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18-12-2011, 07:53 AM
The Straits Times
Dec 18, 2011
Before you invest in paintings and wine...
Alternative assets often promise high returns, but heady profits are not often easy to come by. Yasmine Yahya separates myths from facts
When investors are dazzled with promises of high returns, it is tempting to throw caution to the wind and just sign on the dotted line, but alternative investments are often complicated, unregulated and highly risky.
And going to a reputable and regulated fund for such investments can be difficult, as most usually target institutional clients. So the barriers to entry for retail investors can be high.
Difficult access to information
As many investors learnt during the recent financial crisis, it is foolish to invest in products that you do not fully understand.
Alternative investments require even more research and due diligence than vanilla products such as stocks or bonds.
So before putting your cash into assets such as art, wine, or foreign property, you need to attend events to attain information, perhaps even travel overseas to check things out.
Most alternative investments are not regulated by the Monetary Authority of Singapore (MAS), so it is up to investors to conduct their own due diligence.
Mr Ernest Low, head of product and research at Professional Investment Advisory Services, said retail investors should stick to fund houses and brokers registered with the MAS. Registration 'ensures that MAS has done its due diligence on the company and its directors, and confirmed that they are credible', he said.
'You can do your own homework on the company, try to find out when it was set up, how long a history it has had, and who its directors are. But it is usually quite hard for retail investors to gain access to such information.'
Opaque markets, high costs
An associate professor of finance at Nanyang Technological University (NTU), Dr Low Buen Sin, notes that alternative assets often involve high transaction costs.
That means the asset would have to make a 'decent' appreciation in value to ensure a profit after paying off various costs, such as auction house or brokerage fees, insurance premiums and storage costs. Assistant Professor Stephen Dimmock of Nanyang Business School adds that alternative assets are usually traded in markets that are opaque.
'It is easy for an unscrupulous investment manager to exploit his clients when he trades in illiquid assets, in which prices are determined through negotiations rather than in an open market.
'In a non-transparent market, it is easy for an unscrupulous investment manager to overpay for assets in return for kickbacks or to trade with a related party at unfair prices.'
Another challenge is that it is not easy to find out the past transaction prices for such assets, says SIM University's head of programme for finance, Dr Sundaram Janakiramanan.
'Since there is no active market, there is no historical data available to estimate the risk or return from the alternative investment assets.
'Hence, it is difficult to decide whether to invest in the alternative assets or not.'
Apart from these basic factors, each alternative asset carries its own unique risks and benefits.
Art, wine and, if you are a high net worth individuals, farmland, are among the alternative assets gaining popularity in Singapore.
Art
Mr Daniel Komala, the founder of Larasati Auctioneers, says global art prices have soared three- to four-fold since 2005, even after a correction in 2009.
The value of artworks is not directly related to financial markets and thus, art provides a way to diversify your portfolio.
However, art is not immune to global crises. In 2009, prices around the world plunged about 40 per cent on average.
There are now opportunities in contemporary art as most works are still undervalued, especially those by Asian artists, Mr Komala says.
The most expensive contemporary artwork from Asia costs about US$10 million (S$13 million), while a piece by top contemporary British artist Damien Hirst costs about US$100 million, he notes.
But art collectors from around the world are increasingly looking towards Asian art, and work from this region will certainly go up in value over time.
'(Westerners) woke up one morning to find that Chinese art was selling at millions of dollars. Now, they are paying more and more attention to Asia because they don't want to lose the next big opportunity,' Mr Komala says.
In 2005, Larasati sold a painting by Chinese artist Yue Minjun titled 'Kite' in Singapore for US$120,000. The same painting was sold in Hong Kong for US$1 million 18 months later.
So how do you start collecting art pieces if you know little about contemporary art?
First, find out about the artist who created the piece that you are interested in. 'If an artist has a good track record - he has shows in museums, his works are collected widely and not just domestically but internationally - then he might be good,' says Mr Komala.
Next, the investor should attend auctions and visit art galleries, and talk to experts. Sit at the back of the room during an auction and take note of how many bidders turn up, who is bidding for what, which pieces are hotly contested and the final transaction prices.
The biggest risk in art investment is buying the 'wrong' artwork, says Mr Komala. 'There's a lot more junk out there than good artworks.'
