Collectible investment can work

Investing in Cartier watches or pink diamonds can be lucrative, but there are complications.

A Cartier watch or a pink diamond would be the perfecct investment.

Have you been wasting your time trawling through share tables and auction results? While you were working out share valuations and rental yields it turns out that collectibles have been doing very well indeed — and let’s face it, they are a lot more fun.

According to the well-regarded Knight Frank Luxury Investment Index, the collectibles market has managed a very impressive 41 per cent over the last five years. Even over the last 12 months collectibles managed 3 per cent, which is — at the very least — better than cash.

What’s more, fashions are changing once again as wine outranks classic cars for the first time in many years. It also turns out that antiques are very much on the nose.

Yet most investors are sceptical about collectibles: they know that in reality most ‘‘art’’ is bad, most “rare” stamps are — in fact — all too common and with very good wine ... well, it might be hard to keep it unopened for very long.

But the evidence is mounting that collectibles can indeed be an investment — as opposed to an expensive pastime — for those who put the time and effort into finding out what really offers value.

The Knight Frank report is a global exercise that examines all collectibles and produces a benchmark called the KFLII, which aims to be an overarching guide to price movements over the year.

It is over the long period that the report really presents a case for serious collecting — over the last decade the KFLII is up 157 per cent — almost as good as some Australian real estate, a cynic might suggest.

But you have to look a little more closely to see how all this works. The key word is of course ‘‘luxury’’. The Knight Frank survey examines only the very best assets in each class — the type that will some day end up on the floor at Sotheby’s.

Taking the five-year time frame as the most reliable, it is clear that wine and cars really have shot out the lights in recent times. Collectable cars have done 129 per cent (6 per cent in the last year) while wine has done 55 per cent (24 per cent in the last year).

What these assets also have in common is measurable rarity: there is a clear audit trail of how many items were produced and who produced them.

Fashions change

Even for the amateur, this year’s index lists reveals some highly revealing trends: antiques are down over every time frame, including 4 per cent in the last 12 months. Andrew Shirley, London-based editor of the latest quarterly edition of report says: “The slide has started to slow for antiques but I’m not expecting a sudden bounce back.” Art — a dangerously wide category — is also showing weakness: it went backwards last year by 1 per cent.

A rational investor might easily assume that with China’s once-in-a-generation leap to prosperity, Chinese collectors would be racing to collect Chinese ceramics. Not so. In fact, those Ming vases were the worst-performing asset class last year, down a disappointing 11 per cent over five years (and down a hefty 14 per cent last year). Instead it seems China collectors — who dominate the market for many asset classes — prefer wine, cars, jewellery and watches.

Elsewhere this year, RBC Capital Markets’ survey of Chinese collectors’ intentions (those earning more than 450,000 yuan per annum) finds watches rank very high among the Chinese, with Cartier well ahead of rivals Rolex, Omega and Longines.

Also faring well globally are jewellery and coloured diamonds. The coloured diamond market has a strong Australian dimension, with items such as the Argyle pink diamonds (owned by Rio) a favourite in global markets.

Pink diamonds have done 10 per cent a year for more than a decade. And they may feature higher on the list in the future, as Rio management mentioned this week that the life of the Argyle mine had only four years left and they had yet to replace it. (Argyle’s annual pink diamond sale happens in Hong Kong on October.)

One of the more intriguing elements of collecting anything from art to coins in recent years has been the improving transparency of these markets. Where once collectors had no choice but to trust dealers and informal networks for price information, today much is easily available over the internet.

Another significant trend is the leasing of high-end collectibles. This is at its most advanced in the art market where operators such as rentalart.com.au and Artbank have been operating for years.

Are you convinced collecting can be an investment? The evidence is limited but there for all to see at the top of each market: for people who know what they are doing and are willing to forego any income, it can clearly work.

Of course, for any investment you have to apply the Warren Buffett dictum: the first rule is not to lose money. Collectors can be caught in the most unlikely and unfortunate situations.

On top of the many hurdles facing the investor who wants to make money, the tax office has introduced a very severe and restrictive regime for the holding of collectibles in DIY funds.

Suffice to say with the ever present risk of fraud, a draconian tax framework, the lack of regular income and the ‘‘rarity of rarity’’, the risk in collectibles is considerable — unless you love them more than you want to make money from them.