Hunger for investing into luxury goods is growing, which is demonstrated by the recent marked increased in their prices. The index of luxury investment from Knight Frank has spiked by 126% in ten years. It includes works of art, alcohol, precious coins, modern as well as vintage cars, postage stamps or furniture. The motivation for purchase here is mainly the sense of prestige, social status, collecting as a passion or hobby, diversification of assets and valuation of capital. However, this type of investment should be reserved for experienced investors, considering the specifics and necessary knowledge and experience with the given class of assets. Otherwise, there is an increased risk of getting an overpriced blind bargain with uncertain development of the investment’s value. So, how does one orientate in this market?
Investment vs. collector’s passion
Emotions must be set aside when making any kind of investment. This applies even more to the specific market with luxury investment. The real driver of the purchase is therefore key: Is it an investment aimed at diversifying your asset portfolio and valuating your capital? Or is it to gratify your passion as a collector or satisfy your needs? The prices of these assets are often influenced by emotions, resulting in high volatility. What is popular today may not be so hot tomorrow, next week or next year. Not everybody will appreciate emotional value equally. When such investment needs to be immediately turned into cash, one does not always immediately find the buyer. The owner may then be forced to sell at significantly under the purchase price. And there are also the demanding requirements in terms of the entry investment. Luxury goods investments also require substantial additional costs. Cars and vintage cars need to be safely parked in a garage and need regular maintenance; wine and postage stamps need to be safely stored; expensive works of art must be insured; and antique furniture must be securely handled. Lay investors may be easily deceived, so many spend enormous time studying the characteristics of the acquired asset. However, this still does not guarantee success, and the yield in the table above can easily become a pure utopia.
Index funds as a solution
So, what should an investor do, if he/she wants to participate in the well-performing luxury goods investment but, on the other hand, they do not want to be exposed to the risk of low liquidity, dramatic volatility, high acquisition prices and transaction costs? A common investor does not have enough time for detailed study of the characteristics and qualities of the respective assets. With respect to the absence of a comprehensive solution available on financial markets which would reflect the performance of the above investments, the only possibility for participating in this segment is the Amundi S&P Global Luxury ETF stock index fund (a part of Across Créme de la Créme – a selection of the most advantageous index funds for the Slovak investor in one place).
This index fund enables investors to participate with a single purchase in the business performance of the 80 largest global companies in the sector of manufacture and distribution of luxury goods or the provision of related services. The most prominent positions in the fund include the American manufacturer of sports apparel Nike; Diageo, a British producer of well-known alcoholic beverages; the French company LVMH Moët Hennessy with business activities in clothing and the food industry, as well as carmakers focusing on luxury niche markets, such as Daimler and Tesla. This fund represents a comprehensive, transparent, market-based, liquid and affordable solution requiring low initial investment and, at the same time, it falls under the legal possibility of revenue income tax exemption. The fund’s performance confirms this is a well-founded scheme. The underlying asset of the index fund outperformed global stock prices in the most recent 10 years by almost 5%.
Luxury investments certainly belong in the investment portfolio of any investor. A reasonable mixed proportion of all ingredients represents additional ‘seasoning’, improving the overall mix. Luxury investments are typical for low-level correlation with the traditional asset classes and the economic cycle, which makes them an interesting diversification offering the possibility of above-average revenue. However, their physical purchase is only recommended for experienced investors, who know traditional assets such as stocks, bonds or commodities inside out and have a good overview in the given segment.