some very important upsides. Compare for instance London and Singapore. On the one hand you have the UK’s capital city coming in at 17th most expensive in the world, and on the other hand you have Singapore coming in at number 5. It all depends on what the individual investor or homebuyer wants to get for their capital investment. You can observe the prime markets for decades and as some contributors to this article know, there seems to be very little correlation between ups and downs and mortgage rates. So what factors are influencing the cost of borrowing money for property investment purposes? Brenda Broster, Director, Phoenix Property Services, London maintains that it’s equity, not borrowing that drives property value in London. “We see all sorts of factors that have a direct impact on the pricing of both established and ‘new build’ properties. In our experience it’s new wealth, bonuses as well as domestic and overseas savings and investment that drives these markets. In short, equity, not borrowing is key.” Despite draconian new taxes imposed by the UK Government on property investment in the March 2013 budget, most notably an increase in stamp duty, overseas equity continues to roll into London, particularly for higher value houses and luxury apartments where price growth and transaction volumes have been surging. London is a big city and, whereas overseas investors express initial interest in central London, there is a considerable volume of prime property available in areas such as Elstree, Barnet, Harrow, Kingston, Putney, Richmond, Merton, Kingston, Bromley, and many more. London’s infrastructure is such that central London is easily reached from any of these locations, and they should also be considered by investors. For Broster, it is these outlying areas, rather than central London that may represent the best value to potential investors


FEATURE

Auction Insight

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The Christie's view of Alternative Investments in Asia

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Purple Air (bottom) by Liu Wei (b. 1972). Sold at auction for USD $471,951. By the River II (above) by Cheong Soo Pieng USD $667,073. Homme Assis - Picasso (Left) USD $1,875,528. All images courtesy Christie's Images Ltd.

C

hristie’s signaled its commitment to increasing its representation on the Chinese mainland and servitng the burgeoning Chinese market when it held its first ever auction in Shanghai in late September. The auction, which attracted wtorldwide attention, saw unique and collectable assets such as Chinese and Western art, wine, watches, jewellery and sculpture. According to the findings of the China Private Wealth Report 2013 from Bain & Company and China Merchants Bank, the number of Chinese high net worth individuals (defined as individuals with at least 10 million RMB (approximately $1.6 million) in investable assets) grew to more than 700,000 at the end of 2012, more than doubling since the end of 2008, and on pace to increase an additional 20 percent during 2013. According to a report from Wealth-X and UBS, the population of ultra-high net worth individuals in Asia has rebounded from its 2012 contraction during which the region had only 43,000 ultra-high-net-worth individuals compared to this year’s data showing a 5.4 percent increase resulting in 44,505 with an aggregate net worth of approximately $6.5 trillion. The rapid growth of the above segments of the Chinese, and indeed pan-Asian market has far reaching implications for companies like Christies. Investment Life (IL) spoke to Christie’s senior representatives, including Wen-li Tang (WT), a Director at Christie’s Singapore, to get an insight into how the latest Asian and Southeast Asian auctions reflect the changing tastes in alternative investments across the region and how the new wave of mega wealthy Asian investors are spending their money.


FEATURE

IL Could you give the readers of Investment

Life your impressions of the Luxury Investment Index from Knight Frank and whether Asian and Southeast Asian buyers are focusing on these classes of alternative investments? WT “The high percentage of lots sold and strong results at Christie’s 2013 Hong Kong Spring Auctions confirmed the breadth and depth of buyer interest in Asian art, jewellery and watches as well as wine. “With robust participation from Chinese buyers, we welcomed collectors who experienced a diverse range of art from the region, as well as a f international artists. “From a USD $11 million diamond to a USD $6.7 million Zhou Chen (1450-1535) artwork and a USD $5.8 million Sanyu (1901-1986), bidders competed for highquality works. Pieces from private collections were especially well received. The resurgence of interest in a wide variety of different lots and types of investments was tangible during the entire week of the auction.”

IL Has there been a resurgence of interest

IL If there is one investment that stands out

from the rest in terms of returns at the moment, it is without doubt wine – can Christie’s give some insight on why this particular asset

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as these investment classes are concerned? WT We’ve seen a growing interest in categories such as Contemporary Chinese ink paintings and Chinese Song dynasty ceramics. With an eye on demand for such genres, Christie’s opened its first private sale exhibition of Chinese inked art pieces in New York this February, which followed a non-selling exhibition in Hong Kong in 2012. “The private sale exhibition, entitled ‘Chinese Contemporary Ink – The Beginnings and Beyond’ travelled to Hong Kong during May and an exhibition of Song Dynasty ceramics sourced from a Japanese private collection of over 200 Song ceramic pieces was introduced to the public last year.”

NOVEMBER / DECEMBER 2013

are primarily ‘passion buyers’ or those in search of assets that will outperform traditional asset classes? WT “As an investment category, art and collectibles are increasingly seen to play a useful and valuable role in portfolio diversification. At Christies we also see that the most

ILWhat are your predictions for 2014 as far

class is so popular and some highlights from recent auctions? WT “Investing in fine wine has traditionally been a fairly stable and low-risk investment, appealing to many people from all over the globe. Fine wine is increasingly popular because it is tax efficient, easily stored, offering steady profit growth, and perhaps, most importantly, a delicious investment that can be opened, enjoyed and shared with friends or family. “In terms of fine and rare wines a good example of the prices that are being realized is the sale of Dr. Ku’s Apothecary Collection at Christie’s Hong Kong on 31 August 2013. The total value of the sales was USD $3,862,708. “We saw strong international interests in this sale. Buyers from fourteen countries across Asia, the Americas and Europe participated in the auction of items from this single-owner collection, which was built up over decades by a passionate wine-collecting individual. We are also extremely happy with the performance of wines from Bordeaux and the Petrus estate. Over 94% of the wine from Petrus was sold above its estimate range. White wines and champagnes were also warmly welcomed with over 94% of those sold above initial estimates. This indicates a real diversity of tastes, and the depth of the market for fine wine “In addition, Christie’s has been entrusted with the annual Hospices de Beaune charity wine auctions since 2005. This unique auction is held annually in Beaune and is devoted to supporting associations of humanitarian causes. We welcome wine collectors and enthusiasts to participate in this charity movement with Christie’s, which will be held this November.”

IL Do you think that the Christie’s buyers

successful investors in art have maintained their collections because of a deeply-held passion for acquiring art for its own sake. “That’s why we encourage people to buy what they like and would like to live with on their walls. Each work of art is unique, and its value is very much determined not only by supply, but also by the medium of creation, the condition, the period, the theme and the collecting trends of the time. “Even the ‘hottest’ artists will be valued on the fundamentals of quality, rarity, condition, and provenance, so it is important to do due diligence before purchasing. Buyers should first consider what they are passionate about, before they consider buying a work of art.”

ISSUE 01

in Asian art from buyers in the region and across the globe in general? WT “Strong Asian interest in Asian art has always existed, but there is now an increasing and considerable demand from collectors in Europe, America and the Middle East. In the past 10 years or so, more collectors have come to realize the unique aesthetic value of Asian art, denoted by a great increase in global interest coupled with cross-cultural buying activity. This demonstrates the category’s global appeal and continued potential for growth. “Both the Chinese and Singaporean art markets are under the umbrella of Pan-Asian art market. In terms of style, subject matter and appreciation, both Singaporean and Chinese art have been attracting the attention and focus of the international art market. For those pieces of art which artworks that meet the current standards there is great potential on the market.”

Van Cleef & Arpels Diamond necklace. Sold at auction for USD $823,000 Image courtesy Christie's Images Ltd.


FEATURE

ISSUE 01

NOVEMBER / DECEMBER 2013

IL What are some of the more unusual

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/ noteworthy items that have gone up for auction in the past six months? WT “Christie’s is the first international auction house in the world to stage a sale entirely devoted to Asian contemporary art in 2005 and announce the consolidation of Southeast Asian Modern and Contemporary Art and Asian 20th Century and Contemporary Art in 2011. This drives regional and cultural cross-buying, highlighting the great potential of a diverse international market. The number of Southeast Asian artworks sold has grown from 87 lots during the Hong Kong Spring sales in 2011, to 173 lots in May 2013, achieving fabulous results of over USD $14 million during the May sale this year. “Interest continues to grow, with average prices for top 20th Century Southeast Asian artists such as Affandi, Hendra Gunawan, Fernando Amorsolo and Georgette Chen seeing a marked increase in price since 2010, overtaking height of market prices in 2007 to 2008. “Christies is committed to its promotion of Singapore art and our sales often feature 1st and 2nd generation Singaporean artists in a variety of mediums. At our recent inaugural Shanghai auction, Cheong Soo Pieng’s - By The River II, achieved a record price for the artist, selling at US$667,073, setting an exciting tone for the upcoming Hong Kong Fall Auctions.”

Enduring Investment Fine wines remain one of the most popular alternative investments across the globe. Chinese investors have joined those who are stocking up in anticipation of scarcity driven price increases.

IL Christies has recently launched auc-

tions in China – how successful was this exercise? WT It has been a privilege to be in Shanghai where we enjoyed a hugely warm welcome. The response to our sale and the various events was been extraordinary. Bringing international art, including Picasso, to mainland China for the first time is the realisation of a long held dream for many people at Christie’s. We are delighted to have welcomed several thousand members of the public and clients over the course of our three day gala of exhibitions, forums and lectures in Shanghai and we were astounded by the levels of interest that were generated amongst buyers from all over the world. The Christie’s entry into the Chinese market has heralded a new era for the auction house according to Chief Executive Officer, Steven Murphy, who said of the event “Our mission remains to serve our clients with exceptional works of art and to serve artists and

all those passionate about art by encouraging them to leverage our global network. We hope to continue to share the vibrant creativity we have experienced in Shanghai with a global audience as we grow our operations in mainland China. François Curiel, President of Christie’s Asia was also upbeat about the recent developments. “Our first auction in Shanghai has illustrated how much demand and appreciation there is for art across categories. A red ruby necklace achieved the highest sales figure at RMB 18 million (USD $3,405,285) and records were broken for Singaporean art. “We saw bidders participate from all over the world with online and telephone bidders joining the nearly 1,000 clients in the room during the auction. It was an extraordinary start for Christie’s in mainland China and indicates there will be exciting times ahead for the industry as a whole and art enthusiasts everywhere.” Jinqing Cai, Managing Director of Christie’s China noted that the event was the first step in Christie’s ongoing commitment to operations on the Chinese mainland when he noted that “the inaugural auction in Shanghai has been an unforgettable milestone in our 247 year history. I am incredibly proud of the results we have achieved in Shanghai and honoured by the support we have received. We look forward to continuing to build on the positive momentum.”


FEATURE

So you want to invest in a Yacht? BY ST E VE M AL L AC H

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This is one of those times. I began researching this article in order to pose the question of whether an investment in boats and yachts would provide an acceptable return on investment. In the interests of clarification I should say that it quickly became apparent that this article would be vying for a world-class brevity award. The answer to the question as to whether you should invest in yachts and boats is simply no. Realising that an article which simply ended without going into further detail might be construed as laziness on the part of Investment Life, I decided to dig a little deeper into the subject of yachts, boats and other money hungry holes in the ocean.

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uring the past two decades as a writer and editor I have always strived to provide readers with insight that will add value to their daily lives. Once in a while during the research phase of an article the writer is presented with information which renders argument, or a Devil's Advocate approach simply impossible. The issue is so cut and dried that even the most dedicated fence sitter is left in no doubt as to the logical conclusion.

