Stamford Privee Blog

Why wealthy Asians and Family Offices look at alternatives of alternatives as an asset class

21st December, 2012 - Posted by admin - No Comments

The challenges

Running our family’s and client’s wealth has never been more interesting. The unfolding of significant events post-Global Financial crises (GCF) have influenced the perceptions of wealth and risks management of many significant Asian families. These events include:

Banks and their negative image – money laundering activities and LIBOR scandals have limited the rekindling of trust between Asian families and banks.

Politicians and politics – From the likes of China’s Bo Xi Lai to IMF’s Strauss Kahn, it shows scandals in politics are as old as politics itself.

The decimation of Hedge Funds – The last two years witnessed the global hedge fund industry declining 4.8%, while stock-focused funds suffered an average 19% decline.

The ignominious bond market – Monetary easing measures have resulted in “safe money” returning negative yields.

 

Enter Alternatives of Alternatives

With such crises of confidence, it is small wonder that many are looking for ways in which they can make sense of the minefields. While we do not advocate a complete shunning of capital markets, we do think it would be worthwhile to ponder about the impacts the above challenges have introduced into the investment universe. Will the world revert to the way it was pre-GFC?

If the answer is not a clear yes, then it explains why there has been almost fever pitch allocation of investment in “alternative assets” – asset classes that are not your usual equities and fixed income. These include real estate, gold, selective commodities and agriculture.

On that note, I will like to take the opportunity to highlight the seemingly the more elusive alternative asset classes of wine and art as alternatives of alternative sources of investment.

 

Wine Investments

Stamford Privee invests heavily and specifically in the higher spectrum of the Grand Cru wines,better known as the 1855 Classified Bordeaux wines or Classified Growths. We focused on a range of champagnes and some burgundy, and in the last cycle we overweighted Super Tuscans.

On wine investments, there are two important points to note:

1) Be familiar with what you are investing in. Our keen knowledge in this industry allows us to actively trade the cycles of each vintage rather than passively keep the wines; after all, our family side is involved in the wine distribution business for over 70 years in Asia.

2) If you don’t have much familiarity, you need to look for the best proxy to assist you. Be careful of companies alleging their well-founded knowledge without any grounds.

One of our best forays in this investment space was the Chateau Latour 2008. We purchased a batch of En Primeur at the start of 2009 at EUR 150 per bottle, before taking profit on the vintage at around EUR 700 – a gain of nearly 500% in 2 years.

 

Art Investments

Stamford Privee’s focus in this field has always been in the sub classes of jade, royal porcelain and Chinese calligraphy. Art, as an investment, possesses the most astounding asset class in terms of market growth and return on investments and with China leading the charge as the world’s number one auction market, we can expect these investments to continue posting phenomenal returns.


Some key characteristics of this investment class include:

1) Expanding size of the art and market and emergence of new players

The art market has over USD 14.8 billion in annual turnover is not highly developed. As such it offers good investments opportunities for institutional investors. Furthermore, the Chinese government’s desire to buy back as much cultural heritage as possible has spawned many government backed proxies.

2) Inefficient market

This market is dominated by emotionally-driven individuals whose lack of expertise creates opportunistic events. The lack of transparency and price standardization means transactions are executed in the private markets by art dealers, galleries and private collectors.

3) Imbalance between supply and demand

Supply of high quality art work is decreasing while demand, resulting from the wealth effect of BRIC economies, is growing, placing upward pressure on prices.

4) Art as an asset class

Interestingly, one of the key drivers of such collectibles has been the fact that many wealth owners see them as a popular yet hidden ‘store of value’. Art, as an asset class, is viewed as having both artistic and financial value, with little correlation to other asset classes.

The right shows a pair of White Ruyi with dragon design, our group’s first purchase. It went under the hammer for approximately EUR 200,000 before being sold for EUR 861,580 just 6 months later. Currently, this collection is worth EUR 2.8m, befitting of its exceptionally fine craftsmanship.

 

Alternatives of alternatives as diversifiers

Our families’ foray into the alternative of alternatives space was incidental, so it seems almost uncanny that these are, of late, the most talked about asset classes. Clearly these asset classes have demonstrated that they can be effective diversifiers, and we have been approached by many families with excess liquidity to assist and lead them in the areana.

Source: Capital Watch

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