SECTOR SPOTLIGHT: Alternative Investments (Real Assets)
GUEST POST from Dmytro Lokshyn (CEO & Co-Founder of Investables)
In speaking with investors about their portfolio preferences, most will point to traditional offerings (i.e. stocks and bonds). Discussion of alternative investments as a part of a long-term investment strategy is rare. Since 2014, the emerging sector for alt investments has grown (by asset type, platform, and target user profile). Individuals are now including this segment as part of their overall investment strategy.
What if you’re starting out as an investor and don’t have the savings to make a large purchase? In the last 7 years, new FinTech platforms democratized access for retail and middle-income investors via fractional ownership shares.
In this deep dive, we’ll define this category, types of investments, benefits, and key factors toward investment decisions.
What Are Alt Investments in real assets?
Alternative investments are non-traditional assets — specifically not bonds, stock shares, or cash.
Instead of analyzing market movements and changing strategies in the short-term, alt investments have historically provided predictable and steady, long-term returns based on asset value. The companies in this this sector are leveraging technology to showcase data-driven performance by category. Investors can then make ‘buy’ decisions based on analytics (and move funds from their bank towards investment choices). By participating in both traditional and non-traditional options, investors gain multiple benefits while pursuing higher returns.
Within alt investments, there are real (tangible) assets. This can include luxury items such as art, antiques, jewelry, precious metals, fine wine, and classic cars (as a group considered ‘collectibles’).
According to Data Bridge Market Research, the collectibles market is expected to continue growing into 2028 — similar studies show a growth rate of 4%.
By owning & sakefeeping these items over time, value increases for collectors. Investments can be showcased at home or work and passed down to family members.
Art
In 2021, the global art market capped at $65.1B. From its 1-of-1 appeal, ability to display, and active secondary market, fine art continues to shine as an alternative investment. Minimal upkeep is needed and investors enjoy showing off their collection at their home or office.
One of the most expensive pieces on the market was a metal sculpture of a rabbit (created in 1986 by Jeff Koons). In 2019, the piece was sold for $91M at Christie’s Auction house — from an estimated original price of $50M - $70M.
Technology has brought a new wave of investors focused on digital art. NFTs (non-fungible tokens) provide similar benefits as physical art (value appreciation, scarcity, aesthetic) at a lower pricepoint without any maintenance. Fractional ownership is also available for individuals looking to start their portfolio and diversify investments.
Wine
Increasing in popularity, Fine Wine shows stable growth with a 24.6% annual return.
Burgundy wine tends to be consistent, while others are more susceptible to fluctuations. As specific vintages become even more scare, the demand quickly shoots up.
A bottle of Chateau Lafitte (estimated at $60K) was auctioned for $230K at Sotheby's (#5 on the list for most expensive in 2010).
Luxury Watches, FASHION, JEWELRY
Luxury watches, fashion, and jewelry are also leading asset types to consider. Rarity, brand, unique design / aesthetic, ability to wear, and affinity with a celebrity are all factors in market price growth.
The average price for a Rolex watch nearly tripled in value over the last 10 years. In 2011, the cost of a vintage Rolex would be around $5,000. In 2021, the same watch is valued at about $13,000. Other brands (OMEGA, Breitling, TAG Heuer) offer lower entry points but similar trend. Patek Phillippe and Rolex are commonly considered as leading brands for the investor-collector.
Additionally, vintage high fashion (especially handbags) showcase long-term appreciation. If maintained properly, the majority of classic luxury pieces appreciate by 10-20% with each passing year. Some of the most popular names are Dior, Louis Vuitton, Hermes, and Chanel.
Lastly, jewelry category has its own hype as the top alt investment to wear. Value for vintage jewelry has grown up to 80%. Rare jewels tend to be the better niche due to exclusivity; diamonds leading this group. The CTF Pink Star (a pink diamond) set a record when it sold for $71.2M at a Hong Kong auction.
Classic Cars
Not at the top of the list for investors, classic cars (produced before 1980) can be a lucrative niche within alt investments. Market value exhibits increases of over 3x in the last few years, which outperforms appreciation seen from modern luxury autos.
