The Experts

Nick Raphaely
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What makes a watch worthy?

Tuesday, September 30, 2014

by Nick Raphaely

The announcement of the upcoming Apple Watch has brought wristwatches back into the news, but they’ve never really left our everyday lives. With the average person now owning seven in a lifetime, and Sotheby’s holding dedicated auctions in four world cities, watches are one of the fastest growing luxury asset classes. The Coutts Index reported that returns on investment in classic watches rose 176 per cent between 2005 and 2013. But what turns a watch from fashionable accessory to worthy investment?


This is the most obvious, but still one of the best signifiers of value. It is certainly true that each year at Baselworld, companies clamour to produce increasingly complex scientific marvels that can command the price of a small apartment. However, in the world of investment, heritage is still king. Older, respected brands like Rolex, Cartier and Patek Phillipe still beat out the new innovators in retaining their value in the short term, and appreciating once they become vintage models.


Rarity does not only apply to watches old enough that similar pieces have been lost or destroyed. Some of the most sought after auction pieces are limited editions. If you’re looking to set yourself apart from the pack, make sure you’re looking at a limited edition, rather than a ‘special edition’. For a watch to be a true limited edition in a collectable sense, it will generally be marked with its number within the limited run of production. If a special edition is popular, it can be produced in perpetuity, turning your unique investment piece into a face in the crowd, and diminishing its potential resale value.

Frankenstein’s Watch

The biggest problem if you’d like your watch to be more than a pretty face is the dreaded Frankenwatch. If a watch breaks, and no original parts can be sourced, parts may be replaced with modern or off-brand alternatives. These mixed-provenance watches are said to have been ‘franked’, and are far less valuable than fully original pieces. If you’re purchasing through a reputable auction house, any franking would be noted in the description. However, if you’re buying via private treaty, it is of vital importance that the watch be valued by a reputable expert to search for any appropriated parts.


Driving diversity into your investment portfolio

Thursday, May 29, 2014

by Nick Raphaely

An alternative asset like a classic car isn’t always the first thing that springs to mind when attempting to diversify an investment portfolio. Yet when the market indicates that the value of classic cars has leapt 257% recently, investing in your passions might be the best way to ensure your money goes the distance.

Private bank and wealth management firm Coutts released their yearly “Coutts’ Index: Objects of Desire” report in January to reveal that so-called passion investing has seen a return of around 77% since 2005 – beating stocks and other traditional investment options by a landslide. Leading the charge in returns, far-sighted owners of classic cars profited from an enormous 275% appreciation over the past seven and a half years. In further market reports from Knight Frank, the success of classic cars as an alternative investment is even more pronounced. A 10 year analysis of the financial performance of classic cars shows that their value has surpassed even gold as a sound financial bet.

A case in point is the recent sale of a 1963 Ferrari 250 GTO for a record-breaking $52 million. With such a high price tag, it is officially the world’s most expensive car, and indicates the sheer potential of the classic car market in this current climate. Acquiring an asset such as this one for a collection and an investment portfolio is a coup that defines the parameters of the entire market.

Rising Demand, Shrinking Supply
The driving factor behind these gains in the classic car market can directly be attributed to a factor that is usually missing from an investment portfolio: passion. With new crops of high net-worth individuals entering the marketplace every year, the pure enthusiasm for this asset ensures that demand is kept high. Buying a classic car is rarely a spur of the moment (or spur of the market) decision, and many of these purchases have been contemplated for years in advance. As a result, the enormous appreciation of classic cars continues as eager collectors claim their particular model of choice.

Contributing to the passion behind investment in collectible cars is also the limited supply. It goes without saying that the recently-sold 1963 Ferrari 250 GTO is precisely worth its $52 million asking price because it’s impossible that there will be ever be a 1963 Ferrari 250 GTO again. When there can be no other entrants to the market, and simply a recycle of existing models, classic cars become an increasingly sought-after asset in an increasingly shrinking pool. It has created the perfect storm of supply versus demand and has seeded the enormous asset appreciation figures we’ve been seeing over the past decade.

What’s the risk?

As with any investment, there are certainly risks to be aware of and factor into your decision-making. The largest concern is that the success of the classic car market is less to do with the inherent value of the assets and more to do with the existence of a bubble in the market. Construing the current market as a bubble, however, assumes that either the liquidity of the market is in question or that the asset itself isn’t worth what collectors are paying for it. Given the scarce nature of classic cars and the purely passion-driven nature of the market, this seems unlikely.

The other concern regarding investment in classic cars is to do with portfolio best practices. Although classic cars are showing appreciation beyond many similar asset classes and investment options, it is never a wise idea to commit the majority of your financial interests to any one avenue. As long as you bear in mind your investment strategy as a whole, classic cars are no more volatile than gold, art, or even stocks.

