Variously known as "treasure assets," "passion investments" and "emotional assets," high-end collectibles have been gaining in popularity with the global super-rich since the 2008 financial crisis. Recent surveys by Barclays and Capgemini confirm that, while the wealthy primarily buy for the psychological satisfaction of owning iconic pieces, they increasingly view their treasures as a store of value and a source of growth.
According to the 2012 Barclays report, Profit or Pleasure? Exploring the Motivations Behind Treasure Trends, high-net-worth individuals hold an average of 9.6% of their wealth in collectibles-and in some countries the number is as high as 18%. Barclays surveyed over 2,000 individuals worldwide with more than $1.5 million in investable assets to determine their motivations for seeking out and holding 10 different types of collectibles, including precious jewelry, pictures and paintings, sculptures, tapestry and rugs, antique furniture, wine, classic automobiles, stamps, coins and precious metals.
Recent reports of record auction prices have undoubtedly fueled interest in treasure assets, yet just 18% of the rich acquire collectibles solely for financial reasons, according to Barclays. In other words, the majority of wealthy individuals and family offices may be overlooking the investment potential. And a slow economy might just be the right time for advisors to suggest that certain clients enter the market or expand existing collections, since cash-strapped collectors are selling.
But how can advisors help clients distinguish a high-value collectible from a dust-magnet curio?
There really are no strict rules on what is or is not a true collectible. There are, however, some common criteria. An item should gain in value over time if it is desired by others, if it showcases fine craftsmanship and if it is authentic. It also helps if the item is rare or out of production.
"The fine art market is enormous and probably the most highly sought after of all the categories listed in the Barclays report," says Michael Plummer, co-founder of New York-based Artvest Partners, which advises wealthy families and individuals on investing in fine art. "From an investment standpoint, fine art-contemporary, impressionist and modern art-is a deep market. It's globally traded and liquid."
Plummer, who once developed an art fund as the chief operating officer of Christie's Financial Services, says the 2008 financial crisis was a wakeup call that drove investors into tangible goods. "Wealthy collectors are not just looking for returns; they want to preserve wealth. For many of them, fine art is a good hedge and a store of value in uncertain economic times when confidence is diminishing in the financial markets."
He also says art investors appreciate the fact that their returns are generally not correlated to the stock and bond markets-a disconnect that was confirmed in the World Wealth Report 2012 by Capgemini. And while high-quality collectibles may fluctuate in value, they appear to be profitable investments over the long run. In a 2009 research paper, entitled Emotional Assets and Investment Behavior, three finance professors at Tilburg University in The Netherlands examined the investment performance of a number of collectibles-including art, wine, clocks and watches, stamps, atlases and books-that accounted for more than half of wealthy individuals' spending in the luxury collectibles sector.
Using a broad range of indices, they showed that from 1986 to 2006, all assets in the study provided positive annual returns. Art, wine and books were the best performers, returning 7.6%, 6.1% and 2.8%, respectively, compared with 5.9% for stocks and 2.7% for bonds.
When the stock market plummeted in 2008, prices dropped as much as 30% for some collectibles, as the market was flooded with sellers who were forced to part with their treasures to raise cash. Now prices have not only recovered, they're up considerably for many collectibles.
Capgemini reports that pricey collectibles, including diamonds, gemstones, jewelry, stamps, watches, boats, jets and some luxury cars, appreciated significantly in 2011. But fine wine and sports memorabilia generally underperformed. Capgemini expects art and diamonds to be top performers in 2012.