Passion asset investment combines a pastime pursuit with the potential opportunity to generate substantial capital gain, yet they are often overlooked when families review and manage their overall wealth. These assets not only provide enjoyment and fulfilment during ownership but also may aid with diversification and could potentially be an alternative source of returns. Stephen Harris and Emma Chestnutt from our Family Office Services team provide an overview of some of the benefits and points for consideration most associated with passion assets and how the market has been affected by the recent COVID-19 outbreak.
Principally passion assets are acquired, as their name implies, for use and the enjoyment they bring during ownership, rather than monetary gain. Nevertheless, a rise of wealth owners, particularly from emerging markets such as China, has seen their demand and, therefore, value rise over the last decade. The Knight Frank 2020 Wealth Report shows the average gain in the value of 11 passion assets since 2009 has been 142%. In addition to the potential for returns, they are also seen as a tangible store of wealth that can offer protection against inflation. This is due to their value being driven by their scarcity and a low likelihood of short-term price volatility e.g. the price someone is willing to pay for a Rolex Daytona is not likely to collapse overnight.
It is clear to see why they could be considered as another investable asset class to aid in overall diversification of wealth. However, like all other asset classes that offer the potential for returns, passion assets come with their own risks and considerations.
One key consideration is that whilst offering tangibility, they are generally illiquid and so may not provide means to an immediate source of income. Whilst a call to your investment manager can typically see your publicly traded investments sold, and cash paid to you within a matter of days, disposing of a fine wine collection, classic car, or luxury Swiss timepiece is not so simple. The cost of sale, such as auctioneer’s commission that can be as much as 25% of the realised value, also needs to be considered.
Passion assets can be high-maintenance with considerable costs of ownership. For example, storing smaller items such as handbags and coins is easier than the storage of fine wine, which requires controlled temperature and humidity. The cost of storing, maintaining and insuring classic cars can also be very high. In addition, the rarity of some of these assets makes them susceptible to forgery with items needing to be appraised, often by a third party, to determine authenticity, provenance and legal ownership.
Are passion assets a potential safe haven during turbulent times such as those seen in recent months?
Government ‘lock-down’ restrictions, bans on international travel and social distancing rules have made it practically impossible for sellers to manufacture and transport their items and for buyers to inspect their potential new purchases. This is a particular problem for industries that are reliant on a boutique shopping experience to generate sales, like the Swiss Watch Industry, where historically only 5% of global sales take place online. Statistics from the Federation of the Swiss Watch Industry (FHS) showed a 43.1% drop in export volumes in March, resulting in brands spending most of April expanding their digital platforms in an attempt to display and sell their latest products to prospective buyers.
However, whilst delays to global supply chains are proving a hindrance to those seeking to acquire newly produced assets, they may prove to be beneficial for existing owners. As mentioned earlier, scarcity plays a role in the price of passion assets, and the lack of certainty as to when products will be readily available again, could result in higher values being achieved. Auction houses, the main market place where prospective buyers and sellers of passion assets meet, are moving their businesses online to ensure that the resale market remains open. Initial reports are indicating that consumers are reacting positively to this change with Christie’s recently completing an online-only jewellery auction where the number of unique visitors was nearly double that of a year ago, almost 40% of sales were to new customers, and 80% of lots sold above their high estimates.
Whilst the full impact of COVID-19 will not be known until much later in the year, there are signs that some markets appear to be holding up or recovering. One such example is the classic car market, where according to the HAGI Top index which measures the performance of the best investment-grade classic cars, prices rose by 0.55% in January and February, with no dip forecasted to have taken place in March. Another appears to be the fine wine market, which recently reported an upturn in activity from buyers in Hong Kong and China after they retracted, for obvious reasons, from the market during Q1. A recent article in the Knight Frank 2020 Wealth Report highlighted how the value of fine wine purchased in Hong-Kong via the Wine Owners platform had risen by over 200% during February and March 2020, thereby supporting prices, due to the foreign exchange effects of sterling depreciation.
We find that a family’s wealth usually covers assets beyond those invested in traditional financial markets. We also understand that passion assets will often have a sentimental value that goes far beyond their intrinsic value. If we can support you in your chosen pursuit or if like many of us you have discovered a new pastime during recent weeks spent at home and would like introductions or help to get started please email the Family Office Services team at FOSTeam@Sandaire.com.