It may be necessary to mention the section of high net worth individuals (HNWIs) in The 2012 World Wealth Report*（please see below re the Methodology) first, which was released on June 19th, 2012, discovering the following facts:
- The world’s population of high net worth individuals (HNWIs) was little changed in size at 11.0 million in 2011, but HNWIs’ aggregate investable wealth declined
- Asia-Pacific is now home to more HNWIs than any other region, and it was the first time that Asia-Pacific had more millionaires than North America (3.37 million HNWIs compared with 3.35 million in North America and 3.17 million in Europe)
- The U.S., Japan, and Germany together accounted for 53% for the world’s HNWIs in 2011
- HNWI populations of emerging and developing markets, especially those in Asia-Pacific, continue to grow faster than those of developed markets
- India and Hong Kong topped the list of countries losing HNWIs in 2011
However, in the Report, the value of investments of passion, including art, jewelry and memorabilia, does not count toward the calculations of HNWI investable wealth. In fact, many HNWIs have chosen to devote considerable sums to many types of pursuits and collectibles, as the global economic and financial crisis has led many HNWIs to view these holdings as an important component of their overall investment strategy.
Why Investments of Passion (IoP)?
Art, jewelry, and wine have become increasingly popular for investors. The “passion investments” enable them to pass on to their heirs not only money, but also rights, responsibilities, privileges, and securities. Such form of investments is more than a traditional financial investment in that:
- It allows investors to benefit from favorable tax treatment
- It offers a quasi-financial return in terms of communication benefits, relations, knowledge, and special access rights
- It has a significance and long-term vision that traditional financial investments do not always offer
- It guarantees a return on the investment, whether a financial return, a return in terms of enhanced reputation, privileges, special access to information, places, exceptional people, or a return from participating in the project, which is equal to say that the risk diversification of passion investments is spread over different compartments
- It is less subject to economic cycle/fluctuations, and the so-called “non-renewability”
“Wealthy young investors from emerging markets were an especially powerful force behind many of the classes of passion investments.”
In the early of 2012, the European Fine Art Foundation reported that China (including Hong Kong) had overtaken the U.S. as the world’s largest market for art and antiques. Emerging market buyers have also increasingly shown themselves to favor indigenous works, and items that represent their own cultural heritage, which drove up regional indices, including the World Traditional Chinese Works of Art Index (rose 20.6% in 2011).
Among the “passion” categories, luxury collections, coins, diamonds, and gems were those that rose in value particularly in 2011. Investors remain cautious about the prospects for Asia-Pacific economies, but there is underlying optimism that policymakers will be able to maintain high growth rates without being overrun by inflation.
As an alternative asset class (if you call it an “asset class”), not all passions can be investments. On one hand, investments are subjective; on the other, arts are visual, so an investor may know more about an art than what they think but they are not sure about this. The differences between investing in stocks and collections lie in the evaluation of market value, profiles of investors, liquidity restrictions, risk tolerance, and most importantly, regulation. There is no “SEC” in the passions market.
*Notes (About The World Wealth Report Methodology)
According to RBC Wealth Management, the World Wealth Report analysis is rooted in a market-sizing model that evaluates the size and growth of investable wealth in different regions using Lorenz curve methodology. The model of 2012 covered 71 countries, which together counted for more the 98% of global GNI and 99% of world stock-market capitalization. It is a three-step methodology:
- Estimating total wealth by country, using national account statistics from IMF and WB
- Estimating the distribution of wealth across the adult population in each country, based on formulized relationships between wealth and income
- Quantifying investable wealth as a proportion of total wealth, using statistics from countries with available data to calculate financial wealth figures, and extrapolate these findings to the rest of the world