An alternative investment strategy

Updated: Nov 18, 2021

We all know that a key element of any successful investment strategy is holding a well-diversified portfolio. While investors typically achieve this through a mix of stocks, bonds and property, an array of other ‘alternative’ asset classes are also available for more daring investors. And such investments can sometimes allow investors to combine a personal passion or interest with making money.

In recent years, passion investments have enjoyed growing popularity as ultra-low interest rates have encouraged wealthy investors to seek alternative homes for their money. As a result, some have been keen to hold a portion of their wealth in tangible assets whose value is expected to appreciate over time.

A wide range of luxury collectible items including art, classic cars, stamps, rare whisky, fine wine, watches and even handbags fall within this category. Not only do such objects typically display low correlation to traditional investment classes, but they also often afford the wealthy an opportunity to indulge a hobby or favourite pastime.

Relatively reliable returns

Traditionally, luxury collectibles have been viewed as comparatively solid investments. Knight Frank has tracked prices for a range of such objects over a number of years and its latest data show a combined ten-year return of 129% across all monitored categories, with rare whisky, classic cars and fine wine particularly strong performers during the past decade.

The category enjoying the largest gains in the latest 12-month period was collectible handbags, a sector dominated by French luxury goods manufacturer Hermès. According to Knight Frank, serious collectors are increasingly prepared to pay six-figure sums for the ultimate ‘must have’ items. In November 2020, a Hermès Himalaya Niloticus Crocodile Retourné Kelly 25 sold at Christies for HK$3.4 million (US$437,330) making it the most expensive handbag ever sold at auction.

Research, research, research

Prior to investing in any asset class, it is vital to develop a thorough understanding of the subject matter and this is certainly the case with luxury collectibles. Most passion investors therefore focus on an existing area of specialist interest in which they are already relatively knowledgeable.

As condition is such a fundamental aspect of any item’s worth it is also important to know how to store acquired assets. Fine wine investors, for example, actually rarely take physical possession of the bottles, but instead keep wines stored professionally in secure, climate-controlled bonded warehouses.

A note of caution

While passion investing can be a profitable endeavour, it is certainly not for the faint-hearted. This is partly because such investments are unregulated and therefore not covered by an ombudsman or compensation scheme.

In addition, as values depend on buyer demand, prices can and do fall, as well as rise. Luxury collectible markets also tend to be relatively illiquid, which means it can prove difficult to sell quickly if a sudden need for funds arises. Passion investing should therefore only ever be considered as part of a wider wealth management strategy and, even then, represent just a small part of an investor’s overall portfolio.

Fleet Street Wealth is a trading style of Fleet Street Financial Ltd which is authorised and regulated by the Financial Conduct Authority.