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Passion Investments: Another Smart Choice for HNWIs

The 2013 World Wealth Report indicates that investor confidence in the wealth management industry has improved, and the level of trust in asset managers has risen slightly compared to the previous period. Passion investments, such as yachts, luxury cars, coins, diamonds, antiques, art, antiques, rare stamps, collectibles, jewelry, and fine wine have become increasingly popular among high-net-worth-individuals (HNWIs); investors are motivated to acquire passion investments by more than financial considerations. The risk diversification of passion investments can be achieved via exposure in different compartments.

Passion Investments

Wealthy young investors from emerging markets have been an especially powerful force behind many of the classes of passion investments. Asia-Pacific passion investments categories have grown significantly since 2011, and they constitute nearly one third of global passion investments market today:

• China and Hong Kong have recently overtaken the U.S. as the world’s largest market for art and antiques; the increasing interest is pushing up the value of historical works, as evidenced by the over 20.0 percent increase in the World Traditional Chinese Works of Art Index in 2013.

• Singapore Diamond Exchange Private (SDX) offers diamond portfolios which range between US$250,000 and US$1 million.

• Acquiring sports teams is another growing trend by HNWIs, particularly in China and India. In 2012, nearly 23 percent of Asia-Pacific HNWIs preferred wine bonds, 24% in fine art and collectibles, 14% in Jewelry, and 11% in sports teams.

• In China, there were 2.8 million dollar millionaires in China as of August 2013, up 4 percent year-over-year. 56 percent of them are continuing looking to passion investments as alternatives to real estate and traditional equities[1].

A Chinese bowl bought for a meager $3 sells for more than 2.2 million. The abstract painting “Abstraktes Bild (809-4)” by a German artist, acquired by Eric Clapton for $3.2 million in 2001, while valued at $34 million in 2012. Those are the returns that are difficult to find by investing in traditional assets.

Passion investments enable investors to pass on to their heirs not only money, but also rights, responsibilities, privileges, and securities; passion investments are more than traditional financial investments:

1. Investors in passion investments can achieve ambition, enthusiasm, new experiences, desire, and excitement while pursuing financial gains.

2. Investors in passion investments benefit from favorable tax treatment.

3. Passion investments offer a quasi-financial return in terms of communication benefits, relations, knowledge, and special access rights.

4. Passion investments have a significant and long-term vision that traditional financial investments do not always offer.

5. Passion investments guarantee 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.

6. Passion investments are less subject to economic cycle or fluctuations, and the so-called “non-renewability.”

7. Passion investments are based on tangible assets with strong emotional connotation, themes, and sectors that are relatively uncorrelated to the markets.

8. Passion investments bet on expertise and prestige, while meanwhile privileging profitability and pleasure.

In terms of long-term financial performance, passion investments remain upbeat; however, investors should be aware that there are also concerns associated with passion investments due to their unique nature.

Concern No. 1: Liquidity

One of the major differences between passion investments and traditional stocks lies in the level of liquidity, particularly at the high end of the market. Taking art funds for instance, in the U.S., most art funds have a fixed life, typically five to ten years, and there are liquidity restrictions on investor withdrawals prior to the end of the fund’s life, except in extraordinary circumstances. Therefore, investors should rethink their original expected investment horizon before making a commitment.

Concern No. 2: Diversification

Unlike traditional asset classes, the investment strategies that pursue passion investments tend to be highly concentrated, although individual investment products differ widely. Investors in passion investments should consider potential investments along with their risk tolerance and investment objectives.

Concern No. 3: Transaction Costs

In addition to standard management fees and performance fees (if applicable), a unique expense that is associated with passion investments is the fees paid to advisors or experts who can offer expertise in the respective industry. Successful investing in passion investments has a fairly high requirement for industry knowledge. For example, investors or fund managers will have to pay an amount to diamond advisors before purchasing the commodity.

Concern No. 4: Valuation

As a form of alternative assets, not all passions can be considered investments. On one hand, passion investments are subjective; on the other, passion investments such as fine arts are visual, which means that an investor may know more or less about an investment than what they actually believe. It is sometimes a good idea to pursue expert opinions in the particular sector, and hence to reasonably minimize the downside.

Concern No. 5: Regulation

Most importantly, there is no “SEC” in the passion investments market.

[1] China Passion Investments White Paper 2013 Jointly Published by the Industrial Bank and HurunReport

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