Passion investments like fine art, vintage watches, premium wines etc. have all the characteristics of real assets, functioning as a store of value or even appreciating over the longer term. But what are the differences to standard investments?

Best-in-class examples set auction records across most of the collectibles categories. For instance, a 1967 Ferrari NART spider sold for $27.5 million (Dh101 million) or the ‘Three Studies of Lucien Freud’ from Francis Bacon that set a new record, selling for $143 million in 2013.

Passion investments in terms of the very rare and precious examples are indeed a special type of luxury product with many HNWI looking to ‘invest’ into a trophy asset. Most often the collectibles fetching record prices at auction come with a history of famous owners, which provides value and cannot be replicated. The positives in terms of the pleasure derived from owning such status assets are easy to understand but from an investment perspective there are often some negatives. For example, collectibles do not have a fundamental value or any income-generating aspects and they cannot be marked to market, since the only way to find out their market price is by selling them. Furthermore, collectibles are illiquid and subject to high transaction and holding costs. Lastly, they are also more exposed to changing tastes and trends in the market. However, passion investments are real assets which bring an ‘emotional’ return next to — occasionally — a potential financial return.

China: important growth driver

In May this year alone, art sales in New York accounted for a combined selling value of $2.2 billion. In 2013, the global art market hit a record $64 billion in sales volume, according to the European Fine Art Foundation (TEFAF), marking a 7.5 per cent increase over 2012. The positive performance of passion investments and growth of the global collectibles market in the last decade have coincided with a dramatic incline in the global number of HNWIs in Asia and especially China. The recent Hurun survey states that China’s super-rich are avid collectors with 70 per cent of wealthy Chinese ranking collecting as their hobby.

The global art index category measures the financial performance of the most sought-after schools: modern art, old masters, 19th century art, post-war, contemporary art and paintings such as traditional Chinese works of art. The price return of four of the five categories has been similar — prices fell during the global recession and have barely recovered since then. The only outstanding performance has come from traditional Chinese works of art, almost doubling in value since 2008, as Chinese collectors have been primarily buying Chinese art. This is slowly starting to change however, and in 2013, Chinese buyers increasingly competed at high-profile auction sales of modern and contemporary Western art.

Investing in time

Watches were the most preferred investment of passion among Chinese (close to 60 per cent own more than five time pieces), albeit narrowing their distance to Chinese classic art, whereas jade ware recently emerged as a preferred luxury asset of choice. Comparing the performance of collectable watches over the last decade with the preference for collectibles among Chinese HNWI shows a disparity — that is, watches not yielding the highest returns despite their strong popularity. This suggests two things — firstly, that not all watches are collected for investment purposes and secondly, that not all watches are good for investment. While over the last decade rare watches still attracted the interest of passion investors and are increasingly sought for collections curated by high net worth enthusiasts, growth has slowed in the watch industry compared to the record years of 2010 and 2011.

Auction sales of watches have reached new heights. Who possessed a coveted item was able to achieve returns way above investments into bonds and equities. An example is a well-preserved Rolex ‘Paul Newman’ Daytona, which gained fame as the actor Paul Newman wore the Rolex in the film ‘Winning’. This watch was once to buy for less than $1,000 before it surpassed the $1 million threshold at a Christies auction in 2013.

The world of watches is full of anecdotes and legends which help drive up the price. However, developments as seen in the art market cannot be anticipated. Nevertheless, there are many watch buyers who choose their watches carefully under the aspects of value received or even under the prospects of value growth, especially in times when many traditional investments promise little or only volatile returns. What increases the chance for value retention or even a positive performance is a well-known luxury brand. However, this is only one aspect among many, as not every model of a premium producer may hold its value over time. By far the most important requirement is that the watch is rare.

The online auction market is growing

Purchasing online is becoming the norm even for a sector as traditionally conservative as collectibles. Collecting was once the preserve of well-informed enthusiasts. But this has changed thanks to specialist websites and a handful of international dealers entering the digital auction market, by doing so slowly increasing transparency, while also intensifying competition. The internet has tremendously increased the ease to conduct pre-purchase research and has facilitated trading opportunities. TEFAF estimates that online sales in 2013 amounted to over $3.2 billion or around 5 per cent of global art market sales.

The online auction market — especially for art — is growing very fast, which may shed more light on the collectibles market and further increase the availability of price data. We believe that the growth of new technology and new online businesses will increase competition potentially, bringing the high transaction costs down and broadening the network of available expertise.

Conclusion

Headline-catching record prices could encourage people to buy trophy assets. But the headline sales are the exception rather than the rule. In reality, only a few artists and very few haute horlogerie pieces have held their value or even constantly appraised over the long term. Collectibles are subject to fashion, taste and supply which makes them difficult to value within a portfolio of mainstream assets. Furthermore, they are generally less regulated, are often illiquid and costly to trade. But just because items are hard to value it does not mean that they do not have value. The key is to draw a line between mass-produced luxury goods and genuinely rare items. We would therefore refrain from investing in alternatives assets such as collectibles for pure financial reasons. Collectibles are a long-term investment made first for a return of joy and only second for financial gain.