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It soon became clear that the issue is not as clear-cut as a return on investment in terms of cold hard cash. There were nuances (as they say in the political business) to exactly what constituted a return on investment. In fact there were nuances around what exactly constituted a yacht. For many investors in super or mega yachts utilitarian value is simply not a consideration neither is a return on investment. For many of the individuals that enter the rarified atmosphere of the mega wealthy a superyacht is a status symbol. It’s simply a table stake for playing a game with a very select group of players. The return on investment for these individuals is paid in a currency of envy and the ability to signal their absolute disdain for any sort of rational approach to investment grade goodies. In this rarified atmosphere you buy a superyacht because you can. So when you reach the financial stratosphere like Roman Abramovitch then a USD $1 billion superyacht is simply a must have accessory. Firstly let’s take a look at some of the costs involved in keeping a luxury yacht in running order, let alone stocked with the Champagne, caviar and gold faucets required to power the yachts of the mega wealthy. Most owners and industry experts agree that you are going to be spending at least 10% (conservatively, many estimates run to around 15%) of your yachts purchase price per annum in order to keep the craft crewed, compliant with the relevant rules, docked when necessary and operating in a condition that doesn’t automatically result in a trip to Davey Jones’ locker. Here’s a simple example of the sort of expenditure you can expect - turn the key of a 71-meter-plus yacht and 10 minutes later you will have spent USD $540 on fuel, according to yachting Web site Superyachts. com and compared to some of the yachts on the market a 97 meter yacht is going to leave you feeling a bit inadequate at quayside. So you decide to save a bit and buy a smaller yacht, something conservative in the region of USD $10m – simple math indicates a running cost of a million dollars a year. What sort of super yacht do you get for that sort of money? The Horizon P110 tri deck from Australia is on the market with a discount of AUS $1m, making it a steal at AUS $9.9m

In order to get moored to the dock in one of the playgrounds of the mega rich you’re going to have to part with a pretty penny – not USD, but close enough in a rough sea to work out that this really does look like a lovely way to spend a couple of weeks docked in Cannes. For those in the know this is where the trouble starts. In order to get moored to the dock in one of the playgrounds of the mega rich you’re going to have to part with a pretty penny. According to Swiss yacht management company Floating Life a berth for a 50m boat at Porto Cervo in Sardinia is going to cost you over USD $3,400 a day. Once again it’s worth mentioning that a 50m boat is considered pretty small potatoes in the mega rich conspicuous consumption stakes. What if you want to attend one of the must see and be seen events on the social calendar, like the Monaco Grand Prix? Marina docking fees are going to set you back six figures. In fact docking fees are probably the greatest drain on the finances of any yacht owner. Until they invest a yacht that will come and get you at a foreign port under the guidance of some sort of artificial intelligence equipped bespoke Captain Nemo you’re going to have to shell out for a crew. Aside from the skilled swabs who will keep your floating palace of delights clean, cook your food and and actually sail from port to port the man at the held is going to cost around USD $1,000

per foot. That’s the length of the boat, not the height of the captain. So the average salary of a captain calling the shots on a 150 foot is around $150k. Luxury Yacht Group provides salary guidelines that are in line with that estimate: A Senior Master captain (10+ years of experience) can expect to make between USD $96,000 and USD $240,000 per year, for ships between 120 and 200 feet long. At the low end of that range, that's $800 per foot. At the high end, it comes out to $1,200 per foot. Want another opinion on how much it costs to run a real money-burning monster of the ocean blue? Kitty McGowan of the U.S. Superyacht Association says a 180-foot yacht costs USD $4.75 million annually to maintain and run. Among the costs: USD $400,000 for fuel, USD $350,000 for tying up to the various high rent docks in marinas across the globe, USD $240,000 for vessel insurance, USD $1 million for maintenance and repairs, and USD $1.4 million for crew salaries. But there may be hope for those who want to recoup their investment. Growth in the market for new boats can usually be relied upon to bouy (heh) the market for the more exclusive end of the second hand market. According to Beneteau (BEN), the world’s largest yacht builder the global boat market is forecast to grow for the first time in five years in the 2014 season. Beneteau’s boat sales rose 2.3 percent to 624 million euros ($842 million) in the fiscal year through August, with sales outside of Europe jumping 28 percent to 232 million euros, the St. Gilles Croix de Vie, Francebased company said in an e-mailed statement. Asia and South America “are confirming their status as structurally growing regions for pleasure cruising,” the company said, while Europe is “faced with a significant contraction and major regional differences.” The fact remains that even for the mega rich, the huge, recurring fixed costs of running large yachts can be problematic. Any captain of the high seas who might have inherited a bit of cash to throw around would do well to heed these sage words of wisdom. “There are two great moments in a boat owner’s life…the day he buys it and the day he sells it.”


FEATURE

Go Big or Go Home The World's Most Over The Top Super Yachts THE YACHT (initially spelled as J’acht), was a lightly-built Dutch naval vessel used to trail pirates in low waters. However, it underwent a cultural and historic transformation, when King Charles II of England, decided to set sail in one such vessel, thereby making it symbolic of influence, prestige and power. Today, almost without exception the Monarchy have been replaced by the mega wealthy and the yachts that ply the Seven Seas are no longer powered by sail, but by a combination of diesel and fabulous wealth. Here are some of the most awe-inspiring super and mega yachts on the planet.

Octopus • $200 MILLION Paul Allen, Microsoft co-founder Paul Allen is the owner of this spectacular yacht, which is the eighth largest in the world. The 414-foot yacht first set sail in the year 2003 and has space for two mid-sized helicopters, a submarine capable of housing ten men and seven boats. For marine enthusiasts curious to look below the ocean floor, the yacht also has a remote-controlled sea-navigator.

Eclipse • $1.5 BILLION This pricey yacht was first ordered to be built by Prince Jeffry Bolkiah of Brunei as Platinum 525 only to be abandoned shortly afterwards due to lack of funds. Thereafter, the construction of the abandoned yacht was revived in 2001 by Sheikh Mohammed Bin Al Rashid, the then Crown Prince of Dubai and was rechristened as the Golden Star. The yacht was finally named Dubai, owing to the coronation of Al Maktoum as the current king of the emirate of Dubai. The 525-foot yacht is both expensive and expansive in having features like a proprietor’s suite, five VIP guest suites and a number of guest bedrooms. The yacht is driven by 4 powerful diesel engines delivering a massive output of over 9,000 horsepower.

Superyacht ‘A’ • $353 MILLION

Rising Sun • $200 MILLION

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Media-mogul David Geffen and Oracle CEO Larry Ellison are joint owners of this stunning 453-foot, five-storied luxury yacht. The Rising Sun was designed with the only intention of surpassing the size, scale and amenities of the Paul Allen owned Octopus mentioned above. The affluent Rising Sun has a combined living space of 8000 feet with onyx studded cabinets and display case, Jacuzzi bathrooms, spa and sauna, a personalized gym and even and a private movie theater.

Dubai • $350 MILLION

Billionaire Nasser Al-Rashid is the owner of this 344-foot yacht with retractable roof that houses a 75-foot banquet table designed by Linley Viscount and a helicopter. However, the yacht’s most striking feature is the built-in seaside hotel that glides open from one side of the boat. The sea-resort replica features customary sand and deck chairs as well as artificial palm trees to make the place look more authentic and relevant.

This pricey yacht was first ordered to be built by Prince Jeffry Bolkiah of Brunei as Platinum 525 only to be abandoned shortly afterwards due to lack of funds. Thereafter, the construction of the abandoned yacht was revived in 2001 by Sheikh Mohammed Bin Al Rashid, the then Crown Prince of Dubai and was rechristened as the Golden Star. The yacht was finally named Dubai, owing to the coronation of Al Maktoum as the current king of the emirate of Dubai. The 525-foot yacht is both expensive and expansive in having features like a proprietor’s suite, five VIP guest suites and a number of guest bedrooms. The yacht is driven by 4 powerful diesel engines delivering a massive output of over 9,000 horsepower.

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Lady Moura • $210 MILLION

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The Superyacht ‘A’, owned by Russian billionaire Andrey Melnichenko was built in the year 2008 by German shipbuilding major Voss & Blohm. The 119 meters long yacht is built and engineered with three swimming pools in such a manner that a swimmer can hope to swim against the ocean current through which the ship is flowing. It also has 2 smaller Limo boat models that egress through the corners of the yacht. The Superyacht ‘A’ is stacked with the latest gadgetry and entertainment systems and offers unmatched comfort to its guests. The yacht is capable of congregating up to 14 people in the master suit and 15 others in 6 additional guest suits.


FEATURE

THE OUTSOURCING EVOLUTION OF SOUTH-EAST ASIA

Philippines —

the emerging Asian Tiger

ISSUE 01

NOVEMBER / DECEMBER 2013

Investment Life contributor, Jude de Tar of Singapore based AccentMarkets takes a look at the Philippines as a rapidly growing Business Process Outsourcing investment destination.

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T

he emerging trend of outsourcing to Southeast Asian nations represents what might be called the ‘third wave’ of outsourcing services, which started with Europe, followed by India and is now reaching Southeast Asia. The governments in the region are focusing on both developing the skills of their citizens and extending a helping hand to businesses wanting to start up Business Process Outsourcing (BPO) operations. A sign that the government of the Philippines is taking the BPO trend seriously is its commitment to a government-run program to train its graduates in a wide variety of skills, including BPO services. In recent years, the Philippines has liberalised its economy and provided incentives for Western multinationals seeking to do business

Bright lights, big city Manila is fast becoming a hot spot for BPO investment. Standard & Poor’s raised the Philippines credit rating by a notch from BB+ to BBB(the minimum investment grade) in May 2013, citing the country’s rosy macroeconomic fundamentals.

in the country. In fact the BPO industry in the Philippines compares extremely favourably to India on several parameters, including ease of doing business, openness to globalisation, corruption, and global competitiveness. When comparing Philippines with other emerging markets in Southeast Asia, the expected economic growth in the Philippines continues to attract companies wanting to grow their businesses due to strong economic fundamentals and what some have characterised as explosive GDP growth.

Since 2000, the GDP of the Philippines has grown 195% to USD $257.5 billion. Moody’s now rates Philippine government debt as a BBBand holds a “positive” outlook, which is slightly more optimistic than the other rating agencies and stands in stark contrast to the ratings movements of Malaysia, Indonesia, and Brazil . HSBC forecasts that the Philippines will be the 16th largest economy in the world and the largest economy in Southeast Asia by 2050. While the Philippines have yet to achieve Asian Tiger status and its real investment rates (domestic and FDI) are lower than in neighboring countries, its future offers significant opportunity for growth. The most exciting opportunities may be still to come. The next stage of the BPO industry, which is expansion into offering BPO services for more advanced tech, accounting, legal, marketing, and other services represents an opportunity for significant growth.


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1 Transparent, accountable, and participatory governance

4 Just and lasting peace and the rule of law 5 Integrity of the environment and climate change adaption and mitigation

1 English as a first language 2 Highly skilled labor force and rapidly developing education system

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3 Continuing low labor costs

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These five areas give a blueprint to lawmakers, regulators, and commercial parties on how the government will seek to open up industries and create free and competitive economic environments in a planned and consistent manner. Since President Aquino’s induction, improvements in the incentives, market access, and regulatory environment for manufacturing have remained fairly unchanged. Instead, observers have seen the majority of changes in market access and regulatory environment for the agricultural, public construction, BPO, energy, employment, and education industries. All these adjustments

are having positive effects on GDP, which grew at 7.5% in the second quarter, matching China’s pace and leading the Southeast Asian countries. While FDI has grown at 185% year-over-year (at USD $2.8 billion), it continues to lag behind most of its neighbors, a situation which is expected to continue due to the fact that the industries which are seeing the most growth require a low percentage of capital investment. Part of this recent growth story can be attributed to the surge of foreign remittances, contributing 13% of GDP in 2012, as well as the increase in tourism numbers. As the the IT-BPO industry in the Philippines grows, tourism increases, and the Filipino middle-class grows to around 20% (a trend that seems virtually unstoppable due to robust numbers coming out of the Philippines Central Bank) of the population, the country will see foreign remittances decrease as overseas Filipino workers return back to the country

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3 Rapid, inclusive, and sustained economic growth

to take advantage of the opportunties offered by a growing economy. Most pundits don’t expect this to reduce GDP as it will be a natural shift from one revenue generation stream to another, which will be powered by increased entrepreneurial activity and growing numbers of small and medium enterprises which will be taking advantage of the changing macro and micro economic landscape. There are five main factors why the Philippines has replaced India as the world’s largest voice BPO location and why it will rely upon a services industry development model (similar to Ireland’s development) to gain the high ground in a highly competitive Southeast Asian market:

2 Poverty reduction and empowerment of the poor and vulnerable

Commitment to excellence Higher education in the Philippines is proving a growth engine for the country. Increased numbers of graduates in the fields of science and technology are powering the BPO industry.

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What has marked the development of the Philippine economy in the last decade are ramifications from opening up the telecom and banking sectors starting in 1993. Since then the largest industry to develop has been the BPO industry . Over the last few years the Philippine government has enacted a number of new changes meant to open up the market to competition and ignite the same sort of growth the last significant round of revisions made. Since the Bio-fuels Act of 2006 and coupled with the price of palm oil, the number of palm plantations has increased nearly 400%. Although this is far below the production levels in Malaysia and Indonesia, the number of plantations is expected to continue to grow rapidly. The latest rounds of deregulation and promarket policies have taken place since President Benigno Aquino took office in 2010 and the new Social Contract With The Filipino People was signed (2011), which outlined five major areas that the new administration is focused on improving:

4 Well-developed BPO infrastructure 5 Global growth of BPO Add to this list the fact that there is a similarity of culture and accent between the US and the Philippines (a former US territory).


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ISSUE 01

NOVEMBER / DECEMBER 2013

According to Alejandro Melchor III, deputy executive director at the Department of Science and technology Information and Communications Technology Office (DOST’s lead agency in handling the BPO sector) in the Philippines, “USD $27.4 billion is the new target [they] are looking at for the IT-BPO revenues by 2016 based on a 20-percent compound annual growth rate from $11 billion in 2011”. We attribute this growth rate to the ITBPO industry in the Philippines branching out across a number of sectors. Although the majority of services are in design, marketing, writing, call centers, communications, and other front office operations, we’re expecting to see a significant increase in the accounting, legal, advanced tech, finance, and analysis areas." The Philippines have a highly proficient labor pool and BPO companies have found that they can increase productivity and

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components of the Department of Science and technology’s latest umbrella program called “Smarter Philippines” which aims to facilitate and deliver more effective and efficient services in several sectors, including BPO services. "'Smarter people’ are in a nutshell information technology-oriented,” explained Melchor." Smarter people, in short, are what the BPOs and call centers need. And these are the skills they are looking for, according to Melchor: 1 critical thinking 2 effective written oral, multimedia, and multilingual communication skills 3 collaboration across networks 4 creativity and innovation 5 accessing and analyzing information 6 initiative and entrepreneurialism; and 7 agility and adaptability.

