The luxury goods that make the best investments

When the topic of investing is broached, most people's thoughts turn towards assets such as shares, exchange traded funds, managed funds, property and bonds.

They're less likely to think about a 2008 bottle of w Comte Georges de Vogüé Musigny Grand Cru or a Hermès Birkin 35 bag.

According to Knight Frank's 2024 The Wealth Report, wealthy individuals - those with a net worth of more than $US30 million (about $45 million) - typically dedicate 20% of their portfolios to luxury collectibles.

How do luxury goods perform as investments?

The most popular are art, watches, classic cars, wine and jewellery. And Knight Frank found that the joy of ownership was the number one motivation for investing in such goods, and wanting to turn a profit came second.

But how do these assets perform as investments? And perhaps, most importantly, can they prove a worthwhile addition to the portfolios of regular investors, or are they better left to the experts and those with deeper pockets?

In mid-November, a rare 1962 330 LM/250 GTO Ferrari went under the hammer at an RM Sotheby's auction in New York. It was the most expensive Ferrari ever sold at auction, fetching $US51.7 million ($78.6 million), including fees.

That wasn't the only record-breaking sale during 2023. As the Knight Frank report notes, records were also set for a bottle of whisky at $US2.7 million ($4 million) and a coloured diamond at $US34.8 million ($53 million).

What does the latest Knight Frank Luxury Investment Index show?

Andrew Shirley, editor of the Knight Frank Luxury Investment Index (KFLII), says the sales at the top end of the market don't paint the full picture.

"It sounds like a bumper year for luxury investments. However, the index reveals a less positive picture. KFLII edged into negative year-end territory in 2023, albeit by a fraction of a per cent, as several stalwart members of the index dropped into the red or showed minimal gains."

The index, which tracks the value of 10 asset types across the luxury investment sector, was down 1% over 2023 as a result of drops in the value of rare whisky (-9%), classic cars (-6%), handbags (-4%) and furniture (-2%).

Dietrich Hatlapa, a classic car guru and Knight Frank contributor, says the fall in classic car values was unsurprising following a strong year in 2022 and the temptation for investors to raise their allocations in strong-performing spaces such as equities.

"It's a very small market, so it only takes a minor change in portfolio allocations to have an effect, and probably there has also been a degree of profit taking."

On the other side of the ledger, art was the best-performing category with an 11% growth rate in 2023. That was followed by jewellery (8%), watches (5%), coins (4%), coloured diamonds (2%) and wine (1%).

The 2023 dip for luxury investments was an exception to the recent norm, though. Since its launch in 2013, the value of the index is up 100%, helped by triple-digit growth in the value of the whisky, watch, wine and art sectors over the past decade.

How much should you pay for a luxury investment?

Charlie Fraser, a private wealth adviser at Shadforth Financial Group, says he's heard his fair share of stories about investors making considerable profits on luxury items they've sold. However, he warns that without genuine expertise, it can prove a risky play.

"One of my first jobs was working for a jeweller who specialised in vintage watches. He knew watches inside out and could tell the year, rarity and value of a watch on sight - he ran a very good business. Most of us, however, do not possess that level of knowledge."

This, Fraser says, gets to the heart of one of the major questions about luxury investments: without that level of knowledge, how do you know how much to pay for an item in the first place?

"Listed shares, for example, can be valued by looking at all manner of quantitative data such as cashflow and profit. Luxury items do not produce an ongoing income, so determining the present and future value is far from an exact science.

"This is why most people do not find luxury investing a success. Unless the investor possesses knowledge that others don't, it is unlikely the strategy will be consistently successful. The old adage applies that you make your money in the buying, not the selling," he says.

Ultimately, Fraser recommends that if people are interested in luxury items, they should operate through a lens of passion rather than treating them as an investment, at least until they have built up a portfolio of other assets.

"As an evidenced-based investment firm, we advocate that our clients 'immunise their lifestyle' through low-cost, highly diversified investments before considering satellite or 'moon shot' investments. Only once we have established the level of capital that needs to be set aside through detailed long-term cashflow modelling would we then consider investing funds outside of that disciplined approach," he says.

Can you invest in luxury goods through your self-managed super fund?

One way a number of Australians invest in the likes of art, cars, jewellery and wine is through their self-managed super funds. According to the Australian Taxation Office's (ATO) latest figures, $636 million worth of collectibles and personal use assets are being held in self-managed super funds (SMSFs).

Because these kinds of investments are designed to help fund people's retirements rather than to provide any benefit or pleasure beforehand, the ATO has strict rules around how they should be treated and stored.

For example, collectibles held in an SMSF, such as a work of art, can't be stored or displayed in the private residences of any related parties, nor can they be leased out to someone else. Items also need to be insured in the fund's name within seven days of acquiring them.

Fraser warns that while SMSF owners in particular would need to be extra careful about sticking to the rules, he suggests that all luxury goods or collectible investors, including those 
who hold them outside SMSFs, will benefit from taking precautions.

"Typically, all second-hand luxury goods are valued according to the condition of the item. Therefore, it would be vital to maintain the item in the condition in which it was purchased. Scratches on a watch or poorly stored wine would severely affect the future value of the item.

"Storage of the items is particularly important when purchasing the luxury goods through an SMSF. The ATO has set strict rules around the storage and use of luxury items when owned in a super fund. Contravention of these rules can have serious financial implications.

"That's why we advocate a very clear delineation between luxury items for enjoyment and those considered an investment."

Nant Whisky scandal

In 2017, Tasmania Police launched an investigation into Nant Barrel Holdings. Hundreds of investors had bought barrels of whisky from the business for as much as $14,000, with Nant promising to buy them back after four years while paying investors a 9.55% annual return in the interim.

That return never eventuated, and an audit revealed that hundreds of barrels had never been filled or were missing entirely.

So how can would-be whisky investors avoid being caught out?

• Beware of guaranteed returns. Genuine investments rarely come with guaranteed returns, so any business offering them should be treated with scepticism. So, too, should those promising overly generous returns.  
• Assess the company. It can pay off to take your time looking into the business in question. Make sure it's a legitimate company with a proven track record, with easily viewable terms and fees and positive reviews from past customers. 
• Verify the whisky. If you're buying a barrel or bottle, see if you can have it authenticated by a third-party expert.  
• Don't succumb to pressure: To force your hand, scammers will often pressure victims into making a rushed decision. So, if you're feeling pressured, don't be afraid to walk away.

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