The Global Guru

The Global Guru: So Where Are the World’s Wealthy Putting Their Money Today?

As Ernest Hemingway famously wrote in The Snows of Kilimanjaro: “The rich are different from you and me. They have more money.”

As it turns out, the rich also invest differently as well.

The Financial Times recently reported that property consultancy Knight Frank is set to publish a study on what “High Net Worth Individuals” — that is, individuals with more than $30 million in net assets — like to invest in.

Here’s a hint…

They aren’t worried about whether Apple (AAPL) shares are due for a bounce.

It turns out that, instead of shares, high net worth individuals prefer to invest in “collectibles.” According to China’s Hurun Report, 64% of China’s millionaires are amassing just such collections. In fact, the average Chinese millionaire already has seven collectible watches. And collectibles are more than just status symbols. They’ve also turned out to be surprisingly good investments.

Collectibles As Investments

So, just what is a “collectible”?

A collectible is an item that is worth far more than it appears because of its rarity and demand. Common categories of collectibles include antiques, toys, coins, comic books and stamps.

Prior to the financial crisis of 2008, the super-rich focused almost exclusively on collecting trophy real estate properties.

Today, they have expanded their attention to fine art, watches, wine, jewelry, and classic cars. As Phillip Hoffman of the Fine Arts Group pointed out on a panel I chaired at the Money Show in London last year, fine art remains the most popular collectible investment overall. But different types of collectibles generate different levels of interest from different buyers. As Andrew della Casa, director of The Wine Investment Fund, noted on our panel, French Bordeaux wines are particularly popular among Chinese buyers.

In an effort to track this new phenomenon, Knight Frank compared the performance of luxury items over a period of 10 years. Dubbed the “Passion Index,” it charts investment performance in the key collecting areas of fine art, watches, wine, jewelry, and classic cars, among others.

So how have these collectibles done as investments?

Not badly, compared to the S&P 500, which closed yesterday around the same level it was on March 21, 2000.

Source: Financial Times, February 22, 2013

With an astonishing growth of 395%, classic cars have outperformed any other investment, except for gold, which rose 434%. Rare coins returned 248% and stamps appreciated 216%. Although fine art was tops in 2012, it merely tripled (up 199%) during the past 10 years. Fine wines rose 166% and watches appreciated a mere 76%.

By way of comparison, cars, coins, stamps and art have matched or out-performed prime property investments, over one-, five- and 10-year periods, in five global cities: London, Paris, New York, Hong Kong and São Paolo.

Not that real estate has done poorly. Both Hong Kong and Singapore benefit from new Chinese wealth looking for a safer home. Hong Kong now boasts the most expensive properties on the planet with prices per square meter (10.76 square feet) topping $51,800. London — considered a safe haven by the global elite — is not far behind, with prime property at $44,100 per square meter. Financial crisis or not, London property is up 10% over the past year and has doubled (up 103%) over 10 years.

It’s a Winner Take All World

I believe there are two factors driving the investment and performance of collectibles.

First, the rich are getting richer. You don’t need to be a tree-hugging, Ivy League academic to realize that the difference between the rich and the poor today is the greatest since the Victorian era in the late 19th century.

Think of Andrew Carnegie, J.P. Morgan and their ilk. They all put their money into art. Today’s global wealthy are doing the same. And they are massively overpaying for their Picasso, Modigliani, Rothko and Bacon art works, while leaving art considered a notch below the big names in the dumps.

Second, despite the bulk of today’s global plutocrats being self-made — (as now-jailed Russian oligarch Mikhail Khodorkovsky put it: “If a man is not an oligarch, there is something wrong with him”) — new global money does not have, shall we say, an air of “complete legitimacy.” Despite an emphasis in education, you don’t make billions of dollars in India by getting high SAT scores and good grades in college. You make it by bribing a local official who gives you a tip on a piece of land that is set to soar in price as a result of an impending permit application. Investing your gains into a great work of art both cleanses the money of its shady origins and gives status. The financial appreciation is just a bonus.

Overall, there is a “greater fool” quality to collectible investments. They are subject completely to the whims of fashion and, unlike a stock or bond, they generate no cash flow.

So, if you do choose to invest in that classic Shelby Cobra hoping you’ll make five times your money, just make sure you find a seat before the music stops.

Because it always does…

To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.

Sincerely,

Nicholas Vardy, CFA
Editor, The Global Guru

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