Europe for Filipino freelancers. Similar explosive growth is being seen by a number of other freelancer websites and the 10 largest US BPO companies recently announced that they are aggressively expanding. As stated in the last Philippine IT-BPO Road Map To 2016, there is a unique co-development relationship between the United States and the Philippines. The Philippines rank the highest in preferable locations to outsource voice BPO operations for US companies and it is rapidly gaining recognition in other non-Voice areas as well as back office operations. There is a particularly high correspondence between the development between the Southeast United States and Southeast Asia. This Southeast-to-Southeast corridor is particularly concentrated in the areas of IT, design, writing, data and accounting, marketing, and operations and the highly positive initial success and large remaining resources

‘Smarter people’ are in a nutshell information technology-oriented value at a higher marginal rate with training programs than possible with other work forces around the region. In addition, the Filipino government is making educational improvements to make the country more competitive on a global scale. The country also has a significantly higher rate of private education compared to other Southeast Asia countries. The latest statistics indicate that nearly 80% of tertiary students attend a private institution. The central role that education plays in economic success has been highlighted by the Philippine government. According Dr. Alejandro P. Melchor III developing “smarter people” is one of the

AccentMarkets is a business-building firm that builds companies in emerging markets.

The lack of red tape at the higher levels (the majority of primary and secondary schools are public) has allowed institutions to pivot fairly quickly in offering courses that prepare a larger percentage of their graduates for careers in the IT-BPO industry. This focus on education developing service skills is largely market driven as an increasing number of the working force aged 15–35 are seeking BPO and online freelance opportunities. The freelancer website Elance recently reported that more than 95,000 Filipinos have registered, an increase of 89% yearon-year, and there has been over a 90% increase of jobs from the US, Canada, and

looks to indicate that this is an area that will see significant growth in the second half of 2013 and onward. The GDP of the Philippines grew at 7.5% in the last quarter – the fastest in Southeast Asia –largely due to the concentration of investment in the IT-BPO industry and a strong level of domestic consumption. With high levels of remittances flowing into the country from its foreign labor force , an improved tax regime, improving regulatory environment, political stability, high domestic consumption, and increasing global demand for BPO services, Accent Markets sees the Philippines as providing an optimal opportunity for companies wanting to grow their businesses.

Headquartered in Singapore and with teams located in the US, UK, and the surrounding emerging markets the company’s seasoned team combines in-depth knowledge of the business environments, legal frameworks, high-quality partners, and local cultures and languages in emerging markets to produce real results that impact client bottom line.


FEATURE

The Final Frontier F O R

I N V E S T M E N T

It may seem like science fiction, but there are a number of very interesting and potentially lucrative possibilities in space focused industries. One company, Orbital Sciences has even hitched its wagon to the stars and is currently listed on the NASDAQ. So what is it about space that is capturing the imagination of investors across the globe?

and the promise of a vacuum, specifically the vacuum of outer space. Although sinking your money into ventures, which are seen by many as flights of fancy, may not be the most logical investment strategy, there are those who believe that the future of big returns lies beyond the reach of Earth’s gravity. These visionaries believe that space is the final investment frontier and predict a new wave of investors are ready to boldly go where very few investors have gone before. In fact one of the most exciting fields for investors at the moment could be the investment potential of the rapidly growing businesses of space tech, payload delivery and extra terrestrial tourism. Leveraging the commercial and government requirements for cheap and reliable delivery systems (for satellite and human payloads) and the public fascination with space-based activity has long been on the minds of both individuals and big business. NOVEMBER / DECEMBER

Making way The demise of the shuttle has opened up potentially licrative opportunties for investors.

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oes space represent an out of this world opportunity, or is this an industry which isn’t going to make it off the launching pad? Investment Life investigates the gravitational pull of space investment. A simple rule of thumb is that investment should not occur in a vacuum. The savvy investors considers the impact of social and political issues and both micro and macro factors that influence the potential risks facing investment in any venture or particular stock These considerations give the potential investor a sense of direction and of the framework within which the investment should be managed. However, what approach would potential investors take if the very essence of the opportunity is based on a lack of direction and the complete absence of substance. In fact the entire investment is based on the premise

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FEATURE

NOVEMBER / DECEMBER

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In 1968 entrepreneur Dennis Hope of Gardnerville Nevada began selling acres of property on the moon, despite the fact that the deeds were based on what might charitably be called wishful thinking. There simply isn’t any clear law regarding lunar property rights. This has by no means impeded the activities of Hope’s company - Lunar Embassy Corp. As divorced form legal reality as Hope might be many legal experts have expressed an opinion that selling land on the moon is quite literally uncharted legal territory. As far as title goes, it’s a gray area,” international lawyer and space-law expert Timothy Nelson, who works for the firm Skadden in New York City, told SPACE.com in 2011. In fact the Outer Space Treaty of 1967 forbids countries from claiming territorial ownership over moon real estate (or any other celestial bodies for that matter) However it doesn’t expressly limit private companies form staking a claim. The legal arguments are yet to

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have their day in court, however the lack of judicial rulings has not prevented Hope from selling lunar land (mineral rights included) for USD $19,99 an acre. If the neighborhood is too crowded then a similar sized parcel of land on Mars will set you back USD $22.49, plus tax and shipping and handling. Business is booming, Hope claims to have sold 7.5 percent of the moon so far and given that the overheads seem to be limited to a printers bill for certificates of ownership he might just be on to a winner.

Flight of the Falcon SpaceX - The Falcon's old school looks may be underwhelming, but it's a highly effective delivery system (bottom). The International Space Station (Top).

But Mr Hope was not the first to realise that there might be money in those lunar hills. In August 1958, a now sadly defunct Chicago-area newspaper called The Suburbanite Economist reported that “the Hilton chain is dickering with the idea of opening the first hotel on the Moon.” The origins of the claim had their roots in a floor show held in the Boulevard Room at the Conrad Hilton Hotel in downtown Chicago, which offered delicious steaks, a lavish stage show, and for a short time a glimpse into the possible future of the hospitality industry. At the front of the grand hall was what was billed as the “largest hotel ice rink in the country”, on which groups of tutu-wearing girls strutted their choreographed stuff for the crowds of diners. On a hot summer’s evening in August the dinner suited and begowned clientele were to be exposed to a closing act that would provide the foundations for the Hilton Space Hotel legend. On stage, the final scene for the dancers was called “out of this world”. Although details of the performance are sketchy, The Suburbanite Economist wrote that it was set in a “plush” hotel called the Lunar Hilton. The lavish show caught the writers’ imagination and The Hilton inadvertently staked its claim to some prime real estate on the moon. Unfortunately for ambitious investors, opportunities dwindled during the subsequent Cold War period and the years leading up to the dawn of the new millennium were few and far between. By the time the shine had faded from Glasnost, companies were again turning their attentions to the heavens. Unfortunately the opportunities were also fraught with risk. Possibly the most famous space based meltdown was the implosion of Motorola’s ill-fated Iridium project. In 1985, Motorola executive, Barry Bertinger’s wife, unable to use her cellular phone while on vacation in the Caribbean, convinced her husband of the need for a worldwide mobile wireless system. Motorola then joined with some partners to develop the Iridium global satellite phone. The phone that was five years in the making would work ‘anytime, anywhere’. The company spent $5 billion for developing and USD $40 million for launching the phone that would offer seamless communication in the Amazonian Rain Forest, on the Alaskan Tundra, or on the Himalayas.


FEATURE

Iridium satellite network Cost USD $5 billion, bought for USD $25 million - a bargain. The next generation of satellites will make data transmission, the fastest-growing bit of Iridium’s business more effective and more profitable. Iridium Iridium handsets may still look old school, but a new business model makes the company a consistent performer.

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However, there is a bright and shining light for investors who may want to hitch their portfolio to a star, there are some very big names playing in what is currently one of the hottest potential investments in near Earth orbit – space tourism. There are many big names involved in space tourism, including Microsoft co-founder Paul Allen and his Stratolauncher and Jeff Bezos with his Blue Origin. These two investment powerhouses have very deep pockets, but are some way behind the leaders in the space for profit race. But there are two names that stands out head and shoulders above the rest, primarily because the first, Sir Richard Branson has a track record of taking big risks, and reaping large rewards. His outfit based on a platform known as SpaceShipTwo seems poised to actually make some money from the space tourism business. The second is no slouch when it comes to out of the box thinking and continues to impress with his forward thinking attitude and ability to overcome challenges – that man is Paypal founder and current CEO of Tesla Motors, Elon Musk. His Dragon spacecraft from outfit SpaceX. Musk has already launched two successful unmanned missions to the International Space Station with his Falcon booster and his Dragon spacecraft. And the Dragon that today carries cargo is even now being retrofitted to carry astronauts.

2013

The initial commercial failure of Iridium had a damping effect on other proposed commercial satellite constellation projects, including Teledesic. Other schemes (Orbcomm, ICO Global Communications, and Globalstar) followed Iridium into bankruptcy protection, while a number of other proposed schemes were never constructed. At one stage there was a threat that the Iridium satellites would have to be de-orbited; however, they remained in orbit and operational. Their service was restarted in 2001 by the newly founded Iridium Satellite LLC, which was owned by a group of private investors. Although the satellites and other assets and technology behind Iridium were estimated to have cost on the order of US$6 billion, the investors bought the firm for about US$25 million. In other words a steal, if they could be made to pay in some way. Fortunately the US Department of Defense stepped up to bat for the company. The DoD made up 23% of Iridium’s revenues as at 2010.

Tickets please – space tourism

NOVEMBER / DECEMBER

A nice idea – except for the fact that there is not exactly a ready market of consumers in these areas. As for the military – at the time of Iridium’s launch they had their own bespoke solutions to communications challenges. Many analysts wondered how the strategists at both Motorola and Iridium had blundered so badly. What people in general want is something that fits into their pocket (physically and figuratively) and communicates with others. The company did indeed conduct market research before launching the product. Its marketing team reportedly researched the social behaviour of ‘people on the move’ by interviewing 25,000 people - who fit the company’s customer profile - in 54 cities in 34 countries. The project needed 500,000 customers to break-even and when it folded nine years after launch it had 50,000. The Iridium phone was bulky, needed a lot of attachments to work and cannot be used in cars or buildings. It was overtaken by the increasing functionality and lower cost of mobile phones in short order. Mismanagement is another major factor cited in the original program’s failure. In 1999, CNN writer David Rohde detailed how he applied for Iridium service and was sent information kits, but was never contacted by a sales representative. He encountered programming problems on Iridium’s website, and a “run-around” from the company’s representatives. After Iridium filed bankruptcy, it cited “difficulty gaining subscribers”.

The commercial gateway in Tempe, Arizona, provides voice, data, and paging services for commercial customers on a global basis. Typical customers include maritime, aviation, government, the petroleum industry, scientists, and frequent world travelers. Iridium satellites are now an essential component of communications with remote science camps, especially the  Amundsen-Scott South Pole Station. In December 2006, an array of twelve Iridium modems was put online, providing continuous data services to the station for the first time. So the lessons for investors in space based technology are simple and highly illustrative of the hurdles that face not only those who wish to provide products and services in this highly speculative yet potentially rewarding sector. The firsts seems to be that if you have an impressive idea or grandiose scope then it might just be too big to fail. Although to be fair failure in the case of Iridium is open to interpretation. Yes, the satellites are still whizzing around in the ether, however keeping them up there lost Motorola a significant amount of money. Not the sort of cash you’re going to find under the couch cushions.


FEATURE

NOVEMBER / DECEMBER

2013

Virgin Galactic

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Branson’s Virgin Galactic has a very simple mission, it hopes to put spaceflight, or at least ‘space lite’ within the reach of average Joes and Josephine’s across the globe. At least that’s the long-term plan. The short-term plan is to take (semi) extraordinarily wealthy folk for a taste of the stars. SpaceShipTwo is a small six-passenger space plane with a wingspan of 12.8 m. It’s carried aloft under the belly of the much larger 43 metre wingspan WhiteKnightTwo, to an altitude of 15,000 metres. There the mother ship releases the spaceship, which climbs to suborbital altitude under rocket power, spends five minutes in weightless space and then comes home. SpaceShipTwo is designed to carry space tourists on trips to the edge of space and back for USD $250,000 a ticket. The spacecraft achieved a significant milestone in September of 2013 when it was released from its carrier aircraft, the White Night Two aircraft at a height of 46,000 feet (14,000 meters). Two pilots ignited the rocket motor for 20 seconds, carrying the spaceship to 69,000 feet at a maximum speed of Mach 1.43, the company said. While the price may be steep for some, around 530 people have already put down deposits totaling USD $70 million to at the vanguard of space tourism. The first official passengers will be Virgin Galactic founder Sir Richard Branson and his family. Ashton Kutcher signed up in 2012. Rumor has it that actors Angelina Jolie, Tom Hanks, Brad Pitt and Katy Perry have signed on as well. Virgin plans to operate its flights out of the Spaceport America complex in New Mexico, but it has also signed an agreement to develop a spaceport in Abu Dhabi.

Branson does see more practical, and potentially lucrative applications for the technology that’s currently flying out of (blasting off from?) New Mexico, including moonshots and high-speed city-to-city travel, making transcontinental flight quicker and more efficient than has ever been the case. Reckon on New York to Tokyo in three hours. The first commercial space tourism flights are scheduled for 2014.

