The Snakes and Ladders of Alternative Assets

It is clear that we are in very uncertain times. The financial markets all around the world are showing underlying weaknesses and are easily buffeted by global events. What is the next source of crisis? The Euro / European banking system collapsing? A war featuring one of the major global powers? Or, just something as simple as a global recession allied with runaway inflation?  This has led many investors to pay a lot more attention to alternative assets. Many believe they are a safer more profitable place to park your money. In this article, we’re going to explore four of these alternative investments (gold, classic cars, art, and whisky), look at the advantages and potential pitfalls, and discuss the exit strategy for each one.

GOLD

Let’s start with gold, which has been seen as a safe haven for thousands of years. Gold has certainly held its value throughout the centuries and for many investors, it is seen as a very important part of any portfolio. One reason for this is that in times of stock market uncertainty it tends to go the opposite way to your stocks and shares. This was no more apparent than in the banking crisis of 2008 when the price rose from $872 to $1573 - an 80% rise in three years! Gold can of course be bought physically in either coins, ingots, or bars. Alternatively, there is a whole range of gold investment funds, or you can actually invest in the mining companies themselves. All these will rise and fall on the price of gold.  

Ladders - Gold is a great hedge, and having intrinsic value it will historically retain a large part of its value. As stated previously it is seen as the ultimate safe haven for when everything else is going south. As an example, the price from 1980 to 2005 rarely rose above $250 per ounce. Since the banking crisis of 2008 to the present day, the price has risen from $500 to $1330 but with huge volatile swings in between that time. 

Snakes - With physical gold, there may well be storage and insurance costs. There isn’t really any way to diversify your holdings, gold is gold, and the price is determined by the market. Unlike bonds and gilts, it doesn’t pay any type of yield. Finally, gold is seen as a very long-term investment as the market is very unpredictable.  

The Exit - Gold has a very easy exit as there will always be willing buyers. However, being a volatile long-term commodity, it isn’t something you can plan for (like retirement), with even a short, medium, or long-term strategy. Gold is really there as a hedge against stormy waters, but to reiterate, it is the most tradable of commodities - you will always get your money!

CLASSIC CARS

Most people who buy classic cars are not 100% in it for investment purposes. In fact, most are enthusiasts who have a real passion and love for these cars. Currently, classic cars as an alternative asset are in steady decline. In terms of purchasing a classic car, there are clearly thousands of different types of models in different states of repair. Most owners don’t just park their cars in the garage and forget about them, they actually drive them which all adds to costs, risk, and potential depreciation of the asset. 

Ladders - If you know what you’re buying and what is a fair price, then this can be an asset that can not only increase in value but give the investor immense pleasure along the way. There are a finite amount of these classic cars (like the famous Aston Martin DB5) and in some cases, the supply and demand metrics mean that the price can only go in one direction. Other options are restoration projects, where the aim is to buy a car in a poor state of repair and restore it to its former glory fairly cheaply. The same principle here applies to restoring property with potentially the same risk/rewards. Currently, the cars appreciating the fastest are the classic cars which fall into the affordable category. Last year a Jaguar Mark II (built 1959-67) gained in value from £21k to £27k for a 27% profit. 

Snakes - Costs, costs, and more costs. Unless you’re prepared to park it in your garage and wait for the market it could be an ‘investment’ that just hemorrhages money. Insurance will almost certainly be eye-wateringly high and that’s before you get to the low miles per gallon and the inevitable repairs, plus all the other costs that our dear civic leaders like to pile on motorists. Add to that the wear and tear on the roads and the mileometer ticking over all the time, it all adds up to the ultimate depreciating asset. Finally, it really helps to be an expert in this field when it comes to the buying and selling of this asset. For example, last year the Aston Martin DB7 (2002) depreciated in value from £38k to £31k for a loss of £16%. It is a hard market to predict. 

The Exit - This may not be that easy depending on the type of car you own. If it is quite an obscure make you’ll find that the market is quite small, and it could take a considerable time to find a buyer willing to pay the price you want. The general advice with classic cars is to buy one for the love and passion of owning it, and if you do manage to make a profit out of the exercise then consider yourself lucky. That being said, it is still a tangible asset that can be another hedge against the volatility and ill winds of the financial markets.

ART

The global art market according to Statista shrank from $64 billion to $50 billion last year, but this was mainly due to the pandemic. The art market is certainly incredibly volatile but there are huge sums of money being spent on it, and certain sectors within it are growing – for example NFT crypto digital art. In 2021 Christies shocked many in the art world when they sold a piece of digital art for $69.3 million. Online art sales have also doubled from $6 billion to $12.4 billion in the last year, again according to Statista. There are certainly some very savvy investments to be made in art, but it is very complex and certainly a bit of a minefield. Other factors to consider are the supply and demand of various artists and whether they are living or not.  

Ladders - Art, in general, is seen as a long-term investment and the market doesn’t tend to follow the same patterns as the stock market. This is why some investors like to include it in their portfolios as a hedge against another global stock market downturn. Like Classic Cars, some investors see it more as a passion project and want a particular piece of art in their home to appreciate and admire. They know it has worth, and that over time it will probably increase in value and become a valuable asset, but it isn’t the main objective. 

