I have read a few articles recently discussing luxury goods as investments for high net worth investors. For example, this article discusses luxury cars returns compared to hedge funds returns. http://thestockmarkettoday.com/classic-cars-get-top-marques-for-returns-2/
Here are a few comments concerning the article and luxury goods as part of asset allocation footprint:
Comparing apple to oranges: Luxury goods are alternative beta products, not an alpha products. If you want to compare them compare them to equity or houses. Alternative investments are pure alpha, they did not make much in the latest bull market run, but they are expected to always have positive returns including when beta retreat.
Asset selection is important and difficult in this asset class: What’s value investing in classic cars? Not all Porches and Ferraris become collectible. How one figures out which one will be collectible is often as difficult as figuring out which stock will generate 500% in 10 years.
Liquidity correlation to beta: Second homes, boats, art, jewellery, wine collection and luxury cars collection all fall under that category. Bain and Company did a great study last year (see Global Luxury). Along with the global equity market recovery, luxury goods market have been booming, in fact when seen with respect to equity markets the correlation is remarkably high (see for example Statista data and compare them to S&P returns).
Often the TER (Total Expense Ratio) is not well calculated: Insurance, storage, maintenance are generally not included in luxury good returns calculation. They look at beginning price subtract ending price divide by original price and there. It’s just not that simple. The more complex the good, often the more negative the carry.
Diversification and sample bias: Few returns consider the whole population, they often use sample. If you decide to have a car collection you need to look at the collection value not at the top performing asset. If you buy one car, it better be a winner. If you buy 10 cars and one is a lemon it could sink your collection.
Intergenerational concerns: I would argue that all assets chosen in an asset allocation program fit within a bigger picture. That picture should consider individual preferences, lifestyle choice, footprint maintenance. The larger the footprint the harder it is to maintain, I think this is uncontroversial. The article above discusses 10 years like its nothing. Taking actuarial table as being accurate, we can estimate that generally we have 8 10 years in our life, if we’re lucky perhaps 10. What happens to the car collection? If your heir is not a car aficionado, because the asset class is less liquid than say equities, he might sell badly and that careful investing can end up in disaster. So in building a collection one should also take care to transfer also the passion for collecting, to protect your investment… and share your passion with your kids.
I think the best asset allocation program takes into consideration likely next generation lifestyle choice and protect the patrimony for generations to come. My thinking is that strong intergenerational asset allocation generally has a smaller asset class footprint. A footprint that is not ostentatious. I would also argue that a successful intergenerational asset allocation program should be one with positive carry and with a transfer of the passion of investing for as many generations ahead as possible. No fortune, however extensive, survive forever. The passion for investing and the passion to be a productive member of society can help extending its lifespan.
Even though this post concerns high net worth, I think many of my conclusions can be generalised to the infrastructure and private equity trend gripping pension plans recently. These are short term trends with long term consequences whose consequences are often poorly understood. Intergenerational concerns can be replaced with organizational continuity concerns. Moving away from liquid markets into illiquid ones. As luxury goods they are specialists markets requiring specialists for each asset class, today and for the time of the investment cycle. Most of the comments I think apply in one way or another to institutional investing. Mind your footprint.