Wealth and Wellbeing
Wealthy investors are looking for assets that satisfy both their head and heart. Knight Frank’s latest index maps the spot.
Last year was a combination of relative moderation and charitable deeds for the global rich, according to the results of Knight Frank’s The Wealth Report 2013’s annual Attitudes Survey of private bankers and wealth advisors. A net balance of almost 10% of respondents said their clients had increased their spending on philanthropic activities in 2012, while globally just 1% increased their spending on luxury goods. The slowdown in overall spending levels is hardly surprising, given the economic uncertainty gripping large parts of the world. Russia, North America and Europe all saw a drop in luxury retail therapy.
More unexpected, perhaps, was that philanthropy did not follow suit. However, Maya Prabhu, who heads up Philanthropy Advisory Services at Coutts, does not see a discrepancy. ‘The wealthy don’t live in a vacuum; having a healthy society around them is good for their wellbeing as well as their wealth. You could call it a mixture of enlightened self-interest and compassion.’
Increasingly, philanthropy is also being used as an important tool to help the children of wealthy individuals develop their financial skills in readiness for taking over the family fortune or business, says Prabhu. ‘This approach can be very beneficial for families as it helps them to work out what they really care about.’ Newer forms of hands-on philanthropy, such as impact investing and venture philanthropy, are attracting younger entrepreneurial high-net-worth individuals (HNWIs), who relish combining their charitable activities with their business skills, she adds.
Of course, the whole world hasn’t stopped spending. Across Asia, a net balance of 19% of HNWIs spent more last year on luxury goods than in 2011, helping to make Chinese liquor brand Moutai the world’s fourth most valuable luxury brand, with a value of $12 billion, according to China’s Hurun Report. James Lawson, head of industry analyst Ledbury Research, says this is also reflected in the number of new luxury store openings around the world. The firm’s research shows that Asia-Pacific’s share of the world’s leading luxury brand outlets increased from 39% in 2009 to 44% in 2012, while North America’s fell from 30% to 24%.
Although Europe’s quota remained relatively stable, this was ‘not due to European consumers, but to tourists and their passion for shopping in the luxury capitals of Milan, Paris, and London,’ says Lawson. Australia’s luxury market also benefits from this trend, with an increase in spending by tourists from China and other regional hot spots like Indonesia and Malaysia, according to Melinda O’Rourke, managing director of Sydney luxury consultancy MO Luxury. However, O’Rourke says Australians still account for 65% of luxury purchases, and relying too heavily on overseas wallets is a risky strategy. ‘The industry here learned a hard lesson after the Japanese economy stagnated.’
Investments of passion, such as art, wine and classic cars, occupy a unique and fascinating niche that combines aspects of luxury spending with collecting and investing. According to China’s Hurun Report, 64% of the country’s millionaires are currently building collections. A number of super-prime developments targeting the global super-rich, such as Oliver Burns’ Walpole Mayfair near London’s Ritz Hotel, are integrating display cabinets for art and collectables into their designs.
Janine Stone of the eponymous architectural and interior design firm says one of her most interesting briefs was to incorporate a gallery for a Russian client’s modern-art collection into a project. However, as Dr Rachel Pownall, an expert on passion investments, points out, it is their potential as an alternative to traditional investment asset classes that is raising the profile of collectables.
But, despite this flurry of interest, they still account for only about 4% of HNWI investment portfolios, according to The Wealth Report 2013’s Attitudes Survey. This relatively low proportion highlights the grey area occupied by these ‘emotional’ assets. To some HNWIs and their advisors they will be pure investments, to others they will be personal passions, while for many they will be a combination of the two. When asked to select the most collected passion investments, respondents in all regions of the world chose fine art. Art was also the sector where spending activity increased the most last year.
The next most-collected asset overall was watches. The average Chinese super-rich male owns six luxury timepieces, according to Hurun. In November 2012, an Asian collector bought a platinum chronograph Patek Philippe wristwatch owned by British rock guitarist Eric Clapton for the equivalent of US$3,6 million at a Christie’s sale in Geneva. Wine was the third most popular passion investment, scoring highly in all areas bar the Middle East. Jewellery and classic cars complete the global top five.
