Investing in Collectables: The Passion Index
Handsome rewards await those who can afford the finest luxuries.
DIAMONDS, they say, are for ever. They can be pricey, too. On December 5th 173 lots of jewels auctioned by Sotheby’s raised $54m. They included several pieces belonging to Sean Connery, known for playing James Bond. The following day a car favoured by Bond, the Aston Martin DB5, was auctioned for $2.7m. It was among 24 classic vehicles that together fetched $45m. The sales in New York early last month by the world’s two biggest auction houses, Sotheby’s and Christie’s, also involved fine wines, watches and other luxuries. Between them they sold $200m-worth.
The Economist has compiled price indices for many of these items—diamonds, classic cars, fine wine, art, watches and other curios—and grouped them in a “passion” index. The index is weighted according to the holdings of high-net-worth individuals (HNWI)—defined as people with more than $1m of investable assets—as reported by Barclays. Our passion index has dropped by 2% a year, on average, for the past three years. But since the beginning of 2007 it has returned 5.9% on average, outperforming the total return from the MSCI world, a global stockmarket index.
Passion investing may help hedge other bets: art tends to be inversely correlated to stockmarket indices, for example. The supply of many collectables is fixed; demand for them is growing. The number of HNWIs rose from 11m to 16.5m from 2011 to 2016 and their collective wealth grew to $63trn, according to Capgemini, a consultancy. It forecasts that HNWI wealth will surpass $100trn by 2025, with about 10% invested in collectables.
Caution is advised. The returns from collectables may be hard to realise. First, the indices do not reflect the true cost of investing: insurance, storage and upkeep are all costly. Second, unlike shares, items in our index are neither very liquid (except wine) nor fungible (the goods are rarely interchangeable). When a quick sale is sought—often caused by debt, death or divorce—big losses can be incurred. Finally auctions, the basis for many of our indices, may inflate the market thanks to reserve pricing. Unlike last month’s glamorous showing, losses are often booked quietly in private sales. And you cannot settle in bitcoin.