Wine, Art and Property: The Rise of Alternative Investments

When David Swensen’s Yale Model—a model that invests heavily in alternative or non-liquid investments—was first revealed in 2000[1], it caused quite a stir in institutional investment. In the first 20 years of his tenure (1985-2005) as Yale’s endowment manager, Swensen managed to top the S&P 500’s 12.3 percent annualised return by a further 3.8 percent, breezing through stock market downturns that decimated other institutions.

Mainstreaming Alternative Investment Instruments

Many of Swensen’s contemporaries, and more than a few institutional funds, jettisoned traditional investment strategies in favour of the Yale Model. Most failed to match the performance of even a simple index fund portfolio, not even coming close to Yale’s oversized returns. Granted, the 2008 crash didn’t help—even Swensen made losses of 25 percent—but the long-term reality of the Yale Model was that it failed to work as well (or even well enough) for institutions besides Yale[2].

Investors were missing one key component of Swensen’s model: Swensen. His strategy requires diligence, extreme capability, constant reassessment and analysis, and a long-term commitment. Something most institutional investors simply can’t match—but individuals and family offices can.

The Yale Model has long been a favourite of high net worth and endowment investors, who are no strangers to combining listed instruments with alternatives[3]. Managed well, this combination can deliver stable long-term returns that, ideally, should have a low correlation with mainstream assets. The trade-off with alternatives is that investors generally swap liquidity for yield.

Wine, Art and Property Investments

Collectibles, which includes wine and art, is an alternative asset class that has garnered a lot of interest in recent years. Uncorrelated to the stock market, these investments are attractive to those looking to hedge against crashes and volatility. They’re also more personal than stocks and easier to get passionate about—especially when they’re posting record-breaking returns. Take wine for example. Between 2012-2017, the 10 best performing wines on the Liv-Ex index increased by an average of 150 percent. The biggest mover, Petite Mouton 2011, posted a 165 percent gain in five years[4].

Art by comparison has had a bumpier road of late. Following the 2008 banking crisis, it took a hit and suffered depressed prices again in 2016. While art indices aren’t the best measure of the market’s health—they exclude private sales and are bias by a few pivotal auctions—most indicators suggest that the collectible has recovered from the global recession and rebounded from its 2016 slump. The Knight Frank Luxury Investment Index (KFLII) showed art returns topping wine in 2017[5], a trend that continued into last year with annual growth of 25% in the first half of 2018. It is worth noting that this data was heavily skewed by a few record-breaking sales in 2017. The 2018 figure was bouyed by the rising average prices of Old Masters, while contemporary art charted a slight drop[6].

This is the main caveat of collectibles. Their value at any given moment is entirely dependent on the whim of the seller—one of the reasons why these assets typically don’t form the bulk of a portfolio. By contrast, property remains a relatively stable investment. Even in London, where uncertainty around Brexit and taxation changes have taken a toll on the property market, cash in-flows speak to ongoing investor confidence. International realty law expert and CEO of Cogress, Tal Orly, hit the nail on the head at a 2018 panel event when he stated that, ‘property doesn’t lose value, it’s more a case that we can’t always realise that value. As long as you invest in the right locations and you have the patience to hold, you will eventually achieve the historic price. The property market is governed by supply and demand.’

The Future of Alternatives

The quest for increased returns and reduced volatility has pushed alternative investment instruments into the mainstream. Indeed, a report by HSBC this year[7] stated that alternatives were ‘overall better behaved than traditional markets in 2018.’ I believe that, as investors place more emphasis on diversification, alternative investments will grow in importance. This will encourage growth and support innovation in the alternatives market worldwide.

While the collectible market holds little interest to institutional investors, it is likely to remain the domain of high net worth individuals and family offices. By contrast, property presents opportunities for a wide range of investors, and we’re already seeing the line between different classes blur in the property market as investors diversify into a greater range of instruments. Some institutional investors, historically limited to senior debt, are already dabbling in mezzanine funding or preference shares, for instance. While in the UK, the growth of build-to-rent schemes speaks to an increased appetite for long-term, illiquid investments.

This feature is brought to you by Zac Gazit, Business Development Director, Cogress.

Zac Gazit is the Business Development Director at disruptive property investment company, Cogress. He is an expert in cybersecurity, Fintech, AltFi and property investments. He has previously held strategic roles in global organisations and innovative start-ups, and ran a global consultancy that advised international financial, telecom, healthcare and industry clients on Fintech and cybersecurity implementation as well as global strategy and sales.

Cogress is an award-winning, exit-orientated property investment company. They provide mezzanine and private equity to SME developers, and make off-market property development investment opportunities accessible exclusively for High Net Worth and Self-Certified Sophisticated Investors. To date, Cogress has committed £174m to 53 UK projects, with a combined GDV in excess of £1bn. Capital at risk.

Sources

[1] Justin Fox, 2010. Harvard Business Review.

[2] Rick Ferri, 2012. Forbes.

[3] HSBC, 2017. The Rise of Alternatives

[4] James Connington, 2017. The Telegraph.

[5] Andrew Shirley, 2018. Art tops Knight Frank’s 2017 Luxury Investment Index. Knight Frank.

[6] Andrew Shirley, 2018. Art and wine head 2018’s updated Knight Frank Luxury Investment Index. Knight Frank.

[7] HSBC, 2018. Year-end review and 2019 outlook: Back to reality. HSBC.

See also:

The Logistics of Moving Valuable Art, Explained by Convelio

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