A major challenge is the fact that when a certain artist becomes famous and his work fetches high prices, other less famous artists will flood the market with work of a similar style. Investors who do not carry out proper research often end up buying one of these co-pycat works instead of the real deal.
'For example, there is one Chinese artist who became famous for his baby paintings. All of a sudden, you now have a million Chinese people painting babies,' Mr Komala says.
Once the hype over baby paintings ends, the investor holding an unoriginal piece will find his investment losing value pretty quickly, he adds.
Wine
As with art, it is not always easy to tell which wine would make a good investment.
In fact, one expert here says most people get it wrong.
Mr Lou Ghirardello, managing director of Wine Exchange Asia, says that out of about 100 wine investors he knows personally, only two are turning a profit.
Mr Ghirardello, a former investment strategist at Deutsche Bank, was indirectly involved in the wine business for 15 years before making it his full-time job five years ago.
He tried investing in wine himself some years back - and suffered a loss.
Trading prices of fine wines have slumped by about 10 per cent on average from a year ago.
But many wine investors do not even buy fine wines. They instead have 'cult wines' in their portfolio, Mr Ghirardello says.
These are made by relatively new wineries whose prices shoot up in the first few years after their launch but then fizzle out when the hype ends.
'What usually happens is that the broker will call you and say there is this great opportunity, this wine is massively undervalued and, in five years, it will cost this much more,' he says.
And the investor on the other end of the line usually does not carry out his own research on the wine, choosing instead to trust the broker, only to find out five years later that the wine is worth much less than what he paid for it.
Most investors buy through a wine brokerage, which typically recommends good investment wines, arranges storage and insurance, and eventually helps sell them.
But Mr Ghirardello says this is not how it is working out for many wine investors here.
As many wines have fallen in value, the brokers have a tough time finding buyers for investors who want to exit their wine investment.
Furthermore, once the investor pays the broker's fees, storage and transport costs, the loss will likely be even worse.
Wine Exchange Asia helps in this regard, but instead of finding other investors to buy the wine, it markets and sells it to consumers looking for a good drink instead of a profit.
To avoid making the mistake of investing in a wine that will only lose its value, Mr Ghirardello shares these tips:
•Pick a wine from a wine maker that has decades, if not centuries, of history and tradition. Such longstanding brand names will always have a solid demand base, and their wines will not plunge in value.
•Buy from a wine maker that limits its production and supply. The rarer the wine, the more valuable it tends to be.
•Only invest in wine if you like drinking it. If your investment loses value, you should at least be able to enjoy a tipple with friends and family.
Farmland and vineyards
If you have US$5 million or more to spare, another alternative investment option is agricultural land.
Since the cost of entry is so high, farmland investing is mainly done by institutional investors or family offices.
Proponents say farm land is a good way to diversify a portfolio, preserve wealth and earn a recurring yield from selling crops.
It is also easier to find reputable firms like international property consultancy Savills that can help you with such investments.
The value of agricultural land has a low correlation to other assets: While the stock market has been volatile this year, farmland prices have been rising.
InvestAg Savills chief executive Henry Wilkes notes that land prices in Brazil, for example, have risen by 30 per cent in the 12 months to October.
In more developed markets such as Canada, farm values have climbed by 5 to 7 per cent in the past year.
With the world population expected to increase from seven billion today to nine billion by 2050, demand for food and biofuel will rise, thus boosting farm values, Mr Wilkes says.
But the risks are plenty, especially for new investors, as it is not easy to determine the potential of a particular parcel of land, whether in Australia or Argentina.
'There's the political risk - governments could suddenly implement restrictions on foreign ownership of land or increase taxes on property or exports,' says Mr Wilkes.
There are also the risks that any farmer would face, such as climate change, droughts, floods or crop diseases.
'How you get around that is by having a diverse geographical spread and doing your due diligence,' Mr Wilkes says.
Similar risks and opportunities abound in vineyards.
Mr Thomas Romanelli runs Plus Capital, an investment company that is acquiring vineyards and wine makers in Europe and the United States.
'There are a lot of people who inherited vineyards and wine businesses but did not want to be farmers. Maybe they wanted to be engineers or dentists,' he quips.
'So these businesses lack professionalism. Especially in Europe, these businesses have become smaller and smaller. They don't have the scale needed to run profitably.'
What Plus Capital does is collect funds from various investors to acquire such businesses and their properties.
