5 Exotic Assets You Should Know About
With high levels of volatility in the markets and a financial environment that remains risk-adverse, lower returns on traditional financial investments are driving more high-net-worth clients toward niche alternatives.
In FP Magazine’s December 2012 Issue , independent television documentary director Elena Mannes highlights some of these exotic assets – including trees and violins – and the underlying risk their attractive returns hold.
Here are 5 exotic assets and funds advisors and clients should know about, as well as the risks they possess.
Hawaiian Legacy Hardwoods is a company that sells koa trees that are 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. The downside is that koa trees are vulnerable to fungus and insects, which means there is no guarantee an investor’s trees will live to be harvested and sold.
Art funds have been created as closed-end models that raise money. After the fund closes, the money is used to buy art. Investors then receive their returns when the art is sold in 10 years. The risk here is when and if the art pieces get sold – which can lead to investors sitting on their assets for some time.
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. While there is the inflexibility of a client’s funds being locked for a five-year period, the rewards can be handsome because of fixed scarcity. A 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.
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 and 2011 during the global market rebound. But pricing can fall short of expectations. Wine investors are at the mercy of weather and vine-eating pests, as well as changes in taste among wine connoisseurs.
As with all exotics, clients intrigued by rare coins need specialized guidance. Yet the market for rare coins can be more stable than that for other exotics, according to long-time coin connoisseur Marc Henn, founder of Harvest Financial Advisors, a multifamily wealth management firm. That’s because the value of coins can be firmly established, due to grading services that the market accepts.
However, rare coins are “something you want to have for a long time,” and as an investment, a rare coin is “more appropriate for families or individuals with higher amounts of wealth,” according to Henn.
When it comes to exotics, independent advice is certainly in order. As niche investing draws more interest, the dangers are also rife. As Gary Hutto, a California-based financial advisor states, “Once the consumer starts investing in alternatives on a wide scale, look out. That’s probably the time to be in traditional investments.”