With the shrinking returns from traditional investments, passion investing, which refers to investments in collectibles like art, wine, jewelry and classic cars, is gaining increasing popularity among high-net-worth individuals and family offices. Research shows that passion assets can provide decent returns and diversification benefits. However, high transaction costs, illiquidity risks and authenticity issues remain the key challenges.
Passion investing appreciated for inflation hedge and portfolio diversification
The CPI-adjusted returns for collectibles like fine wine, diamonds and classic cars have outpaced inflation over the past decades. For instance, the value of whiskey and wine surged 40% and 9% in 2018. Although underperforming public equities, passion investments generated higher inflation-adjusted returns than gold, commodities and real estate. With low correlation with stocks and bonds, passion assets can enhance portfolio diversification.
Global HNWIs and family offices embrace passion investing
The number of high-net-worth individuals globally surged from 11 million to 16.5 million between 2011-2016, with over $63 trillion in total wealth. Capgemini forecasts their wealth to exceed $100 trillion by 2025, with 10% allocated to collectibles. Top business tycoons like Buffett, Gates and Ma Yun are leading the passion investing trend, purchasing vineyards, castles and artworks.
Critical challenges in passion asset management
Although passion investments promise inflation-beating returns, significant costs are associated with insurance, storage, maintenance and transactions. The assets are also hardly liquid or interchangeable, making quick exits difficult. Lastly, opaque auction reserve pricing may artificially inflate valuations. Professional advice is needed to ensure authenticity, proper custodianship and optimized exits.
In conclusion, passion investing has emerged as an appreciated asset class among global HNWIs and family offices for its inflation-hedging ability and portfolio diversification benefits. However, illiquidity risks, high costs and authenticity concerns persist, requiring professional advice and guidance.