Nick Raphaely is the co-founder of Assetline, a personal asset lender which enables investors to borrow against valuable alternative assets, in a fast and secure way. Nick has extensive experience with alternative investments and previously worked for Merrill Lynch in the UK and Australia.


Framing the future: is it time to invest in art again?

Wednesday, April 16, 2014

by Nick Raphaely

Tighter rules over personal use assets in self-managed super funds, and the controversial "Resale Royalty Scheme", have seen the value of art and collectibles plummet since 2011, according to ATO figures. Prices cooled as SMSFs sold off works and bought fewer new ones to avoid storage fees, with the royalty scheme affecting both primary and secondary markets.

Around 2% of SMSFs owned artwork or collectibles in 2012, with an average investment of around $70,000 according to the ATO. According to ATO figures, artwork and other collectibles represented 0.17% of SMSF holdings in June 2011.  That had fallen to 0.11% by November 2013.

But is it time to look again at investing in art to diversify your portfolio? Has the market troughed and does it now represent a buying opportunity?

Australian Art price movements

Now that the dust is settling, there are some green shoots emerging in the art market. 2013 has seen a "rise in market confidence" according to the Australian Art Market Report. Its findings by category are:

Aboriginal art: the first half of 2013 saw a strongly positive trend, suggesting that marketing confidence is returning. Auction sales from major houses reached US$8.05 million, up from US$2.69 million in 1H2012.

Modern Australian art: he first half of 2013 totalled $26,835,813 in sales, based on auction sales at major houses. This is 15.1% lower than for 1H2012 and 4% below results for the 1H2011.

Australian Contemporary art: auction sales reached a total of $2,259,200 for the first half of 2013, the highest figure since 2010 and 14.5% increase on 1H2012.

Nicholas Lambourn, the director of Australian Art at Christie’s London, predicts a "reasonably healthy" 2014 for the Australian art market. He believes a lack of fresh work has led to the market looking flatter than it really is.

Paul Sumner, managing director Mossgreen expects an increasing level of confidence in buyer interest across the board in 2014. He says it started in the second half of 2013 and expects it to continue as "a modestly upward trend".

Australian vs international art

The question with any type of collectible is what to buy? Non-Australian artworks are exempt from Australia’s Resale Royalty Scheme and resell more easily to an international audience, though they may be subject to foreign royalty schemes.

Writing in the Financial Review, art commentator Michael Reid predicts that a major European or North American art gallery will follow foreign retail brands and open in Australia in the next three years, attracted by Australia’s strong economy and lower barriers to entry. As a result of this he forecasts that Australian artists may lose out to overseas names such as Damian Hirst, whose works are easier to resell internationally.

Signs of optimism

The art world is also hopeful that the new superannuation rules will be relaxed. When they were introduced, it was on the promise they wouldn’t affect art values. The Art Market Report mentions "rumours" that the rules concerning art in SMSFs could be relaxed to allow investors to hang and display investment-calibre works in their home or office.

Another ray of light could be the review of the Resale Royalty Scheme. Introduced in 2010, it gives artists 5% of the sale price each time their work is resold. But art dealers says it has restricted sales. The Society of Auctioneers and Appraisers claims it has "single handedly destroyed the Australian Art market quicker than any recession could have done."

The growing trend in the corporate sector of art rental rather than art ownership is also creating an opportunity to realise an income stream from art investments.

New finance options for art investment, such as acquisition finance, sale advance loans and personal loans against art and collectible assets are also providing liquidity and investment opportunities.

About Nick
Nick Raphaely is the co-founder of Assetline, a personal asset lender which enables investors to borrow against valuable alternative assets, in a fast and secure way. Nick has extensive experience with alternative investments and previously worked for Merrill Lynch in the UK and Australia.


Alternative lending shaking up the banks

Monday, March 17, 2014

by Nick Raphaely

Westpac’s investment in peer-to-peer lender SocietyOne, via its $50 million VC fund Reinventure Group, is a clear sign that disruptive new finance models are finally being taken seriously by incumbents.

Over in South Africa, Barclays Africa has also just acquired a 49% stake in P2P lending platform RainFin.

The banks are being forced to sit up and take notice of alternative lending. It’s a tough call for banks because they don’t want to cannibalise their own business. But if they’re not in the space, someone else will be.

Race to the swift

These days the race is to the swift, not to the large.

Westpac is so far the only Australian bank that has invested in a disruptive lending model. But when we look at how the market is evolving, it perhaps shouldn’t come as such as a surprise.

