Will investments of passion ever be seen as a mainstream asset class?
As the name suggests, investments of passion involve investing in an asset that yields more than just financial returns. That could mean wine, art, stamps, coins, or even silver and gold. For some investors there is a fine line between investing for financial return and collecting for passion; for others, the difference is fundamental.
Image: © Nationale Beeldbank
We can buy assets to satisfy our desire to express ourselves: to convey, both to ourselves and others, our values and tastes, our position in society and even our status or wealth. Investments of passion enable us to tick some, or all, of these boxes.
Taken to one extreme, some collectors are willing to forgo financial reward for emotional return and love of the asset – wine can be drunk, and art offers an emotional and aesthetic dividend. These positive effects offer benefits that may subsume the desire for financial reward.
At the other end of the spectrum, reasons for investing in passion assets can be purely rational. Their performance tends not to fluctuate with that of stocks and bonds and they can hold their value during periods of expected inflation. They therefore offer an alternative form of portfolio diversification across assets and economic cycles.
As a result, the number of investment and other boutique funds specialising in passion investments, actively investing and trading solely for financial gain, has grown significantly over the last few years. These funds offer a number of advantages, including pooling transaction costs and diversification across genres in a market where knowledge is key.
But there are risks. Liquidity is at times extremely low, particularly at the high end of the market. The market is still in its infancy, so funds and fund managers generally lack track records. Information on how performance is measured is limited, with disclosure often kept to the minimum required. Transaction costs are high, so fees mitigate short-term performance. Fakes and forgeries are rife.
Not just the wealthy few
Because of these factors, investments of passion may not become a mainstream asset class for large institutional investors. But they are increasingly becoming available to the general public, and not just to the wealthy few. For private individuals who are in it for the longer haul, and want sustainable, less actively managed funds, they are already considered as an asset class in their own right.
Many investors want to invest with their hearts. The financial rewards may not be as high, but investments of passion often yield the most valuable premium of all – a good night’s sleep.
Deloitte Art and Finance report 2013
Knight Frank Wealth Report 2013
Barclays Wealth Management Report