Buyer beware the lure of alternative assets

Wine and whisky can deliver mouth-watering returns on investments

Mention the words “alternative assets” to a financial adviser and a curl of disdain may quickly play across the lips. “Very brave, but not really for you,” is often the advice.

But, more often than not, the same adviser is an avid viewer of Antiques Roadshow – thrilled and appalled by turns as some dusty family heirloom similar to one he hurled on the skip last year in a burst of decluttering – turns out to be worth thousands of pounds.

Alternative assets can range across works of art, precious metals, wine, classic cars, farmland and stamps and antiquarian books. In the investment sphere alternative investments can range across commodities, venture capital and private equity. These, as Falkirk-based investment adviser Tom Munro points out, can offer diversification and greater stability than an orthodox gilt/equity portfolio.

Today a combination of stock markets vulnerable to global slowdown and rock bottom interest rates have brought alternative assets under the spotlight – and with incidents of headline-grabbing explosions of value. A David Hockney Portrait of an Artist was sold by Christie’s last year for US$90 million, the most expensive work by a living artist.

A bottle of The Macallan 1926, hand-painted by Michael Dillon, was sold by the same auction house for US$1.5 million – the most expensive bottle of whisky. And if your head is turned by classic cars, it will positively spin at some of the prices being achieved. A 1962 Ferrari 250 GTO was sold by Sotheby’s for US$48.4 million – the most expensive car sold at auction.

Here in Scotland – let’s set aside the Perthshire baronial piles conjured up through the autumnal rain and mists by the perennially sunny Savills – auctioneer Bonhams is as busy as ever in Edinburgh. A painting by colourist Francis Cadell of Spring in Iona recently sold for £35,000. And a grim study of the Old Tolbooth, Edinburgh, by Alexander Nasmyth – a must for manic depressives – fetched £31,312.

Volatility and capricious changes in fashion can render alternatives a minefield for private investors. But the passage of time can also yield compelling rewards.

Recent returns have been impressive. A recent paper found that, between 1998 and 2016, post-war European cars and cases of Bordeaux outperformed equities, fixed income, property and gold. According to Knight Frank’s Luxury Investment Index quoted in the current Investors Chronicle, the value of art as an asset class last year increased by 9 per cent and over a decade by 158 per cent.

If your preference is for more liquid assets, wine and whisky can deliver mouth-watering returns. Over the five years to August this year, the Liv-ex Fine Wine index, which tracks 100 wines from around the world, rose by 32 per cent.

As for Scotch, the Knight Frank Rare Whisky 100 Index, which tracks actual UK auction hammer prices, rose by almost 40 per cent last year.

The group predicted that prices in 2019 “would continue to harden for the right bottles from the right distilleries, as well as increased interest in more affordable bottles from those in the second tier”. The two record-breaking sales last year were bottles of The Macallan distilled in 1926.

It might seem that, after a decade of resounding rises in asset prices, the quest for alternatives has run its course. But there seems no shortage of wealthy players. The global population of Ultra-high Net-worth Individuals – those with investable assets of $30 million-plus (£24.4 million) – might constitute a fractional percentage of the world’s total population, but they hold approximately 13 per cent of the world’s total wealth. And according to wealth tracking concern Global Data Wealth Insight, their numbers are forecast to rise by 22 per cent over the next five years, meaning an extra 43,000 people will be in this top bracket by 2023.

Already there are almost one million people with wealth of more than $10 million. And the further the pound falls, the more enticingly priced that UK alternative assets – from Highland baronial mansions to cases of aged whisky – become.

Effortless though it may seem to have your pension pot hanging on the wall or, if a classic car, kept snug in the garage, there can be formidable challenges – changes in art fashion, market liquidity, fakes and frauds – and, of course, costs: insurance, upkeep and maintenance, commission fees and charges. Specialist knowledge can prevent the unwary from falling into a value trap.

And not everything brings down the auctioneer’s hammer as readily as ripe old age and provenance might suggest. A 1766 Chippendale commode with ivory inlays which sold previously in 1991 for £935,000– a record price for a piece of English furniture – was offered for auction by Christie’s with the inlays removed and an upper estimate of £5 million but failed to sell.

If that was the alternative asset you were counting on for a luxury lifestyle pension, being “stuck on the loo” would truly be no joke.