Musk and SpaceX Musk does not have the showmanship of Branson, nor does he seem to have a predilection for swept back wings and a science fiction aesthetic. Musk is strictly old school, if it works, stay with it, making radical improvements along the way. He’s gone back to the traditional Apollo-like booster with a crew vehicle at the pointy end. However there are significant differences. His rockets are modular: the one-engine Falcon, the nine-engine Falcon-9 and the 27-engine Falcon Heavy. But Musk has already done what no other private entity had done before – he has sent a spacecraft into orbit and recovering it successfully. Aside from putting him in a class of exactly one (at least when it comes to paying cargo) it also attracts the attention of potential investors who value the tried and proven over a flashy show. Playing the odds it simply doesn’t seem like a good idea to bet against Musk becom-

ing Earth’s first space entrepreneur to make big money off government. Musk has already begun building on his success fulfilling a private contract to provide unmanned resupply the International Space Station (his first delivery was only 450kg, but that’s 450kg more than any other private competitor). SpaceX says they will be able to launch supplies or seven astronauts to the International Space Station for an average price of 57 million dollars per launch. The United States government currently sends astronauts to the International Space Station using the Russian space agency at a cost of 63 million dollars a seat. The Falcon 9 rocket can also launch supplies into low Earth orbit for approximately USD $5,512/kg). The Falcon Heavy hasn’t flown yet, and getting that many engines to fire in sequence without the rocket shaking itself apart and ending the dream in a rapidly expanding ball of hot gas on the Launchpad is a significant challenge. The Heavy that is scheduled to make its first flight in 2014 and could launch supplies into low Earth orbit for a cost of USD $2,205/kg. Those prices are less than half of the price that the United States Government spends now using the Russians and the Chinese. This puts him squarely in the spotlight to be the first entrepreneur to pick up the contract to ferry US astronauts into orbit – but that may still be some time off. At the moment the US is sticking with Russia and its aging Soyuz technology to keep the ISS supplied.

So you want to get in on the action? Orbital Sciences is open for business Heavy Testing The Falcon Heavy undergoes testing.

For investors wanting to get in on the ground floor of the space business there really is only one game in town – Orbital Sciences Corporation.


FEATURE

FIGURE 1 .

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the moon is NASA, however in reality it was Boeing that built the Saturn-V rocket. Private companies have been building, launching and operating satellites for decades, as well as supplying NASA and the European Space Agency with components and even finished articles.  Is the investment community on the edge of its seat as regards the possibilities of the returns on investment offered by space based projects? Probably not. However, there are some prodigious business brains straining at the leash to make the outer limits pay off. That said, it is still not all that easy for investors to participate in this rapidly evolving industry.

The Bottom Line

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For all of the progress made in just the last five years, the reality is that Orbital Sciences is really the only option investors have for an investment that is directly tied to space and space exploration. Commercial space is just too small a part of what companies like Boeing do to make space investment a reality by using Boeings share price as a vehicle – that investment angle simply won’t fly. While there is talk that SpaceX may launch an IPO in a year or two, that doesn’t help investors right now. There are some very exciting opportunities just over the event horizon, however investors should never lose sight of the fundamentals. It is mundane details like viable markets, competitive advantages and sustainable returns on capital, based on a sound short, medium and long term strategy and not over hyped marketing that will prevent space based companies from crashing and burning.

2013

reliable and low-cost launch missions. Not precisely beating swords into plowshares, but good enough for (quasi) government work. Orbital is involved in two prominent NASA programs: the Commercial Orbital Transportation Services (COTS)/Commercial Resupply Services (CRS) programs and the Orion Crew Exploration Vehicle (CEV). Under a three-year COTS cooperative agreement with NASA, Orbital developed a new space transportation system to demonstrate the capability to deliver supplies to the International Space Station (ISS). The COTS program involved the full-scale flight demonstration of a commercial cargo delivery system employing the new Antares mediumclass launch vehicle, the Cygnus advanced maneuvering spacecraft and a module to carry pressurised cargo. Expanding on the COTS agreement, Orbital was awarded a NASA Commercial Resupply Services contract to provide cargo delivery services to the International Space Station. Under the contract, Orbital will conduct 8 cargo missions beginning in 2013 to complement Russian, European and Japanese ISS cargo vehicles. As with any start-up technology industry, the space market and its technologies are developing rapidly, and often in unpredictable ways. While private-sector space ventures were once considered implausible, they are now becoming almost humdrum. It is becoming apparent that the private sector has a key role to play in mankind’s efforts to expand its presence and knowledge beyond Earth. The involvement of private companies in space exploration has a long history. The first name that springs to mind when thinking about the technology used to get man to

NOVEMBER / DECEMBER

In a nutshell Orbital Sciences Corporation (known as Orbital, NASDAQ: ORB) incorporated in 1987 develops and manufactures small and medium-class rockets and space systems for commercial, military and civil government customers, including the U.S. Department of Defense (“DoD”), the National Aeronautics and Space Administration (“NASA”) and other U.S. Government agencies. The company’s products and services are grouped into three reportable business segments: launch vehicles, satellites and space systems, and advanced space programs. Since the company’s founding in 1982, Orbital has delivered over 140 spacecraft to commercial, military and civil customers worldwide. To date, these spacecraft have amassed nearly 1000 years of on-orbit operations.  With the April 2010 acquisition of the satellite manufacturing business of General Dynamics, the company has added advanced medium-class defense and scientific spacecraft to its existing satellite product lines. Orbital’s space launch vehicles are designed to boost small payloads to orbit. The company’s Pegasus® rocket is launched from the company’s “Stargazer” L-1011 carrier aircraft and has proven itself as a relaible small space launch workhorse, having conducted 42 missions from six different launch sites worldwide since 1990. Orbital’s Taurus and Minotaur groundlaunched rockets combine Pegasus upper stages with either government-supplied or commercially available first-stage rocket motors to boost larger payloads to orbit. Minotaur IV combines decommissioned Peacekeeper rocket motors with proven Orbital avionics and fairings to provide increased lifting capacity for governmentsponsored payloads. The Company’s advanced space programs segment is involved in developing and producing human-rated (read – sending human beings into orbit and perhaps even further afield) space systems and satellites and related systems primarily used for national security space programs. Orbital designs and manufactures advanced human-rated spacecraft to be used in Earth orbit, planetary exploration and other space missions. It develops and produces small- and mediumclass satellites and related systems used primarily for national security space missions and related technology demonstration programs. With the development of the Antares space launch vehicle, Orbital is extending its capabilities to provide low-cost access to space for medium-class payloads. The inaugural launch of Antares occurred on April 21, 2013 from Wallops Island, Virginia. Interestingly the company has extensive expertise in the use of retired ICBM assets for


Diamonds and precious stones – the new investment frontier K

elvin Tan, a high-flying corporate lawyer, left the legal profession in August 2012 to pursue his passion in diamonds and precious gems. At that time, many of his peers were astonished – “Why would a successful lawyer become a jeweler?”, some would ask. Kelvin simply has this to say: “This is my passion. I only have one life, so I have decided to live my passion to the fullest. Besides, I started collecting diamonds and precious gems as a gems investor and my investments have paid handsome dividends. I think this is the cutting edge of investments in these uncertain times. The yield from value appreciation over time is far more than many financial products. Besides, don’t you think it is more pleasurable to stare at a handful of precious stones than to look at the number of digits in a bank account statement?” Sixteen years of impressive lawyering and a litany of professional achievements, starting from Kelvin’s appointment to the Singapore Judiciary as a Magistrate in 1996, to legal practice in major renown Singapore law firms, culminating in a number of appointments as chief legal counsel of various renown MNCs in the Singapore financial services sector, did not stop Kelvin from realising his life-changing passion. Hence, the birth of Genesis-Global Gems & Jewellery (Singapore) Pte Ltd, the company that was founded by Kelvin and co-founded by his brother, Dennis Tan, in 2012. Kelvin’s love affair with precious


Precious gems are no longer just a girl’s best friend. According to Kelvin Tan Miang Ser, CEO of Genesis-Global, a lawyer-turned-private-jeweler, the men can have a stake too in this precious commodity. By Kelvin Tan gems began when he was a young boy, watching his mother’s beauty magnified through her own jewellery. This taste for beauty followed Kelvin throughout his adulthood and well into his career, culminating in his life-changing decision to turn from lawyer to private jeweler extraordinaire. Today, Kelvin proudly serves his esteemed and well-heeled customers from around the world on an exclusive and strictly confidential ‘By Appointment Only’ basis in his luxurious atelier located at The Central SOHO 1 at Clarke Quay. Indeed, the stunning view of the Singapore River and Fort Canning forms the backdrop of his private and cosy office, where the Who’s Who of high society frequent for delightful private events, swirling cocktail champagne glasses whilst feasting their eyes on rare precious gems and haute couture jewellery specially designed by Kelvin and his team of creative designers hailing from Hong Kong and Italy. With Kelvin’s sharp fortitude in helping his clients find a balanced portfolio of gems investments, Genesis-Global has grown within a short time to become a name known amongst savvy gemstone investors as a trusted purveyor of investment-grade gemstones, ranging from rare natural Argyle fancy vivid pink diamonds, to Type IIA diamonds, fancy yellow diamonds, as well as other rare precious stones. In fact, “a notable trend these days is the strong interest in unheated Royal Blue sapphires from Burma”, said Kelvin. “We

have helped many customers build up their collection of rare blue sapphires and rubies as well”. Indeed, customers have been benefiting in many ways. “As we made bigger purchases for our customers, the suppliers started to know us. We then had greater economies of scale and at the same time, got to know more suppliers. Cost-saving benefits are then passed on to our customers” said Kelvin.

Kelvin Tan

sale value. We have changed that once and for all. With polished diamond price inflation averaging 10 to 12% per annum over the last 10 years, there’s no reason why anyone should fail to make any money when trading-in a diamond to a shop”, says Kelvin. At a recent talk given at the Lee Kong Chian School of Business at the Singapore Management University, Kelvin told attendees to not just “think out of the box” but to “throw away the box” when looking at investments. With that bold signature style displaying his usual unmistakable confidence, Kelvin urged attendees (mostly men) to view top quality diamonds and precious gems as “the form of highest concentration of portable wealth, which in the true sense is a sophisticated form of monetary instrument”. At last, the spotlight on diamonds is turning to centre-stage in the world of alternative investments. With Kelvin as their outspoken ambassador, complete with the luxurious pitch of his bespoke jewellery served on velvet trays to discerning high society investors, it will be no surprise that price valuation of precious stones and diamonds will continue to advance to greater heights, making their lustre and appeal a never ending journey. No wonder, as the old saying goes “A diamond is forever.”

“Diamonds are a girl’s best friend” A visit to Genesis-Global’s website at www.genesis-global.com.sg will inevitably arouse one’s curiosity in diamond investments. Most people are instantly drawn to Kelvin’s invention, a five-year diamond investment plan, for round “triple excellent” diamonds. The webpage clearly shows how Gen-

“Diamonds are forever” esis-Global is helping “customers benefit from their diamond investment in a real and tangible manner” with real profits to the customer. “No longer can anyone say that a diamond has no re-


LUXURY INVESTMENT INDEX

Stem cells and investment strategy

ISSUE 01

NOVEMBER / DECEMBER 2013

How a select group of investors is identifying opportunity in an increasingly complex environment.

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o paraphrase Ralph Waldo Emerson - if you build a better mousetrap, the world will beat a path to your door. It appears that a company called Grace Century FZ, LLC has invented the investment equivalent of a better mousetrap. This organization’s approach to providing exceptional investment value for clients is based on the identification of opportunities within some of the fastest growing sectors in the world. Grace Century, FZ LLC - a global company with its headquarters in the United Arab Emirates. Grace Century attempts to identify two investment opportunities per annum for its membership base. By focusing on only two projects, the company commits itself to providing highly researched and vetted opportunities, and targeting exceptional returns for those investors who have a higher risk profile than those who would rather keep their money in a high interest medium or long-term bank account. According to Grace Century President, Scott Wolf there are a number of criteria that the company uses to identify potentially lucrative investment opportunities. The first is a familiar, yet often underestimated component of the decision making process – common sense. According to Wolf, “we look at an oppor-

Stem Cell Storage Ongoing research indicates that stem cells may hold the key to repairing organs, curing chronic disease and even extreme human longivity. For this reason many parents are storing umbilical cord material which can be used in host specific therepy. What of parents who did not store umbilical material? One company - Provia - thinks they might have a solution.

tunity without rose tinted glasses; is the prospect company actively looking at a real world problem that actually needs solving, and will they be able to deliver a solution faster and cheaper, or will the solution actually make the lives of those in the target market better? If the company is doing all of these then we have a definite candidate for investment.” Grace Century then applies a second and third set of criteria. The first of these is whether or not the company can provide a workable solution – in other words is the solution doable. Is the technology available or can it be acquired at a reasonable cost?

Do we have the “right team,” in place with the experience and ability to implement the plan? This is probably as crucial as the actual solution. Is the timing right? Especially important if something could be subject to political, governmental, or cultural components. The third set of criteria evaluates whether the risk / reward ratio is acceptable. If all the components are in place, is the riskreward appropriate? In other words, it doesn’t make any sense to risk $1 to make $1. Are you able to make that investment, both financially and psychologically? Do you have a pre-defined exit to monetize this investment? This must be done before you get in. One of the current investment opportunities identified by Grace Century fulfills all of the above criteria. The investment opportunity is a company called Provia laboratories, which has a branded name ‘Store-a-Tooth’ (more info is available at www.provialabs.com). Approximately 15 years ago, researchers discovered that Stem Cells from Umbilical cords could be used in therapies to treat certain blood disorders in family members. The family had to


LUXURY INVESTMENT INDEX

The cells themselves are more structurally sound than those found in cord blood and the minimally invasive nature of harvesting the cells means that they can be obtained much more easily, aside from the legal, and ethical problems involved in the harvesting of fetal stem cells which has (for all intents and purposes) derailed stem cell research in the United States. Grace Century offers investors the opportunity to cash in on what is shaping up to be one of the most important medical discoveries of the last century. According to Scott Wolf the attractions of investing in the storage and cultivation of tooth sourced stem cells is something that investors looking for above average returns should be evaluating right now.

