It’s a new era for investors! With sticky higher inflation and interest rates, every investor needs a safe haven in their portfolio planning. Knight Frank’s 2023 Wealth Report provides a pointer.
The Silicon Valley Bank failure has demonstrated the vulnerability of even banking institutions to the erosive potential of high inflation and interest rates. Equities suffered shockwaves over the weekend with memories of Lehman's disastrous end a dark shadow over markets. Thankfully, US and UK Government and monetary institutions responded immediately preventing potential seismic damage for the tech sector, however it provided a stark reminder of the risks involved in shares and a lack of diversification in your investment portfolio.
Tangible assets, such as fine wine, offer valuable options for diversifying. We recently reviewed Passion Assets on Valentine’s Day, it seemed appropriate to look at investments you can be emotionally invested in! However, it’s not just about what you can acquire because you love it, but which of these luxury collectables can make your money grow, protect it from inflation and be tax efficient.
Property investment specialist, Knight Frank published the results of its Attitudes Survey providing insight on the investment trends of Ultra High Net Worth Investors (UHNWIs) in its 2023 Wealth Report this month. The survey compiles the data provided by more than 500 wealth managers, private bankers and family offices globally who represent UHNWIs’ combined wealth of US$2.5trillion. The data period reviewed is the 12-month and ten-year periods to 30th September 2022 and their predictions for 2023.
How is wealth currently distributed?
The portfolio structure of ultra-wealthy investors globally is developed to encompass traditional and alternative assets, and the same could be said for many investors, but the scale or extent of diversification will obviously vary significantly.
The Knight Frank Attitudes Survey provides valuable insight as, very often, investors with significantly more capital available may be the first to enter new markets and test the profitability for us as they can afford to take a risk others can’t. This can provide a valuable pointer to opportunities.
The 2023 Attitudes Survey found that the average portfolio composition for UHNWIs in 2022 included property, bonds, equities, gold and passion investments as a norm.
Average UHNWI portfolio structure
Investment Asset | Proportion of investable wealth |
Equities | 26% |
Commercial property | 21% |
Bonds | 17% |
Private equity / Venture capital | 9% |
Commercial property through funds | 8% |
Other | 7% |
Commercial property through REITs | 5% |
Passion investments | 5% |
Gold | 3% |
Cryptocurrency | 2% |
Source: Knight Frank Wealth Report 2023, March 2023
What safe haven assets are attracting investors?
Residential property and gold are still seen to be the safest investments by those surveyed, with cryptocurrencies viewed as the riskiest and then equities. We continually monitor fine wine performance in comparison with these assets and wine has demonstrated its ability to provide a safe haven for capital in outstanding fashion.
In the year to 28th February 2023 the Liv-ex 1000 has grown 5.9%, UK Property measured by Halifax has seen average growth of 2.1% and gold has declined -4.4%.
Passion asset performance in 2022
Knight Frank record the average performance of ten classes of ‘Investments of Passion’ through their Knight Frank Luxury Investment Index (KFLII). In the ten years to 30th September 2022 the KFLII has grown 137% and 16% in twelve months, over-riding inflation at its peak.
Top Passion Investment performance and record sales in 2022:
Asset | 10 years | 1 year | Top passion asset performer in each class in 2022 | Value |
Whisky | 373% | 3% | The Macallan, The Reach - 81 years old single malt | US$300K |
Cars | 185% | 25% | Mercedes Benz 300SLR Uhlenhaut Coupé | US$143M |
Wine | 162% | 10% | Methuselah Domaine de la Romanée Conti 2007 | US$361K |
KFLII | 137% | 16% | Passion asset average 2022 |
|
Watches | 147% | 18% | Gobbi Milano signed Patek-Philippe 2499 | US$7.7M |
Art | 91% | 29% | Warhol Shot Sage Blue Marilyn, 1964 | US$195M |
Handbag | 74% | 15% | Hermes Himalaya Crocodile Kelly | US$353K |
Coins | 59% | 8% | 1821 $5 denomination ‘Half Eagle’ gold piece | US$4.6M |
Jewellery | 44% | 6% | The Williamson Pink Star (11.15 carats) | US$57.7M |
Furniture | 34% | 4% | Ming Dynasty chair | US$15.9M |
Coloured diamonds | 16% | 4% | The Debeers Blue Diamond ( 15.1 carats) | US$57.5M |
Source: Data 12 months to 30.09.2022 sourced from: Rare Whisky 101, Wine Owners, HAGI (cars), Art Market Research (art, coins, furniture, handbags, jewellery and watches), Fancy Color Research Foundation (coloured diamonds). Knight Frank wealth Report 2023, March 2023
Whisky
Whisky has recorded an outstanding ten-year performance largely driven by a small number of very rare sales. Speculation in the market drove values to unsustainable levels and growth dropped away in 2022 with just a 3% uplift - the weakest passion class performance in 2022.
