The wealthy are increasingly looking to combine their investments with something they can also enjoy. Andrew Shirley delves into the world's art, wine and sport to investigate.
A growing number of investors are discovering that life’s luxuries and pleasures can also make profitable investments. Art, wine and sport, so-called “investments of passion”, are enjoying a growing popularity among investors and, according to the results of The Wealth Report Attitudes Survey, saw a sharp rise in demand in 2011.
The proportion of HNWIs expressing a greater interest in fine art investments rose by 25% compared with 2010. Wine was up by 11%, and even the expensive business of investing in sports teams showed no real overall decline in popularity. North American HNWIs appear particularly sports mad with 24% more interested in investing in a sports team.
While an equity portfolio can lose most of its value overnight, investments of passion, in common with prime property, are more tangible – even if their value does fall, they can still be enjoyed. It’s a sentiment that New York-based Citi Private Bank art advisor Jonathan Binstock is hearing more and more often from his clients: “They accept that if they spend $5m on a Picasso it may go down in value, but even if it does fall by 20%, at least they know they will still have a masterpiece hanging on their walls.”
Although the overall value of art sold in 2011 was still some way below the frenzied peaks hit before the credit crunch, sales were up on 2010, with demand continuing to grow strongly in Asia. A number of works, including “I can see the whole room and there’s nobody in it!” by pop artist Roy Lichtenstein, which sold for US$43m, set new records for their artists.
While collectors are still prepared to spend, the focus is now on “blue-chip” art, says Mr Binstock: “Quality artists with a long-established track record are particularly appealing to investment-minded collectors.”
The credentials of art as an asset class are also growing. Last year the influential Mei Moses World All Art index grew in value by over 10% and has consistently outperformed equities since 2000.
Fine wine, too, has been performing strongly since the credit crunch, with surging interest in Asia Pacific and other developing regions helping to drive demand. Although the value of the benchmark Livex 100 index dropped by 15% in 2011, this was probably due to the market correcting itself after the huge rebound that followed the 22% fall during the financial maelstrom of 2008, says Andrew della Casa, a director of The Wine Investment Fund.
“Between the drops in 2008 and 2011 the market rose by some 76%,” he says. “Longer term, the value of the Livex 100 has risen 66% over the past five years, which is a far better performance than the FTSE 100. In all but one five-year period since 1988, wine investment has shown a positive return. By contrast the FTSE has seen 63 negative periods.”
Buying your own sports team is arguably the ultimate investment of passion – and potentially the most expensive, amply illustrated by the UK Premier League’s billionaire big spenders Roman Abramovich, owner of Chelsea FC, and Sheikh Mansour, who bought Manchester City FC in 2008.
Despite this, all but a handful of the world’s 50 most valuable sporting franchises compiled by Forbes (including Manchester United FC at $1.86bn and the 32 teams of the American NFL) are owned by wealthy individuals and families.
In the past, ownership has often been about prestige and ego. But HNW investors are increasingly looking to combine their love of the game with some kind of financial return, says Bradley Rangell of Citi Private Bank’s Sports Finance and Advisory team. Media rights (the 32 teams in the NFL share annual broadcast rights of around $4bn), stadiums and merchandise can all generate significant returns when managed properly.
“It is possible to make money from owning a team if you follow a plan,” he says. “The problems start when emotional decisions such as paying too much for a player can cause an owner to stray from that plan.”
Mr Rangell points out that the way the four major US sports leagues – the NFL (American football), NBA (basketball), MLB (baseball) and NHL (ice hockey) – are run offers significant advantages to HNW investors over some of the world’s other major sporting leagues.
“The US domestic leagues are relatively socialistic by nature,” he says. “Salary caps, for example, mean wage bills can’t run out of control as they do in Europe. The UK’s Premier League is like the Wild West compared with the somewhat regulated US league system, and when you look at the leagues in Spain and Italy that’s another ballgame altogether.”
While an equity portfolio can lose its value overnight, investments of passion are more tangible - even if their value falls, they can still be enjoyed
Historically, US leagues have frowned upon ownership by consortiums of investors, which may have discouraged those HNW investors used to leveraging deals with private equity. But recent sales, like that of the NBA’s Detroit Pistons franchise to a private equity firm, suggest the leagues are becoming increasingly open to these types of structures, Mr Rangell explains.
Another emerging trend is the growing interest from overseas HNW investors in US team ownership. The NBA is popular in China and Russian billionaire Mikhail Prokhorov owns the New Jersey Nets.
“Wealthy families appear to be increasingly looking for opportunities wherever in the world they exist, and I think we will see increasing foreign ownership – in both directions,” says Mr Rangell. He points out that a number of US HNWIs, led by the Glazer family’s purchase of Manchester United FC, are looking for overseas opportunities where they can apply US best practice to improve profitability.
“In general, the sports leagues are willing to work with international investors who are often passionate about the sport and are willing to invest over the long term to build a successful franchise,” he says.
Although cricket may be a step too far for US investors, the Indian Premier League (IPL), which is partly based on the US league model, highlights the enthusiasm for sports investments around the world.
When franchises for the first eight IPL teams were sold in 2007, they attracted huge interest from Indian HNWIs looking for a glamorous investment and sold for a total of almost $750m. With some of the teams having potential local fan bases of over 100 million people, the opportunities are clear.
According to consultant Brand Finance, the huge interest in the competition saw the IPL brand rise in value to almost $4bn after just four seasons. As a result, when two extra teams joined the league in 2011 they raised over $700m. When it comes to investments of passion, it seems that Asia Pacific could be the region to watch.