Luxury Investments: The Real Art of Investing

If predictions are anything to go by, 2021 is likely to be a record year for the whisky secondary market.

What exactly is the whisky secondary market?

It’s basically the retail trading marketplace for buying and selling whisky. Industry experts estimate global whisky trading activity could top US$100 million (A$137 million) this year, fuelled by strong buying from people willing to pay tens of thousands of dollars for bottles of ultra-rare, aged single-malt Scotch.

Some of these bottles will be added to investment collections. Others will most likely be added to personal bars and consumed. In October, a rare collection of six Highland single-malt whiskies from The Dalmore fetched a record US$1.124 million at auction in Hong Kong.

Each year global property group Knight Frank produces The Wealth Report, which analyses the annual performances of what it terms luxury investments. Rare Scotch ranks high on the alternative investment spectrum alongside the likes of handmade designer handbags, fine art, fine wine and classic cars. Others on the alternative investments list include top-end watches, coins, stamps, jewellery, and antique furniture.

How do luxury investment returns stack up?

Just like returns from mainstream asset classes such as shares, property, and bonds, returns from alternative investments can vary significantly for a wide variety of reasons. Most recently, the global spread of COVID-19 has impacted discretionary spending levels in some luxury segments more than others.

In the 12 months to 30 June this year, the average measured price of high-end designer handbags – some of which have sold for between $40,000 and $500,000 each – rose by 17%. The next strongest luxury items performer in 2020-21, measured by the Knight Frank Fine Wine Icons Index, was fine wine. After a year of consolidation, this segment recorded average annual price growth of 13%.
The art market, measured by the AMR All-Art Index, fell 11%. That reflected a sharp decline in art auctions during the year conducted by major auction houses such as Sotheby’s and Christie’s.

By contrast, the last financial year saw global financial markets rebound strongly from the ‘COVID crash’ in early 2020 to record levels. A number of mainstream asset classes delivered their strongest returns in more than 30 years.

The top-performing asset class in the last financial year was international shares (hedged into Australian dollars). It returned 37.1%.
Australian listed property also had a strong year, returning 33.2%. The broad Australian share market, measured by the S&P/ASX All Ordinaries Accumulation Index, returned 30.2%.

What are the risks of investing in luxury items?

The answer to that question lies in understanding the huge differences between investing and trading in a mainstream asset class like listed shares versus speculating on luxury items that range from consumable substances such as wine and whisky through to art, cars, and fashion accessories.

Importantly, be aware that mainstream investment securities like shares are openly traded on government regulated, highly structured financial markets such as the Australian Securities Exchange (ASX). Investors have full transparency at all times, including being able to see real-time pricing, buying and selling demand, can easily execute transaction orders, and can readily track their investment performance.

The various marketplaces for trading luxury items operate very differently. Most trading activity is unregulated and items are either traded privately between collectors or through niche auction houses. Unlike financial markets, real-time accurate pricing doesn’t really exist for most luxury items. Nor is the ability to gauge investor demand, track investment performance, or to seamlessly execute transactions.

Should you invest in luxury items?

On first glance, Knight Frank’s latest analysis shows luxury items (on a broad level) performed relatively well over the last decade.
The Knight Frank Whisky Index had risen by 478% over the 10-year period to 30 June this year, while the Historic Automobile Group International Index of classic cars had recorded growth of 193% over the same period.

The Knight Frank Fine Wine Icons Index had gained 127%, while the median price of luxury handbags had increased by 108%.
But keep in mind, these growth numbers aren’t indicative of the longer-term actual returns achieved by all investors in the luxury brand items contained within each index.

In other words, if you’d bought a particular rare bottle of Scotch 10 years ago, there’s no guarantee that it’s now worth more than five-times what you paid for it in 2011. That’s a big distinction with the real returns delivered to investors from mainstream asset classes over the last decade.

Could investing in a managed fund or ETF be better?

Let’s say you’d invested $10,000 into a managed fund or exchange traded fund (ETF) covering the broad U.S. market 10 years ago. Your investment would have risen almost 470% by 30 June this year. That’s based on the actual rise of the S&P 500 Total Return Index and assumes you reinvested all of your distributions received over time into the U.S. market.

Using the same criteria for international shares, your total return would have been 298% based on the 10-year growth of the MSCI World ex-Australia Net Total Return Index.

Australian listed property had returned 204%, based on the rise of the S&P/ASX 200 AREIT Accumulation Index, and the Australian share market had returned 146%, based on the increase of the S&P/ASX All Ordinaries Accumulation Index.

While buying a high-end handbag as an investment may sound appealing, you’re unlikely to bag the same level of returns over the long term than can be achieved through investing in mainstream assets and using a reinvestment strategy.

Cover image by: Marten_House/ Shutterstock.com


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