Passion investing: Rubies and Renoirs
Investing in your passions might seem indulgent but it can allow for diversification and if invested wisely, strong returns. In Citywealth’s latest update on passion investing, April French Furnell explores the latest trends in two popular choices for passion investments: art in fractions and celebrity jewellery.
Fractional ownership: You want a piece of me?
Sharing the ownership of art is not a new trend, but it has begun to rear its head but at times disappeared again, notably in the last two years. The Art Newspaper, online, says younger investors have shown the most interest but it seems the concept is not without complications including under subscriptions to share sales, and the problem of a concentration of value with just a few artists, which means not all art is valuable and prices can vary wildly. Reviewing other sectors like cars, property (time share) and jets, most include use of the item in question for a proportion of agreed time. With fractional art, this model is not the same, but you can visit the exhibits as a VIP when they are shown.
Art nitty gritty
“There are three ways of achieving fractional ownership”, explains Fred Clark, associate at Boodle Hatfield. “The first is to have a company which owns the underlying asset, the artwork, and lists the shares in an online platform. The works particularly well for pieces dividing into many different shares. “It makes an illiquid asset, liquid. The second, is to tokenize the asset and register these tokens on a distributed ledger, so that the tokens are then traded in much the same way that shares are; and finally, and more commonly, a small number of investors may have an agreement put in place between them.” Yet, “regardless of how the piece is held, you should consider how a fraction can be transferred, who insures it, who has a right to view it, and where it is stored”, cautions Fred.
Hedge fund model
An example is ARTCELS which is not regulated and launched last week, offering fractional ownership in a closed end investment, charging 2% management fees, as they say, “like a hedge fund” which has a portfolio of 60 artworks in the fund. The private limited company (fund) offering shares has a ‘portfolio’ ‘XXI’ (21) which includes artwork by Banksy, KAWS, Damien Hirst, George Condo, and Jeff Koons.
True profit, deducts fees first
Currently on exhibition at HOFA gallery in Mayfair, a quick Google search, shows the main benefit, of using them, is having an art gallery owner involved, hopefully, to bring market experience in art which seems to have been lacking in previous attempts at this concept. HOFA gallery say that their USP, is that they have a number of art pieces not just one, making them less reliant on individual artist prices. As we know shares go up and down, so what happens with the fractional investment then? If it goes up another fee is applied of 20%, in essence, a success fee. And if it goes down? Well like property, you are probably stuck with it, but the HOFA gallery, says they are over-subscribed; their art works have provenance and are market winners with big brand names.
Shareholders or ‘subscribers’ as they are referred to offer investors equity in the form of digital tokens backed by shares in the artworks as registered assets of a London UK based Limited company. The investment is illiquid for three years, but artwork may be put into re-sale with other people “waiting to join” if an investor wants to get out. Dividends will be paid out to subscribers after three years. The digital angle of ARTCELS, backed by Swiss-based company 4Art-Technologies AG, generates digital signatures that provide authentication for its art assets while Swiss blockchain company Assetyze creates a digital token. ARTCELS seems to be the first model of fractional ownership of a portfolio of works. Other companies such as Masterworks offer fractional ownership for a specific piece of art.
Blue period: Starving artists get hangry
There are a few differing opinions on the merits of fractional ownership. On the one side, the founders of these companies state that it democratises art and opens the market to the next generation who may go on to be large collectors in their own right. However, “there is a school of thought which says that actually it harms artists because, depending on how the asset ownership is structured, the art itself may never actually sell and so artists miss out on royalty rights which they would be entitled to if the piece as a whole was sold”, said Fred.
Betting on the Blockchain
Many fractional ownership schemes are moving towards blockchain to remove the risk that the same share can be transferred more than once. “Blockchain uses a decentralised register where every participant verifies the validity of a transaction”, says Fred. “Consideration needs to be had for how they are taxed and how and whether anti-money laundering checks need to be carried out” he added.
Elizabeth Taylor and her ice
Moving on to jewellery, whilst it might be one of the greatest passion investments with the global market at US$13billion, it has many draw backs including vague provenance, settings going out of date and heavy price fluctuation. The Coutts Passion Index 2019 found that jewellery prices fell by 18.3% in 2018, its largest annual fall since the index started in 2005.
Coloured gemstones gleam
Despite this price crash, coloured gemstones buck the trend continuing to outperform the wider jewellery market, according to the Knight Frank Luxury Investment Index 2019 report. At Bonham’s London sale in April 2019, a 17.43 Kashmir sapphire ring, formerly owned by a European noble family, was sold for £723,063, far exceeding its £300,000 to £400,000 guide price.
Branded baubles win
Other sparkling items include brands. “Luxury, well-known brands seem to consistently show an increase in value once re-sold. Buyers of fine Jewellery are comforted by the security that these well-known brands provide, as they can guarantee both quality and craftsmanship” said Lucia Perchard, Family Office Director at Highvern. The Sotheby’s Magnificent Jewels and Noble Jewels auction in 2019, saw a natural pearl and diamond pendant-brooch combination from Harry Winston, exceed its estimate of 10,000 – 15,000 CHF to sell for 27,500 CHF. The items were the property of an ‘Important Asian American Collection’.
Mary Tudor millions
Vintage jewellery is among the most sought after and the most valuable with the Art Deco and Belle Epoque pieces showing strong returns, as well as pieces with an interesting history. Lucia points to the example of La Peregrina, a 16th century pearl, once owned by Mary Tudor and purchased by Burton in 1969 for $37,000 as a gift for Taylor, and with which Cartier created a pearl, diamond and ruby necklace. It later sold at auction for £7.6m.
General advice to follow is, if you are able check documentation from trusted sources like Goldsmiths who provide valuation reports for insurance companies, also to look for “characteristics such as uniqueness, quality of the stones, the percentage of gold and the workmanship. All of which can ensure that the value will increase over time”, said Lucia. As with all investments, “Advice should always be sought before investing any significant amounts but all experts suggest that it is important to buy jewellery that you love” she concluded.
So whether you want a fractional piece of art, to get on the ‘ladder’ or a magnificent jewel, to admire, in your dotage, always remember that diamonds may be a girl’s best friend but passion, as in passion investing, means a strong and barely controllable emotion, like a hot temper, which ultimately lost Van Gogh his ear.
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Kecia Barkawi-Hauser, Managing Partner, ValueWorks, Zurich
What charities do you admire and why?
I would like to mention 1000 Peace Women, a powerful worldwide initiative.