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More information on Grace Century can be found at their home page: www.gracecentury.com

NOVEMBER / DECEMBER 2013

“It’s the only way we believe you can make money now, without having to wait for 10 years and picking the right therapy and the right company bringing that therapy to market. We are happy to let science catch up, as we are certain the key are stem cells…they just haven’t opened the lock,” he added. He uses the cord blood company, Viacord as an example, of the types of returns that are possible for those who are open to the possibilities of stem cells and the positioning used by companies like Provia. Wolf feels the Dental Stem Cell Bio Banking businesses is exactly like the beginning of the Cord Blood Bio Banking business, with the exception that the science and people’s perceptions are further along and far more accepted than 15 years ago. “The Viacord investors saw a 15 fold return on their initial investment, which is way above the returns for investors in any similar technology. Using the technology that Provia

A business is in the business of making money; no matter what the field.

is employing, and the timing in science, we believe that investors in the banking of cultured and stored stem cells sourced from teeth will do significantly better than this.” Looking at the track record of Provia, a company formed only in 2010, Wolf ’s optimism about these potential returns seems to be based firmly on the success of Viacord’s business model. He cites numerous scientific studies about the technology involved and is optimistic, while remaining conservative in his estimation of potential returns. “I believe Provia can match or even exceed the return on investment demonstrated by Viacord. 95%+ Margins are more than attainable, given that there is history of customer drop off rates lower than 1% per annum and backed by the thorough due diligence and continued strategic oversight provided by Grace Century. We are not asking our clients to invest in something that we ourselves aren’t excited by – as an organisation we have taken a considerable stake in Provia, ” says Wolf. Grace Century strives to bring only two projects to its client base per year; a business model that Wolf believes delivers exceptional value to clients. “Vetting these opportunities is quite a process. We can tell pretty early on if the project has legs. That’s one of the advantages of looking at hundreds of proposals and selecting only those that meet rigorous criteria.” There can be no doubt that the field of stem cell therapy is tremendously exciting. Grace Century has a reputation for providing its members with opportunities for returns that exceed industry norms by any stretch of the imagination. The combination of these two factors provides a select group of investors with opportunities that have the potential to provide exceptional returns on investment. “Grace Century provides clients with a double return - all our projects are designed to be both growth and income producing. Our clients earn interest from 5 - 8% and are provided with ongoing returns, while the project concerned has access to the capital supplied by investors.” In the words of Wolf, “we refuse to let people use our money without providing income for our clients while they use that capital.” Wolf concluded that projects like Provia are not usually on the radar of most investors due to the fact that participation is restricted – hidden behind a “velvet rope”… so to peak. It is possible that this company has succeeded where numerous others have failed – in the design of a better mousetrap – and one that can deliver exceptional returns.

ISSUE 01

decide at the time of birth to store the cord in a “Bio-Bank” approved for storage. This industry called the “Cord-Blood” industry and has been growing at a rate of 25%/year. Recently, it was discovered that powerful Stem Cells can be found in a child’s first set of teeth and also in wisdom teeth. These Dental Stem Cells have the ability to grow cartilage, cardiovascular tissue, dental tissue bone, and even neural cells. This has created an unprecedented new opportunity to provide Stem Cell banking services to families, especially those who might not have taken the opportunity to store umbilical cord blood at birth. Provia uses Cryogenic technology to culture, verify and preserve stem cells that are harvested from a child’s ‘milk teeth’ for future, personalised, regenerative therapies. The Store-a-Tooth concept is similar to the cord blood stem cell banking services from other companies like Viacord and Cord Blood Registry – both based in the United States. The difference is that these cells can be potentially used for a much wider range of therapies and even for the own child, where in Cord blood it usually cannot. Given the above, why has biomed not lived up to its promise? Wolf is of the firm opinion that the most glaring reason is because of a dearth of management skills, rather than any problem with the technology itself. Of course, these companies often lack capital and the time to engage in an adequate research and see out the often extended approval cycle by regulatory agencies, like the FDA. “Although the people working in biomed are incredibly gifted and they have the best interests of the numerous donors and those requiring stem cell therapy at heart, the fact of the matter is that these people lack the essential business skills to successfully bring these products to market. We have seen time after time, incredible projects brought to us by scientists and other similarly gifted individuals, which we passed on simply because, at the end of the day, a business is in the business of making money; no matter what the field,” says Wolf.” The Dental Stem Cell research market is today delivering results. These cells, unlike the cells harvested from umbilical blood have recently demonstrated the ability to produce pancreatic-like islet cells that can produce insulin – a huge leap forward which holds the promise of enhanced treatment for diabetes. Unlike cord blood the Dental Stem Cells can grow into large enough volumes to treat adults, and can be collected numerous times - a telling advantage for the treatment of adult ailments.


FEATURE

Power Lunch

ISSUE 01

NOVEMBER / DECEMBER 2013

Where to go to get the deal done.

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n each edition of Investment life we will be looking at a restaurant in Singapore and further afield that offers investors and business people the ambiance, wine list and food that will make any high powered business lunch or dinner more of a pleasure than a chore. In this edition we have chosen to highlight Serenity, one of Singapore’s most well respected purveyors of authentic Spanish cuisine, Serenity. With a total of three outlets (the newest is at Takashimaya S.C Ngee Ann City, one is in Vivocity and one can be found in Sanur Bali, Indonesia) the restaurant has built up a reputation based on fresh ideas fused with the traditional tastes of Spanish Catalan cuisine. There are a number of reasons that we chose to approach Serenity to be the first restaurant to appear as part of our regular ‘Power Lunch’ features, the first is in the name. This restaurant has an ambiance that simply makes doing business a pleasure. Patrons can relax and unwind while still having the opportunity to conclude their business dealings thanks to the discrete service and skilled wait staff. Rona Lee Managing Director of Serenity is perfectly in tune with the needs of local and international business people. “As a business woman I have to attend a lot business lunches. Business lunches are where either deals are begin or wrapped up. Where we eat reflects what we are - the food, service, ambience and location are very important factors and they can all contribute

Spanish Suckling Pig Six hours to prepare - best phone ahead.

to the success of a business orientated meal. At Serenity, we source quality product for our dishes and our staff is aware of the pressures that business people are under, which is why we train them extensively to be fast, efficient, friendly and professional.” Serenity also offers variety of tapas (which you can enjoy as appetizers). Grilled Spanish Octopus, Braised Beef Tongue and Honey Roasted Pork Ribs are must tries. Catalan Soup is perfect for a light lunch, A delicious combination of vegetables, beans and different types of meats in a savory vegetable stock thee uniqueness of this Mediterranean inspired soup is due to the combination of fmeats or fish into a single aromatic and balanced whole. Serenity’s Catalan soup is a mixture of beef, chicken and pork with beans. If you really want to get under the skin of the tastes of Spain and experience one of the most well known dishes from the region then you might want to try the Paella. There are more than eight types of Paella Paella on offer, including Squid Ink Pella, Seafood Paella, Lobster Paella, Scampi Paella, Vegetarian Pella, Fish Paella, Pork Paella and Crayfish Paella. If you have decided to abandon the idea of a power lunch and transform your Serenity experience into a power dinner then we would heartily recommend that you order the restaurant’s signature dish – the Suckling Pig, known in the Catalan language as Cochinillo Asado.

The presentation alone is a highlight – the piping hot roasted pig is brought to the table on an enormous wooden platter, and swiftly portioned into smaller pieces. The piglet is marinated with sherry, white wine, vinegar and herbs and slow roasted it for more than six hours. According to Mr. Fernando Rojo, Kitchen Director at the venue, “Serenity is a great choice for a business lunch. We have over 42 types of tapas including vegetarian dishes. If you are not into a heavy meal, there are four types of soups and five types of salads to keep you fueled and alert while you discuss strategic issues.” Serenity has more than 60 labels of Spanish wines covering famous wine regions such as Rioja, Rueda, Torro, Rebera Del Duero, Riaz Bixas and Malaga. More than 60 labels are exclusive and rare Spanish wines. You can find Serenity at any one of these locations:

Ngee Ann City Takashimaya S.C., Singapore Tel: 62359989 Serenity Spanish Bar & Restaurant

VivoCity, Singapore Tel: 637 681 85

Serenity Spanish Bar & Restaurant

No. 27A, Jl. Bypass Ngurah Rai, Bali, Indonesia Tel: +62 3 619 29 8820


LUXURY INVESTMENT INDEX

Muhammad Ali’s Boxing Gloves Ali memorabilia alternative asset heavyweights.

Sentiment and success power memorabilia and collectibles markets.

item through a good or bad economy. There is however a downside to an emotional connection with your investment. Just as you can fall in love with stocks (personally I could fall madly, deeply passionately in love with some IBM or Google stock right now) and not want to sell, memorabilia takes this effect and multiplies it a thousand fold. This emotional attachment can make it extremely difficult to assess financial worth. On the other hand if you have a signed team photo, or a world cup winning soccer ball that monetary value may very well be irrelevant. Sit back and enjoy the aesthetics and pride of ownership – don’t sweat the financial aspect of the investment. If trends remain constant your investment in higher end memorabilia will provide above average returns over the medium and long term. The renowned casino owner and coowner of the Ultimate Fighting Championship, Lorenzo Fertitta splashed out an incredible USD $1.1 million on a pair of boxing gloves wore by legendary American boxer Muhammad Ali.

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it’s still an escape,” said Rick Ellington, managing editor of SportsBusiness Daily in the United States. “I think you can expect a trend for at least the immediate future where real high-end sports merchandise will continue to sell and go to auction at the same prices or above than we’ve seen in the past. But the value will be in the rare and vintage materials. The modern stuff is where you’ll see the brunt of the economy’s impact.” Perhaps one of the reasons that this material continues to outshine other investments is simply because the collectors are vested in an emotional connection with the items, which smooth’s out the investment ride and helps to prevent extreme volatility. To put it another way – sentiment is one of the most important factors contributing to the performance of both sports memorabilia and other forms of collectibles. In other words, the collector gets very attached to a certain player, team or event. He’s more invested than just dollars and sense. He will likely show patience and hold onto an

NOVEMBER / DECEMBER 2013

T

he collectibles market has bounced through the recession almost unscathed by market jitters and plunging currencies. In fact the higher end of the collectibles market has shown remarkable resilience. Sports memorabilia is one subset of this asset class that has continued to perform. However, the mindset of the average collectibles enthusiast may have more to do with the attractiveness of possible returns when compared to stocks, bonds or other financial instruments. It seems that in times of financial peril, higher-end sports memorabilia tends to find itself in a surprising bull market. When all else fails, adding rare, limited edition and vintage sporting gems to your portfolio has proven to be a fairly sound investment. Hobby and sports business experts, say that “investments of passion” such as classic and luxury cars, jewelry, antiques, coins, wines and sports memorabilia have almost become recession-proof. “It’s still sports and

ISSUE 01

Get in the Game


LUXURY INVESTMENT INDEX

Bradman's Bat Smashed expectations by selling for USD $45,715 at auction.

Lorenzo bought the gloves at a charity auction by narrowly beating out Dallas Cowboys owner Jerry Jones, who had bid USD $1 million. Considered to be a cultural icon, Muhammad Ali wore the gloves 46 years ago during his first heavyweight title fight in Las Vegas, Nevada, where he defeated Floyd Patterson.