One of the main trends driving the market for investments of passion is the ever-increasing globalisation of wealth, and no asset sector epitomises this better than the world of fine art, according to data compiled for The Wealth Report 2013 by art advisory firm 1858 Ltd. ‘China is now the world’s largest market for art,’ says Viola Raikhel-Bolot, the firm’s head of international art advisory.
China’s share of the global market in 2011 was 30%, up from 23% in 2010, compared with 29% for the US (down 5%) and 22% for the UK. The huge spending power of HNWIs from China and other growing economies has helped the art market recover rapidly from the credit crunch, says Raikhel-Bolot. ‘Sales in 2011 were already almost back to the 2007 peak of US$66 billion.’ Although the spending power of the Chinese is waning slightly, this has given collectors from other parts of Asia and further afield the opportunity to flex their muscles in the Hong Kong sale rooms, says Raikhel- Bolot. ‘Two of the top lots in Sotheby’s Contemporary Asian sale last autumn went to Westerners. The top lot, Zhang Xiaogang’s ‘Tiananmen No. 1’, sold to a European collector for US$2,7 million.’
Sotheby’s (US$375 million) and Christie’s (US$412 million) set new sale records at their November auctions in New York. Personal bests were also achieved by artists including Jackson Pollock (US$40 million), Franz Kline (US$40 million) and Jeff Koons (US$34 million), while Mark Rothko’s ‘No. 1 (Royal Red and Blue)’ fetched over US$75 million.
The past 12 months have seen a slight shift towards other previously undervalued sectors and genres, like contemporary Indonesian art, says Raikhel-Bolot. ‘Asian buyers are actively collecting older works, not only from their own culture. They are acquiring the f nest examples of Western art, with 17th-century Dutch paintings particularly popular.’ Picasso, though, remains a firm favourite in the region, she notes, with his ‘Femme Lisant (Deux Personnages)’ selling for US$21,3 million to an Asian bidder at Sotheby’s New York in May 2011.
The question remains, though: will investments of passion ever be seen as a mainstream asset class? As the name suggests, investments of passion involve investing in an asset that yields more than just financial returns. That could mean wine, art, stamps, coins or even silver and gold. For some investors there is a fine line between investing for financial return and collecting for passion; for others, the difference is fundamental. We can buy assets to satisfy our desire to express ourselves: to convey, both to ourselves and others, our values and tastes, our position in society and even our status or wealth.
Investments of passion enable us to tick some, or all, of these boxes. Taken to one extreme, some collectors are willing to forgo financial reward for emotional return and love of the asset – wine can be consumed, and art offers an emotional and aesthetic dividend. These positive effects offer benefits that may subsume the desire for financial reward.
At the other end of the spectrum, reasons for investing in passion assets can be purely rational. Their performance tends not to fluctuate with that of stocks and bonds, and they can hold their value during periods of expected inflation. They therefore offer an alternative form of portfolio diversification across assets and economic cycles. As a result, the number of investment and other boutique funds specialising in passion investments, actively investing and trading solely for financial gain, has grown significantly over the last few years. These funds offer a number of advantages, including pooling transaction costs and diversification across genres in a market where knowledge is key.
But there are risks. Liquidity is at times extremely low, particularly at the high end of the market. The market is still in its infancy, so funds and fund managers generally lack track records. Information on how performance is measured is limited, with disclosure often kept to the minimum required. Transaction costs are high, so fees mitigate short-term performance. Fakes and forgeries are rife.
Because of these factors, investments of passion may not become a mainstream asset class for large institutional investors. But they are increasingly becoming available to the general public, and not just to the wealthy few. For private individuals who are in it for the longer haul, and want sustainable, less actively managed funds, they are already considered as an asset class in their own right. Many investors want to invest with their hearts. The financial rewards may not be as high, but investments of passion often yield the most valuable premium of all – a good night’s sleep.
– By Dr Rachel Pownall, associate professor of finance at Tilburg University, and specialist in art finance and alternative investments.
Text: Andrew Shirley, extracted from the Knight Frank Wealth Report 2013