Cars
Cars had a strong 2022 with the return of physical sales driving collectors back into the market. HAGI recorded average price growth of 25% last year with the top sale producing the most expensive car ever sold at auction. The Mercedes Benz Uhlenhaut Coupe roared into pole position with a staggering US$143M price tag.
Wine
Knight Frank’s wine investment data is specific to their data source, Wine Owners’, holdings. We always quote investment wine performance from the secondary market data published by Liv-ex.com. Liv-ex acts as a global stock exchange for fine wine and reports trade price information sourced from more than 650 global merchant members. Liv-ex recorded 12-months growth of 22% on its Liv-ex 1000 index and 16% by the Liv-ex 100 benchmark at 30th September 2022, so trend was above Wine Owners' performance.
The top sale of the year at auction reported by Knight Frank was, unsurprisingly, from Burgundy icon Domaine de la Romanée Conti with a Methuselah of 2007 raising US$361K.
Watches
Rare watches saw values increase by an average 18% at auction sales in 2022. Total watch sales at the top three auction houses rose 33% on 2021, totalling £475million. Focus on the top end is centred on a small number of key brands and models. Forty watches sold for over £1million each, and the three designs most in demand were Patek Philippe Nautilus, Audemars Piguet’s Royal Oak and Rolex Daytona.
Art
Art is up there as the most popular collectable. Individual, outstanding sales of extremely rare, museum quality art pushed total collection sales at major auction houses to over US$2.5billion in 2022. High profile collector sales, such as Microsoft founder Paul Allen, hit media headlines. Allen's Andy Warhol Shot Sage Marilyn Blue, created in 1964, topping the Art sales at US$195 with Christies. Five auctions last year achieved sales of over US$100million.
NFTs and Passion Investments
The digitalisation of art, in particular, has grown, especially during Covid when so much more was done online. Is this likely to keep growing in light of the Crypto crisis in 2022? The survey revealed that 34% of UHNWIs believed that the digital art market with NFTs still has a lot of potential, 32% never had any confidence in this approach. A further 20% have been affected by the Crypto crash and are no longer considering this route and 12% don’t understand the market.
What are the expectations for Passion Investments in 2023?
Wealth managers and advisors to UHNWIs see 2023 as the start of a new era for investors. 2023 will be a ‘period of reset at the end of an era of ultra-loose monetary policy’. After nearly 18 months of rising inflation and interest rates, inflation appears to be coming under control and there are indications that future rate hikes may be paused. But it will take time to see the levels of both reduce to anything like approaching the norms of the last two decades, if they even get that far.
UHNWIs are expected to take defensive investment decisions in 2023 with stickier higher inflation and interest rates prevailing. Safe havens will continue to appeal, and property is seen as key in established global hubs such as London, New York and Singapore. Since publishing the Report we have witnessed the SVB failure and the reality of hedging the risks of the high interest rate / inflation environemnt wew now live in.
Knight Frank’s Attitudes survey finds that art, classic cars and fine wine are the top three most popular passion assets for UHNWIs. In terms of actual intention to invest in collectables in 2023, the findings revealed that 59% of the UHNWIs in question are planning to acquire art, 46% watches, 39% fine wine and 34% classic cars.
Our view on investing in Passion Assets
Fine wine is an important safe haven asset for all investors to protect capital, enjoy growth and diversify a portfolio. It is the most accessible and liquid passion asset, enjoying price transparency, an efficient secondary market not reliant on auctions, and beneficial tax treatment.
Investment wine returns outperform most assets over the longer term, including UK residential property. Capital Gains Tax changes in 2023 means that exempt assets such as fine wine will be even more appealing as the UK tax allowances are reduced significantly in April.
For more information, see our latest Market Report and speak to a member of our expert team on 0203 384 2262.