@CouttsandCo Investing with passion by Mohammad Syed, Head of Strategic Solutions at Coutts

A classic 1957 Ferrari 250 Testa Rossa reportedly sold in January 2014 for £24m, making it the most expensive car ever sold publicly in Britain. Perhaps more startling, the anonymous buyer is understood to have paid three times what the car changed hands for in 2009, confirming that wealthy individuals are continuing to put passion into their portfolios.

Long gone are the days when investment portfolios comprised just cash, bonds and shares. Today, so-called alternative assets, such as property, classic cars, fine art, jewellery and other collectibles, play an increasingly vital role in the portfolios of wealth individuals.

Since the global financial crisis, volatile markets and record-low interest rates have increased demand for more diverse investments and driven interest in many physical assets that have intrinsic value, particularly where the supply of those assets is limited. This has pushed up the prices of many alternative assets.

While many alternatives have provided fairly spectacular returns, there is much more to investing in such assets than price appreciation alone. Indeed, for many wealthy individuals, alternatives are less about investing and more about owning and enjoying assets driven by their emotions. Profit could not be further from their mind...

Over the past decade, classic cars have been the standout performer, with the Coutts Index showing their prices to have risen by 257% since 2005, over which time the MSCI All Country equity index rose by 53%.

But other alternatives have also been in demand, including diamonds and jewellery, particularly those commissioned by a luxury brand, with provenance and a history of famous owners. History has a value – it can’t be replicated.

Rarity is another valuable characteristic. Rare, period artefacts with geographical resonance are also highly collectable. For example, Chinese artefacts, such as porcelain, are increasingly being bought by Chinese collectors who provide a sizeable pool of wealth to support the market. The overall Coutts Index, covering 15 “passion assets” across trophy property and alternative investments, has risen by 77% since 2005.

While the stunning price performance of many alternative assets could be enough in itself to tempt investors, this is an area best reserved for those with a genuine passion for the objects they are buying. Price appreciation must be viewed as an added bonus, not a pre-condition.

Yet alternatives can offer advantages purely as financial assets too – most notably portfolio diversification. Returns from these alternatives often have little correlation to stock market returns, for example, and their prices can move independently – in certain cases they may rise as shares fall, and vice-versa.

A key appeal of these alternative assets is that they are tangible. Some also offer tax advantages in certain jurisdictions. For example, in the UK classic cars are exempt from capital gains tax.

Yet, while alternatives are in vogue, the markets are generally very illiquid – impressionist masterpieces and million-pound Ferraris don’t change hands very often. The lack of liquidity can cause prices to fluctuate and makes alternatives difficult to value and sell. This makes it imperative that investors understand their markets. It also means owners must be prepared to hold such assets for the long term.

However, if they are genuine investments of passion, this shouldn’t prove too onerous a task. In fact, it might prove more challenging to remain detached enough to recognise the investment potential in your passion and to sell when the time is right.

The returns quoted for many alternative assets almost certainly will have been estimated from relatively few transactions on unregulated markets, where pricing can be sketchy and opaque. The few indices that follow the prices of, for example, classic cars track the universe selected by the index creator and can be biased by that selection process.

What’s more, it’s not possible to invest in any of these indices and the prices commanded by individual assets may not be representative of the market or index as a whole.

  

Another drawback of alternative investments compared with stocks and bonds is that they don’t pay an income. What’s more, owners of large collections of art, cars or jewellery need to think about estate planning for those collections.

Despite these drawbacks, alternative investments (even above the potential financial returns they offer) provide one thing that no index can measure – and that’s happiness. The idea of someone paying $50m for an old car that’s uncomfortably hot, noisy, leaks water and has a turning circle that makes an average tank look agile seems insane. In many ways it is. But the happiness such a car can bring is immeasurable.