Businesses and individuals have always needed to borrow. As with anything a roadblock only encourages innovation. Since the global financial crisis, access to conventional funding has remained tight. This restrictive climate, along with renewed economic and business growth, is compelling the discovery and adoption of new types of lending. 

Post-GFC we’ve seen developments in all the following:

Peer-to-peer lending: as with Society One, also called social lending. Investors are matched with the capital-constrained. The investor is in fact the lender and so the intermediary and carries no risk

Crowdsourced funding: leading players include Kickstarter, Indiegogo and Pozible, where individuals pledge money towards a project they want to see funded. Kickstarter alone claims to have received over $1 billion in pledges

Debtor finance/factoring: where companies raise funds on their invoices to keep the cash flowing

Microfinance: not just aimed at developing countries, but also targeting marginalised communities in OECD countries including the US and Canada

Asset-based lending: as a disclaimer we’re in this space, but the big global gun is UK start up borro, which has ridden the post-GFC funding crisis to reach a loanbook of $100 million and expand into the US

What these models have in common is that they’re helping people who can’t talk to the banks to get money. If you can’t satisfy a conventional bank’s lending criteria, you no longer have to give up on your plans. Instead, you can find lenders through the "disruptive" marketplace.
Alternative lending outlook

A while back, in 2008 at the height of the GFC, Gartner predicted that social lending would account for 10% of all lending by 2010. That may have been over-ambitious, but Accenture is now predicting that full service banks could lose around 35% of their market share by 2020 and up to 25% of US banks could disappear completely.

Technology, mobile and social are major disruptors when it comes to the finance sector. Also giving start ups a boost is new Australian legislation that allows loan underwriters to access more credit data. In the US, where this has been available for a while, the alternative lending sector is far more developed.

It will be interesting to see if any other major Australian banks take Westpac’s lead and dip their own toes in the waters of alternative lending.


The rise of alternative assets

Thursday, February 20, 2014

By Nick Raphaely

When we talk about alternative assets, the first thought is usually hedge funds, managed futures funds or other financial products to diversify a conventional portfolio. But other alternative asset classes seeing a rise amid volatile markets are physical assets: from gold bullion to collectibles.

Objects of desire

So strong is the worldwide growth in these alternative assets that UK financial institution Coutts recently started an "Objects of Desire" index. Coutts’ research has found that what it terms "passion assets" have risen 77% since 2005, outperforming the broader equity markets.

Classic cars have returned the most, rising by 257%. Classic watches are up 176%. Jewels returned 146%, while China’s growing wealth resulted in booming demand for traditional Chinese works of art, which rose by 163% between 2005 and June 2013.

Collectibles and SMSFs

In Australia, many self-managed super funds hold art and other collectibles. They are recognised as appropriate investments by the government, and subject to stringent rules to ensure their purpose as investments rather than lifestyle assets.

Artwork continues to be one of the key assets invested in, but the rules allow a wide range of assets as diverse as rare manuscripts, wine, coins and even social and sporting club memberships. In 2012 around 2% of SMSFs owned artwork or collectibles, with an average investment of around $70,000 according to ATO statistics.

Unique character of "passion assets"

The nature of these alternative, "passion assets" varies from conventional assets in several key ways.

  1. They appreciate over the long term. Unless an event occurs to dramatically increase value such as the death of an artist, spikes in price are rare. But over the long term, particularly with increased scarcity, it is not uncommon for collectibles to double their value within a few years as the Coutts data shows. Another advantage is that most collectibles increase in value along with inflation.
  2. They have ongoing costs. Australia’s super rules require proper storage of assets as well as insurance, which includes appraisal costs. This can add quite a few percentage points in cost - while premiums vary, they can be as high as 10% depending on the quality of security.
  3. They are expensive to sell. It can also be costly to sell high value physical assets, with the need to hire appraisers, restorers and dealers, with auction fees alone around 25%.
  4. They are highly illiquid. Most collectibles sell through auction, which is at least a three months process, and six months or more to actually realise value (if the item sells). This can restrict further investments particularly time-sensitive opportunities if wealth is tied up in slow-to-sell assets.  Asset-based lending is one solution to this, either as a short term loan or cash advance.
  5. They are about emotion. Collecting is often as much about purchasing as investment, with assets having sentimental value. This effectively increases their illiquidity, as collectors are reluctant to sell.

Alternative assets in 2014

So what can we expect to see in Australia’s alternative assets market in 2014? At least for fine art, the feeling is that the market has bottomed out and it's beginning to head upwards again after a turbulent two to three year period.

Auctioneers expect increasing buyer confidence, seen from the second half of 2013, to continue as a modestly upward trend.