Some of these vehicles can reach millions of dollars on the market, such as the 1955 Mercedes-Benz 300 SLR Uhlenhaut Coupe (sold in 2022 for $142M).
Benefits of Alternative Investments
Here are the top benefits for investors in choosing alt investments:
Lack of Correlation with the Stock Market: As physical assets, alternative investments aren’t as susceptible to fluctuations in value as stocks. Scarcity and value are unaffected by investor sentiment on stocks. Even in turbulent market conditions, growth trends tend to be consistently linear and not full of volatility. Since there’s no direct correlation, investors are able to diversify holdings more effectively and participate in the upside of traditional and non-traditional markets. Various types of alt investments can yield further diversification as well — this can come from fractional ownership of assets & NFTs. These alternative investments are expected to grow beyond the primary market in the next decade (see chart above).
Strong Performance: Most alt investments exhibit long-term value for the owner (with proper maintenance and upkeep). Uniqueness (mostly from how rare an item is) is a constant, which continues to appreciate with time. Secondary markets and auction houses are supporting the growth of this sector as well by making it easier to buy & sell. Family members inheriting an artwork or timepiece can choose to retain it or go to these marketplaces to cash-in. The pandemic had a positive effect in alt investments as potential investors were able to research what other options were available outside of the stock market (via fintech platforms).
Direct Ownership: A key advantage is gaining direct ownership of a tangible asset that can appreciate in value. Purchasing stocks lacks this sense of custody, since its intangible.
CRITERIA in EVALUATING Alt Investments
Before making a decision, it’s important research and connect with financial advisors on the overall approach that fits your personal goals and budget. Proper education and resources can help lead to the right investment decision — these decisions and strategy can then be revisited on a semi-annual or annual basis to make sure progress is being made toward goals.
For new investors exploring alt investments, here are key areas to evaluate as part of your discovery process:
Understand the Asset Class Function: Alt investments come in various classes and categories. Depending on market projections, structure, and regulations, each asset type (wine, art, etc.) needs to be researched thoroughly. Understanding the specific function of an asset also helps ensure it meets your investment goals and capabilities in maintenance.
Perform Due Diligence: With any major investment decision, proper vetting is critical. Not all high-ticket items are a strong investment choice — some may lack appreciation or poor secondary marketplaces. Knowing the history of an asset, fees involved, its risks, historical performance, and competitor comparison goes a long way to an informed decision.
Engaging with Trusted Providers: Focus on value, transparency, availability, and fit. Disclosure (especially when it comes to maintenance fees) is critical — added costs in preserving assets can drain long-term returns. The best providers have the buyer’s interests top of mind.
Fractional Investment Opportunities: The full pricepoint of alt investments may not be a possibility for all investors. Fractional investments (leveraging SEC-regulated products) offer the ability to purchase a fraction of the asset within a larger pool of investors. Even though there isn’t physical ownership, individuals can access multiple alt investments at one time without worrying about maintenance responsibilities.
Fintechs that offer affordable fractional investments provide apps that serve as a marketplace for buyers and sellers. Platforms (such as Investables) simplify transacting and allow access to new opportunities previously only available to high net worth individuals. Offerings from fintechs often feature Regulation A exemptions from registration, so buying & selling of securities can take place without having to register with SEC.
OUTLOOK FOR ALT (PHYSICAL) INVESTMENTS
The sector continues to show strong performance. For investors seeking exposure to non-traditional markets, this alternative path is growing in popularity due to diversification and long-term growth.
Other physical assets are also starting to enter this market. Sneakers, comic books, history and movie memorabilia also share characteristics of rarity and value appreciation. More fintechs are moving these niches forward through dedicated platforms in which fans and collectors can become investors. Younger generations can now gain exposure at an earlier age by investing in an asset they know well.
With this momentum, the growing popularity of alt investments can become a natural part of wealth management strategies for investors of all types over the next decade.
Join our community @FinTechtris for more industry content & insights (including deep dives & sector spotlights).
As a bonus, access our subscriber-only resources for evaluating and building the next generation of financial services. Signup today —>