ISSUE 01

NOVEMBER / DECEMBER 2013

BRADMAN’S BAT

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A cricket bat used and signed by Australian legend Don Bradman has sold with outstanding results at Charles Leski Auctions' August 15 sale in Victoria, Australia The 1948 Sykes bat was used by Bradman in his last first class innings on Australian soil as captain, shortly before his "Invincibles" team headed to England to secure the Ashes. It made USD $45,715, a 150% increase on its USD $18,286 estimate. The bat's appeal was further enhanced by the signatures of the entire 1948 Australian team. The Icon Gallery on Singapore’s River Valley Road is making big waves by supplying some very picky Southeast Asian investors with unique and eyecatching art, collectibles and sporting memorabilia for three years. A three year history may not seem noteworthy, but in a city that often seems to be evolving at the speed of light it is a veritable specialist retail Methuselah. Investment Life (IL) spoke to owner James Walton (JW) about the history of the famously eclectic gallery and what makes it so popular with a cross section of Singapore’s hipsters, movers, shakers and art aficionados. IL Tell us, when did The Icon Gallery start operations? JW “The Icon Gallery was established in early 2011 by my wife Esther and myself on the strength of the increased demand that we saw for the collectibles that we were supplying our clients via our first business in Singapore, Sporting Memorabilia, which was established in 2002. IL “Why did you think that a concept like the ICON Gallery could succeed in Singapore’s notoriously fickle memorabilia and art investment market? JW “Our clients were demanding an ever increasing variety of sports memo-

rabilia due to Singapore achieving a greater prominence in the world of international sport. I definitely think that the Formula 1 was contributing enormously to the increasing interest in the memorabilia that drivers were providing to fans all over the world. We had been running Sporting Memorabilia (SM), a specialist in the supply of signed sporting memorabilia since 2002. Since originally opening at The Shophouse in Gillman Village, SM has offered signed memorabilia to as election of clients, as well as offering services as a fund raising specialist, providing items and running charity auctions. The motivation to start Icon Gallery was provided by repeated client requests for collectable music related items. We also wanted to expand the charity related work that was a passion and a mainstay of the Sporting Memorabilia business.” We researched the market in depth and whilst not feeling particularly comfortable with music memorabilia we loved music related art, such as album cover artwork. The Beatles Sgt Pepper artwork by Sir Peter Blake being a prime example of great art in our opinion. Realising that there was a vibrant art scene in Singapore but no galleries carrying music related artwork, we decided to take the plunge and open Icon Gallery, specialising in music, sport and other collectibles, we’ve also seen a huge demand in Singapore for movie related memorabilia." IL It obviously takes a special team to really get under the skin of this specialist art and collectible niche, were you also interested in the types of art and collectibles that we see in the gallery? JW My wife and I have always had a passion for music and sport. There’s an excitement and a passion and the supporters have a real taste for the history of their chosen teams. In our experience this passion is reflected in the tastes of those who collect memorabilia. I think that you have to have a passion for your subject matter, I‘m from Coventry and musically I was influenced by the early 80’s ska and two-tone scene, particularly with The Specials. I’m also a lover of live sport, a long suffering Coventry City supporter and a follower of England Rugby, the British & Irish Lions and F1 when I can. Whilst I have had a career in finance, I have always


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had a great interest in the business and entertainment side of sport and was part of the team that ran the first IRB Singapore Sevens in 2002. I have also run numerous sporting/rugby dinners where we also auctioned memorabilia to raise funds for charity.

top Premier League teams, Muhammad Ali, F1 and Star Wars signed film posters. Other nationalities like a memento from their favourite home team or nation. The further they are from home the more patriotic they get!

IL Aside from the obvious passion that your customers have for their areas of interest, has the clientele changed over time? JW Before we opened Icon Gallery the sporting memorabilia sales were predominately to expats. Now with the gallery space and the introduction of art, our sales are pretty evenly spread between locals and expats and also other overseas clients visiting Singapore.

IL Are there any particular trends / types of collectibles that have remained favourites ever since the establishment of the gallery? JW On the memorabilia side you can split the favourites into recent releases and historical memorabilia. The most popular current memorabilia is without doubt that featuring signed photos or merchandise from major stars. People always want winners, so you need to stock memorabilia from the winning EPL team, winning F1 driver, winning World Cup teams or Olympic athletes or tennis stars, amongst others. But memorabilia is very much also about legends and icons, so the historical favourites include Muhammad Ali, Pele and Brazil from the 1970’s, England 1966 World Cup winners, George Best, Ayrton Senna, Michael Schumacher and Sachin Tendulkar.

ISSUE 01

NOVEMBER / DECEMBER 2013

IL You have a wide selection of different ‘passion investments’ from signed sports memorabilia to movie posters to original prints and artwork. Could you give us some insight into your clients? JW Most of our clients are professionals with a love of sport or art or music. On the memorabilia side the Singaporeans love the

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94

IL What are the most popular types of collectible that are today sold at Icon Gallery? JW The art and memorabilia are equally popular. On the art side we have just had an exhibition of ‘explosive’ oil paintings from Paul Oz which were particularly well received. We are also delighted to have Colin Brown joining us in November for an exhibition of new original contemporary multi-media collages. Colin is renowned in the world of collage and features in a number of definitive publications on the subject. We also have a number of ‘soundwave’ pieces by Tim Wakefield, which are original works signed by music legends including Paul McCartney, Pink Floyd’s Roger Waters or Nick Mason and Coldplay. On the memorabilia front, current favorites are the range of Star Wars film posters signed by Dave Prowse who was the man in the Darth Vader suit, Muhammad Ali, the England soccer team of 1966, Michael Schumacher and as mentioned George Best. IL Where do you source your various pieces? JW On the art side we represent four British artists on an exclusive basis; Paul Oz – explosive oils, specialising in F1 and cultural iconography including Queen Elizabeth II. Colin Brown a multi-media collage artist, Horace Panter who is a collectible water colour and collage artist specialising in music imagery (Chicago Blues, retro cassettes) and other icons. One of our most successful artists is Tim Wakefield who produces stunning canvases based on the sound waves that appear in the recording studio process. He customises resulting in unique contemporary representations of individual pieces of music. In addition to our inventory from these four artists, we also carry work from many more, such as Sir Peter Blake’s album cover art work. The memorabilia is predominantly sourced from the UK, but we also have rugby items from NZ/Australia and Muhammad Ali sports memorabilia sourced directly from his management company representatives in USA. IL Has there been a change in the attitude towards these types of collectibles as an investment and have any of your clients gone on to resell any of the art and if so have they realised a profit? JW Most people buy a piece of art or memorabilia primarily because they love it and it reminds them of a special occasion, event or song. A small number of clients may also have a secondary reason to buy, being investment.


LUXURY INVESTMENT INDEX

A number of our clients have seen a significant appreciation in value, particularly in the case of Muhammad Ali items authenticated by his management company; England Rugby World Cup 2003 items; New Zealand 2011 Rugby World Cup items; and a number of Tim Wakefield’s sound wave music artworks such as the Pink Floyd pieces. IL Can you give us some insight into the global market for collectibles and sports memorabilia - is it growing, shrinking or static? JW The major auction houses such as Christies and Sotheby’s now have memorabilia departments which have been launched based on the huge interest and massive expansion of interest in these pieces, something that we are seeing with our growing customer base. Many of the current and existing clients want something eye catching, yet tasteful. If that can be combined with a return on investment that matches or even beats other asset classes then that is obviously also a factor in the buying decision.

IL Can you break down the price (in broad terms) for the various types of collectibles and art that are featured at Icon Gallery?

IL What is the most expensive collectible that Icon Gallery has stocked? JW Whilst we have had many items in the S$7-10K range we do not carry too many items above that price point. Our most expensive pieces are Paul Oz original oil paintings which go up to around S$12K. In our opinion these represent excellent value, and may be potential investment grade collectibles. Although of course the art and collectible world is so mercurial that you’d be better choosing in piece like this for its intrinsic beauty and your appreciation of the original artists music. IL James, we’d like to thank you on behalf of our readers. Be sure to keep us in the loop about your next exhibition. The world of collectibles is both extremely interesting and for those with an eye for a unique investments –potentially extremely rewarding. JW Always a pleasure chatting.

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BONUS QUESTION What is the name of the gallery in Singapore where you can buy a signed photograph of Mohammed Ali?

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NOVEMBER / DECEMBER 2013

IL What influences the price of a collectible piece of sports memorabilia? JW It’s simple market economics combined with an intangible – passion, which simply can’t be measured. Desirability and scarcity combined with the status of a winner/cham-

IL Can you source specific pieces of sports memorabilia or other collectibles should a collector have a particular area of interest? JW We often source special pieces of memorabilia for our clients, some of whom have been known to leave us a ‘wish list’ of incredibly rare and hard to get collectables. We have sourced rare F1 items for the Singapore GP’s charity auctions and F1 suits, helmets and other race worn items for collectors.

JW We have a wide range, from S$50 for a signed book to over S$10,000 for an original Paul Oz oil painting or race worn F1 suit.

ISSUE 01

IL How would a collector or enthusiast ensure the provenance of the items that they are purchasing? JW When buying art or memorabilia it’s very important to find a trustworthy, reputable supplier who is willing to spend the time talking to you about the piece and its provenance. This is why the majority of fakes are sold on the Internet, where the sellers don’t meet the buyer. These unscrupulous dealers are here one day and gone without trace the next. At Icon Gallery we spend time talking to our clients about the provenance and where possible we like to pass on the original certificate, such as those authenticated by Muhammad Ali’s management company, the international rugby unions or the Olympic organisers and other reputable organisations. On all items that we supply we provide our own money-back guarantee of authenticity. Our buying process is so vigorous we have the utmost confidence in the provenance and authenticity of the pieces. It’s no good buying a piece without peace of mind that it is actually going to offer a decent return on investment.

pion/legend who might only have signed a limited number of pieces or has even passed away are all good indicators of investment value. An excellent example is Ayrton Senna signed items, including race worn F1 clothing or match worn football/rugby items. The ball that Jonny Wilkinson kicked to seal the RWC 2003 went for huge money. Muhammad Ali items with his management company’s certification are also in huge demand.


FEATURE

The Latest Credit Suisse Global Wealth Report

The Rise of Asia

ISSUE 01

NOVEMBER / DECEMBER 2013

A

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96

he latest Credit Suisse findings on the state of global wealth are hardly surprising, although they do illuminate and focus attention on just how the changing demographics in countries across the world are changing the rules of the investment game. For instance the pool of High Net Worth Individuals will keep growing – increases in the size of this attractive market will primarily be driven by growth in the middle segment, but the number of millionaires will also rise markedly over the next five years. The implications for those positioning various types of investment is clear. Traditional markets remain strong and individual wealth continues to grow across the globe (aside from some localised gloom). The evolution of personal wealth and the growth in numbers of High Net Worth Individuals (HNWI’s) and the possibilities for profit in emerging markets is however something that many luxury brands are only now beginning to embrace. The rise of the super rich in China will affect investment and the creation of new opportunities for both inbound investment, and harnessing of the Chinese appetite for foreign investment. The study shows that global wealth is expected to grow by an astonishing 40% over the next five years and emerging economies will be responsible for 29% of that growth. China will account for nearly 50% of the increase in emerging economies wealth. It is no coincidence that Apple has very recently snatched Angela Ahrendts, ex CEO of Burberry to join the Capertino based tech firm. Ahrendts helped Burberry capture the hearts and minds of Chinese luxury goods consumers through a savvy combination of online marketing expertise and some very clever pricing structures. Apple is committed to its China investment as the country is projected to be the world’s biggest Smartphone market within four years, but the company is being schooled in how to run a China investment by old(ish) Asia hands like Lenova, ZTE, Xiaomi and Samsung.

Number of millionaires in 2013 and 2018 (regions and selected countries) Number (thousands) 2013

2018

Change %

USA

13,216

18,618

41

France

2,211

3,224

46

UK

1,529

2,377

55

Germany

1,735

2,537

46

Brazil

221

407

84

Korea

251

449

79

Mexico

186

273

47

Singapore

174

235

47

Indonesia

123

194

58

Russia

84

133

58

Hong Kong

103

168

63

Turkey

102

158

55

Poland

45

85

89

Malaysia

38

67

76

Chile

54

86

59

Africa

90

163

81

Asia-Pacific

5,266

9,074

72

China

1,123

2,112

88

Europe

10,236

15,027

47

India

182

302

66

LAC

569

936

64

North America 14,213

20,001

41

31,680

47,614

50

World SOURCE

Credit Suisse

Apple is clearly pinning its investment hopes on the appointment of Ahrendts and her experience in building the Burberry luxury behemoth in China. It is this sort of knowledge that is helping company’s like auction houses Sotheby’s and Christies make a success of both auctions on the Chinese mainland and auctions of luxury investments aimed at Chinese HNWI’s held across the world where Chinese investors are taking a more and more prominent role (see our feature on Alternative Investments and the Christies article elsewhere in this edition).

There are also some surprises at just how resilient the economies of certain countries have been in the face of the ongoing global financial crisis. For instance, although emerging economies are often punished as a group by markets across the world for economic missteps, the reality is that many of these economies are extremely robust. The Credit Suisse report shows that there have been both winners and losers during the current period of global economic and financial turmoil. The emerging market economies of Brazil and Russia for instance have been buffeted by weaker currencies, while Mexico continues to show signs of a renaissance in the investment sector. Many of the ‘old world’ economies have not faired well during recent times. The highly publicised economic implosions of countries such as Greece and Spain have definitely hurt investor confidence. Counter intuitively there has been resurgence in Eurozone wealth. The Credit Suisse report findings in fact challenge the European Central Bank findings on household wealth. The report indicates that the ECB may have underestimated the household wealth per individual adult across the Eurozone, with the notable exceptions being Cyprus and Malta.

Emerging markets to increase their share of global wealth Between 2000 and 2013, emerging markets nearly doubled their share of global wealth from 12% to 21%, thus increasing their share of global wealth by 0.7% each year. The share of wealth of emerging markets will likely reach 23% by 2018, an increase of 0.5% on average each year. The annual rate of increase is projected to be 9.1% for emerging markets against 6.1% for developed markets. Among major economies, China will likely be the largest gainer in relative terms. Since 2000, Chinese wealth has increased by 13.3% per annum, and Credit Suisse expects it to continue to grow at a rapid pace of 10.1% over the next five years. China accounts for 9.2% of global wealth, and this will rise to 10.7%, while the USA will


FEATURE

lose some share, but will still account for 29% of global wealth in 2018. Wealth in India will also grow very rapidly, at an annual pace of 9.3%, although a fraction down on the 9.5% growth rate since 2000.