It then injects fresh management and talent to revive the winery.
yasminey@sph.com.sg
Dec 18, 2011
Before you invest in paintings and wine...
Alternative assets often promise high returns, but heady profits are not often easy to come by. Yasmine Yahya separates myths from facts
When investors are dazzled with promises of high returns, it is tempting to throw caution to the wind and just sign on the dotted line, but alternative investments are often complicated, unregulated and highly risky.
And going to a reputable and regulated fund for such investments can be difficult, as most usually target institutional clients. So the barriers to entry for retail investors can be high.
Difficult access to information
As many investors learnt during the recent financial crisis, it is foolish to invest in products that you do not fully understand.
Alternative investments require even more research and due diligence than vanilla products such as stocks or bonds.
So before putting your cash into assets such as art, wine, or foreign property, you need to attend events to attain information, perhaps even travel overseas to check things out.
Most alternative investments are not regulated by the Monetary Authority of Singapore (MAS), so it is up to investors to conduct their own due diligence.
Mr Ernest Low, head of product and research at Professional Investment Advisory Services, said retail investors should stick to fund houses and brokers registered with the MAS. Registration 'ensures that MAS has done its due diligence on the company and its directors, and confirmed that they are credible', he said.
'You can do your own homework on the company, try to find out when it was set up, how long a history it has had, and who its directors are. But it is usually quite hard for retail investors to gain access to such information.'
Opaque markets, high costs
An associate professor of finance at Nanyang Technological University (NTU), Dr Low Buen Sin, notes that alternative assets often involve high transaction costs.
That means the asset would have to make a 'decent' appreciation in value to ensure a profit after paying off various costs, such as auction house or brokerage fees, insurance premiums and storage costs. Assistant Professor Stephen Dimmock of Nanyang Business School adds that alternative assets are usually traded in markets that are opaque.
'It is easy for an unscrupulous investment manager to exploit his clients when he trades in illiquid assets, in which prices are determined through negotiations rather than in an open market.
'In a non-transparent market, it is easy for an unscrupulous investment manager to overpay for assets in return for kickbacks or to trade with a related party at unfair prices.'
Another challenge is that it is not easy to find out the past transaction prices for such assets, says SIM University's head of programme for finance, Dr Sundaram Janakiramanan.
'Since there is no active market, there is no historical data available to estimate the risk or return from the alternative investment assets.
'Hence, it is difficult to decide whether to invest in the alternative assets or not.'
Apart from these basic factors, each alternative asset carries its own unique risks and benefits.
Art, wine and, if you are a high net worth individuals, farmland, are among the alternative assets gaining popularity in Singapore.
Art
Mr Daniel Komala, the founder of Larasati Auctioneers, says global art prices have soared three- to four-fold since 2005, even after a correction in 2009.
The value of artworks is not directly related to financial markets and thus, art provides a way to diversify your portfolio.
However, art is not immune to global crises. In 2009, prices around the world plunged about 40 per cent on average.
There are now opportunities in contemporary art as most works are still undervalued, especially those by Asian artists, Mr Komala says.
The most expensive contemporary artwork from Asia costs about US$10 million (S$13 million), while a piece by top contemporary British artist Damien Hirst costs about US$100 million, he notes.
But art collectors from around the world are increasingly looking towards Asian art, and work from this region will certainly go up in value over time.
'(Westerners) woke up one morning to find that Chinese art was selling at millions of dollars. Now, they are paying more and more attention to Asia because they don't want to lose the next big opportunity,' Mr Komala says.
In 2005, Larasati sold a painting by Chinese artist Yue Minjun titled 'Kite' in Singapore for US$120,000. The same painting was sold in Hong Kong for US$1 million 18 months later.
So how do you start collecting art pieces if you know little about contemporary art?
First, find out about the artist who created the piece that you are interested in. 'If an artist has a good track record - he has shows in museums, his works are collected widely and not just domestically but internationally - then he might be good,' says Mr Komala.
Next, the investor should attend auctions and visit art galleries, and talk to experts. Sit at the back of the room during an auction and take note of how many bidders turn up, who is bidding for what, which pieces are hotly contested and the final transaction prices.
The biggest risk in art investment is buying the 'wrong' artwork, says Mr Komala. 'There's a lot more junk out there than good artworks.'
A major challenge is the fact that when a certain artist becomes famous and his work fetches high prices, other less famous artists will flood the market with work of a similar style. Investors who do not carry out proper research often end up buying one of these co-pycat works instead of the real deal.
