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The rise of alternative assets

Nick Raphaely
20 February 2014

By Nick Raphaely

When we talk about alternative assets, the first thought is usually hedge funds, managed futures funds or other financial products to diversify a conventional portfolio. But other alternative asset classes seeing a rise amid volatile markets are physical assets: from gold bullion to collectibles.

Objects of desire

So strong is the worldwide growth in these alternative assets that UK financial institution Coutts recently started an "Objects of Desire" index. Coutts’ research has found that what it terms "passion assets" have risen 77% since 2005, outperforming the broader equity markets.

Classic cars have returned the most, rising by 257%. Classic watches are up 176%. Jewels returned 146%, while China’s growing wealth resulted in booming demand for traditional Chinese works of art, which rose by 163% between 2005 and June 2013.

Collectibles and SMSFs

In Australia, many self-managed super funds hold art and other collectibles. They are recognised as appropriate investments by the government, and subject to stringent rules to ensure their purpose as investments rather than lifestyle assets.

Artwork continues to be one of the key assets invested in, but the rules allow a wide range of assets as diverse as rare manuscripts, wine, coins and even social and sporting club memberships. In 2012 around 2% of SMSFs owned artwork or collectibles, with an average investment of around $70,000 according to ATO statistics.

Unique character of "passion assets"

The nature of these alternative, "passion assets" varies from conventional assets in several key ways.

  1. They appreciate over the long term. Unless an event occurs to dramatically increase value such as the death of an artist, spikes in price are rare. But over the long term, particularly with increased scarcity, it is not uncommon for collectibles to double their value within a few years as the Coutts data shows. Another advantage is that most collectibles increase in value along with inflation.
  2. They have ongoing costs. Australia’s super rules require proper storage of assets as well as insurance, which includes appraisal costs. This can add quite a few percentage points in cost - while premiums vary, they can be as high as 10% depending on the quality of security.
  3. They are expensive to sell. It can also be costly to sell high value physical assets, with the need to hire appraisers, restorers and dealers, with auction fees alone around 25%.
  4. They are highly illiquid. Most collectibles sell through auction, which is at least a three months process, and six months or more to actually realise value (if the item sells). This can restrict further investments particularly time-sensitive opportunities if wealth is tied up in slow-to-sell assets.  Asset-based lending is one solution to this, either as a short term loan or cash advance.
  5. They are about emotion. Collecting is often as much about purchasing as investment, with assets having sentimental value. This effectively increases their illiquidity, as collectors are reluctant to sell.

Alternative assets in 2014

So what can we expect to see in Australia’s alternative assets market in 2014? At least for fine art, the feeling is that the market has bottomed out and it's beginning to head upwards again after a turbulent two to three year period.

Auctioneers expect increasing buyer confidence, seen from the second half of 2013, to continue as a modestly upward trend.

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