The next year, when the client said he planned to multiply that amount by five times, Hutto balked. He decided to investigate. Since then, he's invested more than 20% of his own retirement assets in the trees.
Disillusionment with returns on traditional financial investments is driving more high-net-worth clients toward niche alternatives. Former presidential candidate Mitt Romney's extensive IRA holdings, for example, include a variety of private, nontraded entities.
Other options gaining favor among wealthier investors include rare coins, wine, art, real estate and musical instruments. (Or baseball cards: See "Let Me Help You With That," on page 67, for a story of an advisor who helped a client find a highly collectible Honus Wagner card.) In some cases, like the koa wood offering, investors of more moderate wealth are placing their investment bets far beyond the securities markets.
INVESTABLE FORMAT
Hawaiian Legacy Hardwoods, the asset in which Hutto and his client invested, sells koa trees that the company planted on the big island of Hawaii.
Koa is an exotic wood prized for furniture and musical instruments, such as guitars. It's also scarce. That's typical: Limited supply and built-in demand are two factors that make niche assets - whether they are wood, rare coins or wine - attractive.
Mike Wilson, director of sales for Hawaiian Legacy Hardwoods, says the company projects that a single lot of 100 trees, purchased for a bit more than $9,000 at current prices, will appreciate over the 25-year fixed term of the investment, when all the trees have been harvested - for a payout of $285,000.
That's if the trees survive, of course. Koa trees are vulnerable to fungus and to insects. Wilson says the elevation at which they're planted minimizes these risks. Still, there's no guarantee that an investor's trees will live to be harvested and sold.
While the firm can't eliminate all risks, Hawaiian Legacy has addressed one drawback of exotic investments by creating an "investable format." That's something Thomas Healey, a retired Goldman Sachs partner in New Jersey, says is lacking in most niche investments. He defines them as investments that attract little or no institutional interest.
'A TENTH OF A PICTURE'
"There are no funds," Healy notes, "which would be a typical way of organizing an investment that multiple smaller clients can invest in. If you're an investment manager, it's hard to obtain a tenth of a picture or to create a diversified portfolio of paintings."
As interest in exotics has grown, however, specialized vehicles have multiplied. Art funds have been created as closed-end models that raise money. After the fund closes, the money is used to buy art. Investors receive their returns when the art is sold in 10 years.
An open-end model is being used by the Artist Rare Instrument Fund, which invests in rare stringed instruments. Investors must commit funds for five years. The fund's managers will call in the money as needed when a desired musical instrument comes available.
There are fewer than 600 rare Stradivarius violins in existence, for example. Fund partner Ed Papier says investors are assured that they will get their money back because of the fixed scarcity.
The Stradivarius cello owned by the late performer Bernard Greenhouse recently sold for more than the previous record price of $6 million - although an exact sale price is not known.
Average annual returns of exotic investments may not necessarily outstrip those more traditional asset classes over the long term. Between 1900 and 2000, the S&P 500 rose at an annualized 11%, according to Healey; between 1980 and 2005, he says returns on investments in fine violins rose 10%.
LIQUID ASSETS
Of course, exotics are by nature non-liquid assets, meaning clients who need to cash out in a hurry could have trouble doing so. This is true even when the non-liquid assets in question are highly desired bottles of wine.
The best vintages in French wines remain a hedge against inflation and currency fluctuations. Sotheby's sales figures for fine wines in the Hong Kong/Asia market grew 213% between 2009 to 2011 during the global market rebound.
Yet risks remain for investors. Auction houses like Sotheby's don't give investment advice, says Robert Sleigh, head of wine for Sotheby's Asia. "We only can advise how wine has performed in the past," he says.