'For example, there is one Chinese artist who became famous for his baby paintings. All of a sudden, you now have a million Chinese people painting babies,' Mr Komala says.
Once the hype over baby paintings ends, the investor holding an unoriginal piece will find his investment losing value pretty quickly, he adds.
Wine
As with art, it is not always easy to tell which wine would make a good investment.
In fact, one expert here says most people get it wrong.
Mr Lou Ghirardello, managing director of Wine Exchange Asia, says that out of about 100 wine investors he knows personally, only two are turning a profit.
Mr Ghirardello, a former investment strategist at Deutsche Bank, was indirectly involved in the wine business for 15 years before making it his full-time job five years ago.
He tried investing in wine himself some years back - and suffered a loss.
Trading prices of fine wines have slumped by about 10 per cent on average from a year ago.
But many wine investors do not even buy fine wines. They instead have 'cult wines' in their portfolio, Mr Ghirardello says.
These are made by relatively new wineries whose prices shoot up in the first few years after their launch but then fizzle out when the hype ends.
'What usually happens is that the broker will call you and say there is this great opportunity, this wine is massively undervalued and, in five years, it will cost this much more,' he says.
And the investor on the other end of the line usually does not carry out his own research on the wine, choosing instead to trust the broker, only to find out five years later that the wine is worth much less than what he paid for it.
Most investors buy through a wine brokerage, which typically recommends good investment wines, arranges storage and insurance, and eventually helps sell them.
But Mr Ghirardello says this is not how it is working out for many wine investors here.
As many wines have fallen in value, the brokers have a tough time finding buyers for investors who want to exit their wine investment.
Furthermore, once the investor pays the broker's fees, storage and transport costs, the loss will likely be even worse.
Wine Exchange Asia helps in this regard, but instead of finding other investors to buy the wine, it markets and sells it to consumers looking for a good drink instead of a profit.
To avoid making the mistake of investing in a wine that will only lose its value, Mr Ghirardello shares these tips:
•Pick a wine from a wine maker that has decades, if not centuries, of history and tradition. Such longstanding brand names will always have a solid demand base, and their wines will not plunge in value.
•Buy from a wine maker that limits its production and supply. The rarer the wine, the more valuable it tends to be.
•Only invest in wine if you like drinking it. If your investment loses value, you should at least be able to enjoy a tipple with friends and family.
Farmland and vineyards
If you have US$5 million or more to spare, another alternative investment option is agricultural land.
Since the cost of entry is so high, farmland investing is mainly done by institutional investors or family offices.
Proponents say farm land is a good way to diversify a portfolio, preserve wealth and earn a recurring yield from selling crops.
It is also easier to find reputable firms like international property consultancy Savills that can help you with such investments.
The value of agricultural land has a low correlation to other assets: While the stock market has been volatile this year, farmland prices have been rising.
InvestAg Savills chief executive Henry Wilkes notes that land prices in Brazil, for example, have risen by 30 per cent in the 12 months to October.
In more developed markets such as Canada, farm values have climbed by 5 to 7 per cent in the past year.
With the world population expected to increase from seven billion today to nine billion by 2050, demand for food and biofuel will rise, thus boosting farm values, Mr Wilkes says.
But the risks are plenty, especially for new investors, as it is not easy to determine the potential of a particular parcel of land, whether in Australia or Argentina.
'There's the political risk - governments could suddenly implement restrictions on foreign ownership of land or increase taxes on property or exports,' says Mr Wilkes.
There are also the risks that any farmer would face, such as climate change, droughts, floods or crop diseases.
'How you get around that is by having a diverse geographical spread and doing your due diligence,' Mr Wilkes says.
Similar risks and opportunities abound in vineyards.
Mr Thomas Romanelli runs Plus Capital, an investment company that is acquiring vineyards and wine makers in Europe and the United States.
'There are a lot of people who inherited vineyards and wine businesses but did not want to be farmers. Maybe they wanted to be engineers or dentists,' he quips.
'So these businesses lack professionalism. Especially in Europe, these businesses have become smaller and smaller. They don't have the scale needed to run profitably.'
What Plus Capital does is collect funds from various investors to acquire such businesses and their properties.
It then injects fresh management and talent to revive the winery.
yasminey@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
