In recent years, there has been a notable increase in investments of passion assets including wine, whisky, classic cars, luxury handbags and stamps.
There has even been growing interest in comic books and collectible cards with world renowned US rapper Post Malone paying $2m (£1.6m, €1.9m) for a rare one-of-a-kind card for the fantasy game ‘Magic: The Gathering’.
More notably in the UK, rising interest rates and market fluctuations are affecting many traditional asset classes which is paving the way for more people to seek out alternative assets to reach their investment goals.
Alternative assets can provide many positives to the investor such as advantageous tax positions and portfolio diversification but they also provides investors with something that traditional assets don’t – fun!
They can provide excitement and enjoyment to investors that comes with owning a tangible asset they can see and use.
However, these types of assets, as like any others, comes with its own risks which must be assessed before investors incorporate them into their financial plans.
Hedging against market volatility
Richard Bacon, head of business development at Shard Capital, said that passion assets are undergoing a transformation.
He said: “In the last two years there has been a tangible increase in how accessible and democratized these assets have become. They are becoming mainstream we haven’t seen before. The more we understand the headwinds we are facing in traditional asset classes given the current economic backdrop, the more important it is that we broaden our investment universe and look for alternative assets.”
As markets become more volatile, clients are turning to passion assets to safeguard their wealth.
Naomi Wharam-Adatia, private client director at GSB Private, commented: “These unconventional holdings provide a hedge against market volatility and inflation; typically maintaining value during economic downturns unlike traditional assets such as stocks and bonds.”
They can also provide investors with much higher returns outside of their traditional portfolios.
Wharam-Adatia provides the example of the price increase for Hermes bags which can fetch investors returns of up to 30% or more.
Rob Harrison, head of research at Progeny Asset Management, added: “These assets can deliver strong returns for the less risk averse investor and can be uncorrelated to what is gong on in stock markets and the wider economy so can be useful diversifiers for this reason.”
Advantageous tax position
Passion assets also have the added attraction of having an advantageous tax position.
HM Revenue & Customs (HMRC) views many of these assets as ‘chattels’ which is property that is tangible and moveable and gives investors a £6,000 ($7,500, €7,000) tax free exemption.
Henry Lowe, partner in the private client team at Mercer & Hole, said: “HMRC is alive to the fact that the value of some collections is in their entirety rather than individual elements. If being sold from one person to another, HMRC may consider them a set and value them as one asset accordingly.
“For example, a case of wine, of the same vintage or from the same producer, would be considered a set and valued as a case rather than by the bottle.”
Some passion assets are also viewed by HMRC as ‘wasting assets’ which have a life of less than 50 years.
“Wasting assets, irrespective of their value when sold, are free from capital gains tax, except where the asset has been used in your business,” added Lowe.
Risk
Scott Atkinson, managing director at PFM Financial Planners, part of the Loyal North Group, highlighted that while there is nothing wrong with an investor indulging in their passions, these assets still carry a risk.
He said: “Using these types of assets as a basis of investment and financial planning is highly risky and completely unpredictable.”
There are certain obstacles that come with investing in alternative assets such as issues of liquidity and a lack of a centralised market.
Ed Read-Cutting, director at The Fry Group Belgium, said: “A significant challenge with passion assets lies in a potentially illiquid secondary market. Unlike more conventional investments, selling passion assets can be intricate and uncertain.
“Their value is often influenced by sentiment and demand, leading to potential price volatility and unpredictability when the time comes to sell.”
Lee Anderson, wealth planning director at the Atomos Preston office, also pointed out that the cons of passion asset investment can also include “high transaction costs, storage and maintenance expenses and the need for expertise to navigate the market effectively”.
Therefore, while investing in alternative assets can have many pros, it is important that investors are aware of the cons before investing.
This comes down to advisers and wealth managers to present the full picture to their clients and provide their professional opinion to help investors get the most out of their money as well as enjoying the process of investing in something they have a passion for.
GSB’s Wharam-Adatia added: “The intricacies of valuing, acquiring and maintaining such assets requires specialist knowledge and investors would be prudent to collaborate with trusted advisors who understand the market and can perform strict due diligence on their behalf, helping them to make informed decisions.”
Emotive experience
While there are valid arguments that passion asset investments should not be the foundation of an investors portfolio sitting alongside conventional investments, it can allow investors to have an emotive experience.
Jennifer Toon-Davenport, membership and acquisition director of Lawsons Networks, said: “If someone really is interested in something, be it wine or watches or luxury fashion, then that surely is the best way to become an expert investor in whatever it is. And the more expert they are, the more money they are likely to make.”
Passion assets don’t only produce a financial return but also an emotional return that investors may not be able to get from traditional assets such as stocks and bonds.
They allow investors to put a personal touch on their investment portfolios and diversify it with things they have an interest in and value.
Charles Gillespie, wealth planner at Kingswood Group, uses himself as a case in point.
He said: “Personally, along with a small collection of art in recent years, I have invested in a portfolio of high grade first edition vintage comics as not only are they lovely to own and something of interest to me but also I believe that the long-term growth potential is excellent.”
Time will tell how popular investing in passion invests will become as markets continue to react to rising interest rates, and how that will impact various markets, but Gillespie points out that assets which are scarce will always be in demand.
Passion assets are gaining traction in the investment landscape and are a point of debate within the industry.
However, what is important is for those working in the industry to do their due diligence and help clients to not only receive financial gain from investments but also to gain emotional fulfilment which can be achieved by investing in passion assets, making sure they slot into a traditional portfolio while also safeguarding their clients financial future.