Financial assets will drive wealth gains Advances in wealth will result from gains in both real and financial assets. Financial assets accounted for more than half of gross wealth during the past decade, but the collapse in asset prices during the financial crisis caused the share of wealth to fall in 2008. Since then, financial assets have staged a remarkable recovery and are up 32% (6.4% per annum) against an increase of 23% (4.8% per annum) for real assets. We believe that financial assets will continue to do well, and will rise by 7.5% per annum, against an increase of 5% per annum for real assets.

Who wants to be a millionaire?

250 USD Trillion 200 150 100 50 10% 2000

2002

2004 FIGURE 2 .

2006

2008

2010

2012

2014

2016

Wealth growth rates since 2000, by region

■2000-2013■2000-2007 ■2000-2008■2008-2013

400 Growth in % 350 300

97

250

150 100 50 0 -50 World

North America

Europe

Asia-Pasific

China

James Davies, Rodrigo Lluberas and Anthony Shorrocks, Credit Suisse Global Wealth Databook 2013

Latin America

India

Africa

www.investmentlifenews.com

200

SOURCE

NOVEMBER / DECEMBER 2013

The Credit Suisse Global Wealth report’s examination of the leading lights in the Asian economic region show that the next 50 to 100 years may very well prove to be the Asian century. Although

Total global wealth 2000-2013, by region

■Africa■India■Latin America ■China ■Asia-Pacific ■Europe■North America

Asia’s growing influence – The Country highlights

FIGURE 1 .

regional, cultural and social circumstances. An examination of the regional differences between investment in financial and real (non- financial) forms, as well as average debt and net worth. Worldwide, financial assets on average comprise 52% of total gross assets, and debt accounts for 15%. There are several countries, however, for which financial assets are more important, including Japan, the USA and Switzerland. At the other extreme, real assets dominate many Asian countries, including India and Indonesia. Advances in wealth will result from gains in both real and financial assets. Financial assets accounted for more than half of gross wealth during the past decade, but the collapse in asset prices during the financial crisis caused the share of wealth to fall in 2008. Since then, financial assets have staged a remarkable recovery and are up 32% (6.4% per annum) against an increase of 23% (4.8% per annum) for real as-

ISSUE 01

Trends indicate that there is less of a changing of the guard when it comes to the new cadre of millionaires that are now economically active across the globe. Rather than the old guard giving up their places, the numbers of high net worth individuals and the mega rich are being swelled by a new generation of ‘super investors’. This process is being fueled by the game of catch up that is being played by emerging economies. As the gap between the very richest countries and the new emerging market powerhouses shrinks the trend is towards increasing numbers of emerging market millionaires joining top segment of global wealth distribution. According to the Credit Suisse estimates the number of global millionaires could exceed 47 million by 2018, a rise of almost 16 million. While the number of millionaires in emerging economies is still far below the level in the USA (18.6 million) or Europe (15.0 million), it is expected to increase substantially in the next few years. Asia-Pacific is expected to increase its number of millionaires by 3.8 million, reaching 9 million by 2018. China could see its number almost doubling by 2018, raising the total to 2.1 million. Pushed by Brazil (an extra 186,000) and Mexico (an extra 87,000), the trends indicate a substantial increase in the number of millionaires in Latin America, which will reach almost 1 million in five years’ time.

the report does not exhaustively cover the entire Asia – Pacific area it is becoming clear that the countries in this region may play a pivotal role in shaping both economic and geopolitical trends over the medium and long term. When place alongside a basket of economies across the rest of the world some countries, notably China, India and Indonesia record significantly above-average growth rates. At the other extreme, Japan’s wealth has grown very little in terms of US dollars, and not at all in yen. Experiences varied in the immediate aftermath of the 2007 financial crisis. The UK, for example, recorded a very large drop in wealth, but Switzerland registered little decline in US dollar terms. Wealth in most major OECD economies has now regained or exceeded the 2007 level in constant exchange rate terms. The Credit Suisse report provides an insight into the differences between the types of assets that investors are choosing according to their


FEATURE

FIGURE 3 .

sets. We believe that financial assets will continue to do well, and will rise by 7.5% per annum, against an increase of 5% per annum for real assets.

China wealth distribution (% of adults)

100% 90%

China - Tenacious growth

■ 2013 ■ 2018

80% 70%

SOURCE

Credit Suisse

58.4

60%

54.4

50% 41.1

40%

39.1

30% 20% 10% 2.4

0% USD 0-10000

USD 10000 - 100000 FIGURE 4 .

4.3

0.1

USD 100000 - 1M

0.2

USD 1M+

Wealth share of emerging markets

24% 22% 20%

16% 14% 12%

- Wealth share of middle and low income economies - Forecaste

10% 2000 SOURCE

2002

ISSUE 01 www.investmentlifenews.com

98

2004

2006

2008

2010

2012

2014

Credit Suisse

FIGURE 5 .

NOVEMBER / DECEMBER 2013

18%

Evolution of wealth by component

- Real Assets - Financial Assets - Debts

250 USD Trillion

SOURCE

200

Credit Suisse

150

100

50

10% 2000

2002

2004

2006

2008

2010

2012

2014

2016

2016

According to the Credit Suisse Report wealth per adult in China has grown robustly since 2000, almost quadrupling from USD 5,700 to USD 22,230 in 2013. Wealth fell by approximately 20% as a result of the financial crisis, but soon recovered and despite recent uncertainties is well above its pre-crisis peak. The level has increased more in US dollars than in yuan, due to the appreciation of China’s currency since 2009; but most of the rise in wealth reflects real growth. Total household wealth in China is the third highest in the world, just 2% behind Japan and 56% ahead of France (in fourth place). Due to a high savings rate and relatively well developed financial institutions, a high proportion (46%) of Chinese household assets are in financial form compared with other major developing or transition countries. At the same time, privatized housing, new construction and rural land are very important forms of wealth in China, accounting for much of the USD 12,900 in real assets per adult. Debt averages USD 1,400, equivalent to 6% of gross assets. While this is relatively low, personal debt has been rising at a fast rate in recent years. Although significant inequality is created by the strong urban-rural divide in China, at the turn of the century overall wealth inequality was low – both by broad international standards and in comparison to other transition countries. This was due to factors such as the virtual absence of inherited fortunes, and relatively equal division of both rural land and privatised housing. Inequality has been rising strongly, however, with the increasing wealth of successful entrepreneurs, professionals and investors. China now has over one million millionaires, and more residents with wealth above USD $50 million than any other country except the USA.

India - Emerging wealth As the world’s largest democracy with a strong federal structure and vibrant markets, India has seen rapid growth in wealth since the year 2000. Wealth per adult rose from USD $2,000 in 2000 to USD $4,700 in 2013, but the 35% rise in the adult population caused aggregate wealth to more than triple during the same period. In US dollar terms, there was a significant contraction in 2008, mostly due to depreciation of the rupee. The rupee took another dive in 2011–12, prompting a 20% decline in wealth in USD terms. Adjusted for exchange rate movements, however, wealth per capita has grown quite steadily since 2000, managing an average annual rate of 8%.


FEATURE

Along with most countries in the developing world, personal wealth in India is heavily skewed towards property and other real assets, which make up 86% of household assets. While wealth has been rising strongly in India, and the ranks of the middle class and wealthy have been swelling, not everyone has shared in this growth and there is still a great deal of poverty. This is reflected in the fact that 94% of the adult population has wealth below USD $10,000. At the other end of the scale, a very small proportion of the population (just 0.4%) has net worth over USD 100,000. However, due to India’s large population, this translates into 2.8 million people. India has 254,000 members of the top 1% of global wealth holders, which equates to a 0.5% share. There are 1,760 UHNW individuals with wealth over USD $50 million and 770 with more than USD $100 million.

Singapore — Robust and stable growth

FIGURE 6 .

Taiwan - Asian Tiger Taiwan is a prime example of a successful Asian Tiger economy. Its average wealth is USD $151,800, well above the level of even the most successful developing and transition countries, and close to some countries in Western Europe. Wealth rose from USD $107,000 in the year 2000 to USD $167,900 in 2010, with no decline during the global financial crisis of 2007-09. Currency depreciation

Dollar Millionaires by country of residence TAIWAN 1%

USA 42%

SWITZERLAND 2% CANADA 3% AUSTRALIA 4%



 





CHINA 4%

 



 



REST OF THE WORLD 12% SOURCE

James Davies, Rodrigo Lluberas and Anthony Shorrocks, Credit Suisse Global Wealth Databook 2013

UK 5%

GERMANY 5%

FRANCE 7%

JAPAN 8%

99 www.investmentlifenews.com







ITALY 5%

The rise in personal wealth in Indonesia has been very strong, with the average increasing more than fourfold since the year 2000. The rebound from the Asian financial crisis of 1997–98 has been impressive. In USD terms, the global financial crisis caused a small setback, but growth recovered quickly and wealth per adult is now well above the pre-crisis level. The declines in wealth observed in 2007–08 and in 2011–12 were due to exchange rate fluctuations. In fact, in terms of domestic currency, Indonesia has recorded an increase in average wealth every year this century. The wealth comparison between Indonesia and India is noteworthy. In some respects the two countries exhibit common features. The composition of wealth is similar, with real assets making up 84% of gross assets in Indonesia compared to 86% in India. Personal debts in both countries are very low, averaging just 5% of total assets in Indonesia and 6% in India. However, although wealth per adult in the two countries was fairly similar in 2000, with Indonesia just 23% ahead, the figure for Indonesia is now more than double that for India. This is in line with the faster pace of growth in Indonesia’s GDP, which grew at an average annual rate of 13.1% between 2000 and 2013 compared with 9.9% for India. In Indonesia, 81% of adults own less than USD $10,000, which exceeds the global figure of 69%. At higher wealth levels, there are progressively smaller numbers in relative terms, compared with the world as a whole. This reflects the fact that while wealth has risen strongly in Indonesia in recent years, it is still low by international standards. However, due to considerable dispersion in wealth distribution, 175,000 people in the country are within the top 1% of global wealth holders, and 123,000 are US dollar millionaires.

NOVEMBER / DECEMBER 2013

SWEDEN 2%

Indonesia - Impressive growth

SPAIN 1%

caused a 12% drop in wealth in USD in 2011, but wealth stayed level in domestic currency terms and has since edged upwards again. Over the entire period 2000-13, wealth per adult grew by 2.7% per annum using current USD and by 4.3% per year using constant exchange rates. Reflecting a high saving rate and well-developed financial institutions, the composition of household wealth is skewed towards financial assets, which comprise 64% of gross assets. Debt is modest, equaling just 14% of total assets. Relative to the rest of the world, wealth distribution in Taiwan is skewed towards the high end, with less than a quarter of the adult population having wealth below USD $10,000 compared to 69% in that bottom range for the world as a whole. Almost a third of adults in Taiwan have net worth over USD $100,000, which is four times greater than the worldwide average of 8%.

ISSUE 01

Household wealth in Singapore has grown rapidly in recent years, rising from USD $112,800 at the turn of the century to USD $281,800 by mid-2013. Most of the rise is due to the high saving rate and asset price increases rather than exchange rate movements, although the latter

provided a strong boost after the global financial crisis. Singapore currently ranks eighth in the world in terms of wealth per adult. Interestingly, it is now well ahead of Hong Kong, which ranked tenth in the world in 2000, just above Singapore. Wealth in Singapore grew at 7.3% per annum between 2000 and 2013 versus just 2.1% for Hong Kong. Household assets in Singapore are divided evenly between financial and real assets, reflecting strong government encouragement for both saving and home ownership. The average debt of USD $54,500 is moderate for a high wealth country, at just 16% of total assets, although it has grown fairly quickly in recent years. The number with wealthy above USD $100,000 is about six times the global average. Reflecting its very high average wealth rather than high inequality, 0.6% of its population or 262,000 individuals are in the top 1% of global wealth holders, while its adult population accounts for just 0.1% of the world total.


FEATURE

Shale Oil Opportunity Does the exit of an oil supergiant mean investment opportunities for smaller players?

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DECLINING LEVELS OF PRODUCTION

400 350

Oil Production (Barrels per Day)

T

he current reshuffle of players in the North American shale investment industry may open significant opportunities for smaller players with a tolerance for risk and an interest in one of the fastest growing energy related industry sectors on the globe. Anglo-Dutch powerhouse Royal Dutch Shell is planning to sell off its entire 106,000-acre holding in the Eagle Ford Shale and another 600,000 acres in the Mississippian Lime play in Kansas. The question being asked by many investors is why this heavy hitter is quitting these promising prime producing assets? Should this be a concern for those who are looking to get their hands dirty in the shale business. The knee-jerk reaction to this is to ask why would this supergiant sell off these prime producing assets—especially the liquids-rich assets? On the surface, of it Shell sale of its shale interests is aimed at making up for a USD $2.1 billion after-tax impairment charge that was revealed in its second-quarter earnings statement. Combine the accounting issue (the after-tax impairment charge is primarily related to the abovementioned North American assets) with the fact that the company is simply, not meeting its size and profitability targets in terms of its US shale interests and it’s exit begins to make a lot more sense. Shell's sale of leases on 106,000 acres in the oil-and-gas-rich region illustrates the struggles major oil companies have had in places where smaller energy firms have thrived. Shell isn’t alone in ridding itself of US shale assets, but it is leading the pack when it comes to exiting of the more profitable liquids-rich real estate. The BG Group and BHP Billiton (BHP) have reduced their North American shale holdings, but those divestitures have been gas-heavy assets.

