Collectibles

Fine wine investment performance analysis – evidence from the Swiss market
Due to financial and sovereign debt crisis issues, traditional asset classes like stocks or bonds have delivered low or negative returns over the last 10 to 15 years. But is this also the case for alternative investments like fine wine, which is also slightly correlated to the financial markets due to wealth effects (as previous research has shown)?

In their latest paper, Philippe Masset, Jean-Philippe Weisskopf and Vincent Deboccard examine this topic with auction prices from Switzerland, one of the world’s largest markets both on the buy- and sell-side.

Data used for analysis
The authors use a dataset of the 225 most liquid wines, and exclude uncommon bottle sizes and vintages older than 1970 (due to liquidity problems).

Index construction and performance
The paper applies repeat-sales regression as it is the best method to estimate a price index for an asset that is both heterogeneous and relatively illiquid.

Wine performance in the selected period was rather disappointing and volatile: A 20% decline during the 2000s crisis was followed by a 50% price increase and a 20% negative return during the financial crisis. In 2011 there was another severe correction of about 15%.

Risk / return analysis
Volatility is generally higher for individual wine indexes than broad wine market indexes, but on average smaller than stock market volatility. All wine indexes are positively correlated with stocks in the range of 40% to 60%.

The results show that fine wine cannot be considered an excellent portfolio diversifier (like bonds, for example), but has other characteristics making it an interesting investment when compared to stocks, like smaller risk and better performance, especially in crisis periods.

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Timberland

Timberland investments

The value of the global investable universe of timberland is estimated between $300bn and $480bn, distributed over 165 million hectares of managed or manageable timberland, nearly 50% of which is located in North America.

A recent survey for the Food & Agriculture Organization of the United Nations tries to assess the realities, trends, perspectives regarding the involvement of institutional investors in timberland assets.

The main findings include:

• The number of investors interested in forestry is growing.

• Investors cite potential allocations of 5-10% of the total portfolio.

• Diversification and inflation hedge were the primary reasons for investing in forestry.

• Sound policies and investment conditions at the country level are highly important to investors.

• Investors generally seek forest investments that can be certified as sustainably managed.

• Planted forests are preferred over natural forests.

• Investors’ satisfaction with the performance has been mixed.

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Collectibles

Since the beginning of 2011, so-called investments of passion like art, jewelry and memorabilia saw strong demand from high net worth individuals worldwide.

The World Wealth Report 2012 published by Capgemini and RBC Wealth Management points out that even though a significant part of global demand comes from collectors buying an item for enjoyment only, many HNWIs see those holdings as part of their overall investment strategy.

Emerging-market HNWIs as the driving force in collectibles

Especially emerging-market investors are seen as a driving force in the markets: In 2011, China has emerged as the largest art market worldwide, increasing its global share from 23% in 2010 to 30%, pushing the U.S. to the second place.

Buyers from emerging-market countries have also shown keen interest in pieces of art representing the local culture, as indices tracking the prices for traditional Chinese and LatAm art rose 20.6% and 16% respectively.

Price development by segments

However, not all classes of passion assets were able to profit from increasing demand, as investors focused mainly on assets promising lower correlation to financial markets.

• Diamond prices rose 20% in 2011
• In contrast, investments in sports fell out of favor with HNWIs
• In the luxury car segment, rare historical auto values tracked by the HAGI Top Index rose 13.9%.
• The different fine wine indices calculated by Liv-Ex ranged between +10% and -10% in 2011.

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Investing in life settlements – Market update and fund Performance

Current situation on the secondary market for U.S. life policies
As a growing number of investors is attracted to insurance-linked securities due to their uncorrelated returns, the controversial U.S. life settlements sector is entering the spotlight again. As a matter of fact, many observers think that now might be a good time to invest in a life settlements investment vehicle, for a number of reasons:

First, the market is now widely regulated.

Secondly, underwriters are committed to audit their results and, if necessary, improve their methods of life expectancy estimation.

Last but not least, the current supply and demand situation on the secondary market indicates the existence of a buyer’s market:

• Supply on the senior life settlements market is driven by both demographic factors and growing awareness of the existence of a secondary market

• Demand is restricted as asset managers struggle to find investor money and have very limited access to credit

In summary, life insurance policies are trading at distressed levels, promising high rates of return to investors who enter the market early.

Fund profile – Ress Capital’s Uncorrelated Assets Fund
Stockholm-based Resscapital AB (advisor to Ress Capital Fund Management SA in Luxembourg) recently launched a new life settlements vehicle, called “Uncorrelated Assets Fund”. The fund will purchase a large and diversified portfolio of senior life settlements, aiming for a net return of 12% (USD) and aims to invest USD 300 million within 24 months.

Investment approach
The managers use proprietary physician based medical underwriting specialized on senior mortality , together with in-house actuarial experience to provide more accurate life expectancy estimates. The fund systematically filters large numbers of policies in order to minimize the risk of provider or underwriter bias and then buys single policies. Every quarter the fund’s net asset value is independently reviewed and the value of the life insurance portfolio is determined.

Risk mitigation

• Longevity risk

• Execution risk

• Credit risk

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Collectibles

Investment grade wine – Asset class analysis and fund performance

The state of the fine wine market

2011 proved to be a difficult year for wine investors. After reaching a new all-time high in June 2011, the Liv-Ex Fine Wine 100 Index, which tracks price movements of 100 most sought-after fine wines, experienced a draw down of over 21% towards the end of the year; a decline in prices last seen during the financial crisis.

As suggested in a previous issue of A SQUARE, the prices of fine wines reacted highly sensitive to cooling emerging economies. Empirical research shows a strong correlation between the number of billionaires, specifically in BRIC countries, and wine prices

Long-term asset class analysis

U.S.-based wine investment firm Trellis Fine Wine Investments LLC provides additional data explaining the long-term properties (July 2001 to December 2010) of investment grade wine. Trellis compares the Liv-Ex 100 to other asset classes:

• Performance: The Liv-Ex 100 returned an annualized 11.33%, third highest among all major non-fixed income asset classes. Only gold’s 18.28% annualized return and the Dow Jones-UBS Commodities Index’ 12.89% annualized return have outperformed investment grade wine on an absolute basis.

• Volatility: Only the 5.73% standard deviation of the Dow Jones-Credit Suisse Hedge Fund Index is lower than the 10.57% standard deviation of the Liv-Ex 100 Index for this period.

• Sharpe Ratio: In terms of risk-adjusted returns, fine wine performed second best (1.07), again only inferior to the Dow Jones-Credit Suisse Hedge Fund Index (1.11).

• Correlations: The Liv-Ex 100 Index had a correlation of 0.34 with the S&P 500 Index and a correlation of 0.13 and 0.26 with gold and the Dow Jones – UBS Commodities Index, respectively. This suggests that fine wine might help investors to protect their portfolio against events affecting equity and commodity markets.

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