Snakes - Many! Firstly, unless you’re an expert you’ll need to do your research and increase your knowledge. Then you’ll have to formulate an investment strategy and find the type of artwork that fits your budget, and which you think has an investment opportunity. The Art World is of course very diverse, very subjective, and very susceptible to unscrupulous practices with fakes, copies, and inflated pricing. Another aspect to consider is that with the more established, famous artists you’ll need incredibly deep pockets to get involved in this market. With newer artists whose work is clearly much more affordable, you then have the problem of how subjective this is and it is very risky. If the artist in question never establishes themselves then your investment will be virtually worthless. 

The Exit - The obvious route here for many investors is an auction house or gallery. Depending on the piece of art you are selling will determine the demand. However, it still isn’t guaranteed that you’ll make a profit and even at the top of the market, there are wild swings in the auction price. To conclude, art does have intrinsic value and if you are well researched and dealing with trustworthy people, then it can be a very profitable long-term investment and hedge against the market. Beware though, as the risks are very high.

WHISKY BOTTLES

With the growing global demand and interest in Scotch whisky, the number of collectors and investors in whisky bottles has increased exponentially in the last few years. Currently on average, 60,000 bottles are auctioned worldwide, most of them through Scottish online auction companies. The market is only going in one direction at present, and the growth is set to continue, as these rare bottles are finite in their supply.  

Ladders - With this market, you don’t need to be wealthy to get involved and it can be an excellent short, medium, or long-term hold. Internet research is now very easy, and many of the best online auction sites have a plethora of historical information about each expression of whisky, and its historical pattern of growth. This makes it easy to bid on a number of bottles at each auction and build up your portfolio. The larger, individual online auctions can be around 10,000 bottles to bid on - the choice is very wide, and will vary in price from £20 to £100,000+ on average, so the involvement is easy. Whisky sealed in a bottle also doesn’t have a shelf life (unlike wine), therefore as long as it is stored properly it can be held for as long as the investor wants.  

Snakes - Buying a large number of bottles has some challenges. There will be significant transportation costs involved in the buying and selling process, plus all the auction fees themselves. Also, since 2020 any transactions occurring with EU countries now incur extra import duties and VAT. As your collection increases, this may take over a whole room in your house. There may also be extra insurance costs to factor in. For some investors, they have had to rent storage units to hold their bottles, which is another associated expense. Finally, all of the above is very time-consuming.  

The Exit - As long as the market continues to grow and prices increase, then the exit is relatively simple. Most investors send their bottles to the online auction house of their choice, and they will usually sell. Like any auction there are risks and it is advisable to set a reserve (at extra cost) for anything you deem to be valuable. The auction house will then credit your bank account within the month, minus their costs.  Whisky bottles are a less risky option than some of the other alternative investments. It is easy to test the waters with lower sums of money, and there is more versatility in the length of time you need to hold. Like other alternative investments, this can be seen as an excellent hedge against the market and these whiskies do have real intrinsic value. One last option is that you don’t have to cash in your investment - you can just enjoy the pleasure of consuming it! 

WHISKY CASKS

This type of investment is even more versatile than bottles, with many more advantages if done right. The popularity in the trading of whisky casks has increased rapidly in the last few years, with a mix of savvy investors and whisky enthusiasts dominating the market. However, with a lot of uncertainty in the traditional global financial markets, gravitation towards alternative investments was almost inevitable. 

Ladders - As with a piece of art, classic car, or a rare bottle of Scotch, if you purchase one of these items today and sell it in 10 years’ time, you are hoping that with supply and demand and price inflation, it will increase in value. With the other alternative assets, be it a physical car, piece of artwork or a bottle of whisky, the product remains unchanged throughout your hold time. However, when you purchase, for example, a five-year-old cask of whisky and come to sell it in 10 years’ time, you are not selling the same product.

You now have in your possession a 15-year-old cask of whisky, which is an entirely different proposition. Your aged whisky has completely transformed in the cask - we are not aware of the same younger whisky selling for a higher price than the same older whisky...! Another advantage is that the whisky only gets taxed when it is bottled. As an investor, you act as the caretaker of the cask, watching as it matures from, for example, three years of age until it is bottled, usually at one of the milestone ages of 10/12/15/18/21/25 years.

The value of the cask can range from about £1500 for new-make spirit, right up to over £100,000 and beyond for older, rarer casks. Logistically it is very easy for the investor, as the cask generally stays in its warehouse until it is bottled. The only thing that might change is the certification of ownership, with storage and insurance costs minimal. 

Snakes - There are a large number of unlicensed, offshore broking companies which have entered this market, who have questionable operating practices at best – some of these companies certainly are snakes! It is important for any investor to do their due diligence, and make sure the company they are dealing with is selling them the right cask at the right price. Investors should be aware that if they are initially overcharged for their casks, it could take many more years to get out, as your profit has already been taken! 

The Exit - Assuming you have bought your cask from a reputable company, exiting your investment is key. At Cask Trade the majority of our customers are trade/independent bottlers to whom we can offer the cask. We have five in-house exit strategies; we can make you an offer to buy-back the cask ourselves, advertise it on our stock list, or we can offer to sell it privatley through our sales team. Another option is our online, first, cask-dedicated Auction Your Cask platform. Finally, there is the option, of course, to bottle your own cask, which we can also facilitate. 

Conclusion – We see the graduation to alternative assets continuing at a pace, taking a higher percentage of any investment portfolio. It is clear that the number of options available today has never been greater. Our advice is to research, research, research and make sure you always deal with a reputable company.

To find out more about whisky investment and purchasing Scotch Whisky casks, contact the Masters today.

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