300 YEARLY DECLINES

First Year = 60% Second Year = 64%

250

Third Year = 72% Fourth Year = 46%

— Production 2008-2011 — Production first 5 months of 2012

200 150 100 50 0 1

13

25

37

49

Months on Production Type well decline curve for Eagle Ford liquids production.

In the eyes of the strategists at Shell, there may be bigger fish to fry elsewhere in the world. The oil and gas giant would probably see better returns in the Gulf of Mexico and offshore Malaysia. Add to this the fact that it’s Eagle Ford holdings are worth a bundle of cash, cash that could be extremely useful in further developing its Gulf and Malaysian investments. The giants like Shell and BHP Billiton were slow to come to the shale party (ExxonMobile was also a late entrant), sitting on the sidelines watching smaller players make merry during the shale boom time. The argument could be made that Shell and other large multinationals overpaid for lower-quality and less wellexplored assets Although those heady shale rush days are far from over, the slump in natural gas prices is giving the ultra large integrated companies

SOURCE Hughes (2013)

pause. They had invested big during the during the shale heydays, and are now facing an accounting hangover that can be dealt with swiftly given the appetite of smaller investors for both these liquid rich properties and the hopefully attendant Shale profits. There are certain industry pundits who believe that this opportunity for investment by smaller players is only the beginning. There is talk around the water cooler that the next couple of years infrastructural development is going to make investment even more attractive. In 2015 the first liquefied natural gas production facility in the Eagle Ford play is scheduled to come on line. Five LNG processors will produce LNG for oilfield fuel applications, leading to significant operational cost savings by developers.


FEATURE

Total U.S. oil production by geologic formation, 2008-2040 (Million barrels per day)

US GAS AND OIL PRODUCTION

3

2011 SOURCE EIA

other

2

Eagle Ford

1

Bakken

Permian Basin

0 2008

CAUTION WARRANTED

Getting oil from these sources is critical for America's energy future. That makes it all the more sobering that a savvy company like Shell has decided it wants no part in it.

ON THE POSITIVE SIDE Oil production in Texas' Eagle Ford rose 54% in April from the previous year. It reported 530,689 barrels per day for the month of April. So even from February of this year, production has grown a robust 13%. The nine fields that make up the majority of Eagle Ford yielded 530,689 barrels of crude a day, according to data released by the Texas

Recoverable shale oil

Technically recoverable oil shale reserves have been estimated at about 2.8 to 3.3 trillion barrels.

2020

2025

2030

2035

2040

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Railroad Commission, which oversees oil and gas drilling in the state. The fields produced 345,702 barrels daily in April 2012. February output was revised to 561,554 barrels a day from the preliminary report of 529,874, the commission said. The state produced 2.37 million barrels a day in March, the highest monthly level since February 1986, according to the Energy Information Administration, the statistical arm of the Energy Department. So based on the latest available numbers, production in the Eagle Ford has grown a staggering 150,663% since 2008. At this rate, if short-term trends hold true Texas could be producing 2.5 million barrels of oil a day. That would be its highest output since 1982. Some number to give investors an idea of the opportunity in Texas at the moment – the state is currently home to over 10% of all the drill rigs on the planet. And there’s more excitement on the way as new technology allows drilling teams to revisit legacy wells in the legendary Permian Basin to frack the rest of the oil that's been left behind. The EIA increased its estimates of global oil deposits by 11%, thanks largely to American shale. It also boosted its shale gas estimates 10% and, combined with earlier U.S. results, stated there's now 47% more known amounts of gas deposits. The EIA now it estimates an additional 313 billion barrels' worth of shale or tight oil, compared with 2011 estimates. Shell has left the building, but the show goes on. For some savvy investors with a tolerance for the wildcat world of oil and gas exploration the only way is up. There are now figures coming through that are making a lot of new players very curious to see if they can climb on board a shale powered elevator that left the ground floor some time ago, but is now heading straight for the penthouse suite of profit central.

NOVEMBER / DECEMBER

So everything is looking rosy for even the smaller investors. However one aspect of this growing oil production industry, which is based on tight oil formations, has not changed. It remains a challenge to make profits when a company is pulling oil from the ground using existing technology and production methods. The most successful company in the Eagle Ford has been EOG, which produced 94,000 barrels a dayfrom the Eagle Ford in 2012. That's almost a quarter of the 399,000 b/d that the Texas Railroad Commission reported was produced by all the Eagle Ford producers put together in 2012, and a 150% increase over EOG's 2011 Eagle Ford production. But it's interesting that even though EOG reported an average price received around $98/barrel in 2012 compared to $93 in 2011, the company's operating income for the year was down 30% from 2011. Gains in revenue were outweighed by increases in marketing and depletion charges. Conoco Phillips (COP) produced 89,000 b/d from the Eagle Ford in 2012:Q4, almost as much as EOG, and a 144% increase over what the company produced from Eagle Ford in 2011. Although there are lots of other factors besides Eagle Ford that matter for COP's bottom line, operating income was basically flat year-to-year despite the success in the Eagle Ford. Chesapeake (CHK), another key Eagle Ford producer, reported a big operating loss for 2012. Other companies are still doing well with the Eagle Ford and other tight formations. But among the challenges to making ongoing profits at this game are the very rapid rates at which production flows decline after peaking and the fact that the vast majority of wells produce very little compared to those that receive the most publicity.

2015


FEATURE

Don’t Lose Your Head NOVEMBER / DECEMBER

2013

“We’re all mad here” The Cheshire Cat – Alice in Wonderland

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nvestment is a strange and many splendored thing. When investors lose site of fundamentals, reason and calculation surrender as individuals saddle up for a dizzying ride on the back of an out of control penny-farthing investment cycle. This is a ride that threatens to throw the rider into a yawning abyss of complete and utter financial chaos as it careens towards financial ruin. Market fundamentals are ignored completely when the collective insanity involved in the business of speculation takes hold. Investors place their faith in trends and fickle human taste and are subject to a whimsical market, driven not by the fundamentals of supply and demand of the utilitarian value of the underlying assets, but rather a manic sort of headlong rush toward profit. In the annuls of investment there can be no better example of mass hysteria than the events that unfolded in Holland during a few years of madness which started in 1634.

The Dutch Tulip Mania When : 1634 – 1637 Where : Holland

The numbers: Although difficult to ascertain with any certainty the amounts involved in the Dutch Tulip Mania were astronomical. At the peak of the craze the sale of a single tulip bulb would guarantee that the seller would never have to work again. There is anecdotal evidence indicating at the top of the investment cycle ordinary men and women were successfully selling bulbs that enabled them to purchase entire estates. At the bottom of the cycle a rare tulip bulb could be had on the open market for the price of an onion.

A short history of speculative madness The tulip is indigenous to Turkey, Iran, Pakistan, Afghanistan and other parts of central Asia. But tulips first gained popularity in Holland in 1593 when Carolus Clusius became the Head Botanist at the University of Leiden

in the Netherlands. On assuming his position in Leiden Carolus wasted no time in planting the first tulip bulbs. The fame of this beautiful bloom spread rapidly and the flower was immediately popular with the upper classes. The novelty value of the new flower made it widely sought after as a symbol of wealth, prestige and power. This demand quickly put the price of both the bulb and the flowers beyond the reach of the average wage earner. If not for the appearance of a non-lethal virus named Mosaic, the story would have served as a horticultural footnote in an academic treatise on the flora of Europe. Mosiac changed everything. The virus did not kill the tulips but rather caused the appearance of flame like patterns of colour on the petals of the plant. The tulips, already selling at a premium, began to rise in price according to how their virus alterations were valued, or desired. A tulip madness gripped Holland. Men and women across the country began to deal in bulbs, and very soon speculation became the underpinnings of a road to wealth and prestige. With © BRUEGHEL THE YOUNGER / WIKIMEDIA COMMONS


FEATURE

FIGURE 1. Tulip Price Index [1636 - 37]

Feb 3

200

Feb 5 Feb 9

150

Dec 12

Dec 1

100 Nov 25

50 Nov 12

Fast Facts – Tulip Mania 1 The tulip was once the most expensive flower in the world. At the peak of tulip mania single bulbs sold for more than ten times the annual income of a skilled craftsman. Social status began to be measured by exotic tulips. Many economists consider tulip mania to be the first speculative bubble. 2 At one point during the height of tulip mania, a single Viceroy tulip bulb was purchased for two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, 12 fat sheep, two hogsheads of wine, four casks of beer, two tons of butter, a complete bed, a suit of clothes and a silver drinking cup. 3 aniaAt one point during the mass hysteria that seized Holland an English amateur botanist, intrigued by an unknown bulb lying in his host's conservatory, proceeded to dissect it, and was put in jail until he could raise an astronomical 4000 guilders. 4 In the winter of 1636-37, a valuable tulip bulb could change hands ten times in a day. 5 Tulips are native to Central Asia. Although they are the quintessential Dutch flower, they actually originated in Central Asia, including Turkey, where the tulip is the national flower.

7 By 1636, the tulip bulb was the fourth leading export for Holland — after gin, herring and cheese. 8 There are over 3000 varieties of which are divided into 15 groups with names such as Parrot, Rembrandt and Triumph.

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6The English word tulip is derived from a Persian word, delband, which means turban. The flower was seen as turbanshaped, hence the name.

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© NORTON SIMON MUSEUM / WIKIMEDIA COMMONS

the asset class that underpinned the craze. In mid 1637 traders woke up to the fact that the tulip bulb, although decorative, has a limited utilitarian value. These investors decided to sell and realise their profits. A domino effect of progressively falling prices took place as market forces finally asserted themselves. All at once everyone was selling, the market was flooded and panic set in. As the prices spiraled ever-downward bulbs continued to be hawked, regardless of losses. Dealers refused to honour contracts and as the collective madness subsided it dawned on the general populace that they traded property, sacrificed fixed assets, depleted savings and abandoned positions that provided a steady income. By this time the possibility of civil unrest could not be ignored as crowds gathered in streets all over Holland. Images for layoutThe government attempted to step in and halt the crash by offering to honor contracts at 10% of the face value, but this only fueled the panic and the market plunged even lower. The reverberations of the crash were felt throughout Europe. In Holland there was not a family that emerged unscathed. Even those who had prudently exited the market early suffered during the subsequent depression. The effects of the tulip craze left generations of Dutch investors extremely wary of speculative investments. For modern investors the message is clear. Market fundamentals should be the guiding light for investment. A thorough examination of the actual value of the asset that underpins the investment is required prior to making any decision. When in doubt consult an independent advisor. And sometimes, stop for a moment and smell the flowers – regain some perspective.

A flowery fortune The Viceroy Tulip.

NOVEMBER / DECEMBER

steadily rising price came a frenzy of speculation on the tulip market, which was widely believed to have no ceiling or limits of any kind. In 1636, stock exchanges were established to trade in bulbs and ‘Bulb Futures’. Despite attempts by the authorities to cool down the market, trade blossomed and people sold land, houses and valuable objects to invest in tulip bulbs. The most popular varietals of bulb were the Semper Augustus and Viceroy bulbs and in 1635, a sale of 100,000 florins for 40 bulbs was recorded. This was around a year’s salary for the average labourer. To make matters worse professional bulb buyers began to fill inventories for the growing season, depleting the supply further and increasing scarcity, while demand soared. As the bulbs began to show an exponential price increase the population of a sort of collective madness seized the Netherlands. Ordinary men and women were trading their land, life savings, and anything else they could liquidate to get more tulip bulbs, plowing back their investment into rare specimens and involving themselves in the opaque world of futures trading, where tomorrow’s tulip varieties might turn a small investment into a large fortune. For many of the investors the key to riches was the sale of bulbs to witless and unenlightened foreigners, thereby reaping enormous profits. During the collective spasm of investment madness that shook the Netherlands, the originally overpriced tulips enjoyed a twentyfold increase in value, all in a single month. Needless to say, the prices were not an accurate reflection of the value of a tulip bulb. As it happens in many speculative bubbles, some prudent people, with at least a passable notion of the fact that the good times simply could not last – especially given the nature of

May 1


CLOSING BELL

With the launch of Investment Life Panashco Media aims to provide a quality investment publication to readers across Asia. We identified the need for a coffee table publication that provides the private individual with a combination of solid, well researched insight into the sometimes challenging world of investment and a great read – something that has been lacking in a regionally based investment publication. The success of Property Life and the continuous feedback from both our partners expert editorial contributors and our readers reinforced the fact that investment in Southeast Asia, and the wider pan Asiatic region is becoming a global hot topic. Our team looked at the increasing amounts of investment capital flowing from China and elsewhere and the rapidly changing wealth demographics across the region and decided that the time was right for the launch of a new publication aimed at high net worth and aspirational readers. With our international partners, who are experts at investment across Europe and Asia, we have access to a wealth of experience and a depth of knowledge that we believe to be unrivalled.

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2013

The result is a publication that will provide insight and information to allow readers to make informed decisions about their investments across a variety of different asset classes as well as stay up to date with the latest trends that are shaping the panAsiatic investment environment. In addition we realize that in the age of the Internet publishers have a responsibility to not only provide publications that offer insight but that also entertain and encourage debate – we believe that we have provided that publication in Investment Life. We look forward to your continued readership of Investment Life and welcome your comments. Our readers are our most valuable asset – without you we would not have launched this title and your continued interest will allow us to provide even more quality content and insight.

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Alexander Knight MANAGING DIRECTOR / PUBLISHER Investment Life

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Investment Life Magazine November December 2013