Tag: asset

Categories
Learn

Five low-risk assets to hedge against inflation

Low-risk assets against inflation
Low-risk assets against inflation

As purchasing power slowly drains, investors with low-risk tolerances are feeling the sting. At the time of writing (May 2023), UK inflation sits at an uneasy 10.1%. With the average savings account interest at a flimsy 0.23%, cash is going backwards. Meanwhile, high inflation munches away the future value of bonds and debt like a deranged Pac-Man. This represents a real problem for wealth managers. In a constantly shifting sea of interest hikes, inflation, and market shocks, how can they maintain and strengthen lower-risk portfolios without going too overweight on equity? How can they keep the cautious risk profile intact without endangering returns?

This article examines five overlooked assets for cautious investors, which have a history of punching back against inflation.

Gold

In the fight against inflation, physical gold is surely Mohammad Ali. Gold tends to increase in value as inflation rises. According to World Gold Council data from the past 50 years, when inflation is above 3%, the gold prices jump by 14%.

This asset class has the added benefit of being universally accepted. Unlike interest-generating assets or fine wine, precious metals can be included in Shariah portfolios.

Not only is gold inflation-resistant, but it is also classed as a low-risk asset, which must be a welcome relief for low-risk investors. Arguably, gold is even less risky than cash, as its value is intrinsic.

However, that doesn’t mean that there aren’t bubbles and market corrections. Over the past years gold’s performance has shown more volatility alongside the public markets.

Fine wine

There are several reasons why fine wine kicks back against inflation. It’s a physical asset. The market is global and wealthy, often relatively unaffected by market shocks. Plus, buyers are usually passionate, so they are unlikely to panic-sell. Perhaps most importantly, bottles are unique, and they deplete over time.

The steady returns can help to smooth overall portfolio volatility and reassure clients. According to an index that tracks the performance of 1,000 fine wines from different regions (Liv-ex 1000), investors have benefited from average returns of 40.3% over the past five years. By contrast, the FTSE 100 delivered just 4.8%. You can see the performance of your preferred wines here.

However, there are downsides. Although wine shields against inflation, it can be difficult to sell quickly. For clients who need to urgently access funds, this asset might not be ideal. What’s more, clients only realise returns after they sell. Unlike with bonds and shares, investors cannot enjoy gains and stay invested.

One solution for wealth managers could be to offer a mix of assets with different liquidity. For example, by combining fine wine, gold and inflation-linked bonds in one portfolio.

Sustainable energy

As the prices of raw materials tend to be the first to rise, commodities are often used to predict and hedge against inflation.

Traditionally this asset class includes oil and non-renewable energy sources. But with the rising regulations and scientific warnings, this may not be a wise or future-proof investment anymore. The EU, for example, is in the process of amending the Energy Efficiency Directive so that 45% of all European energy will be renewable by 2030. The Green Deal also imposes carbon taxes on dirty providers. Already, around 29% of the world’s energy comes from clean sources, and that figure is likely to increase over the long term.

While green energy can be higher risk, it’s not as precarious as non-renewables. In the same way that whale oil plummeted in 1860, investors left holding fossil fuel stocks in twenty years’ time could find themselves with stranded assets.

Inflation-linked bonds

Unlike other debt instruments, inflation-linked bonds are pegged to the recorded inflation levels. So, even in high-inflationary environments, they should retain their value.

A huge advantage of inflation-linked bonds is that they can usually be traded quickly. This could be helpful for wealth managers looking to balance out the illiquidity of fine wine or property.

However, the success of these assets hinges on the accuracy of the indices. Sometimes the consumer goods selected and measured can lead to artificial results. For example, the UK index contains DVD players and MP3 players. These are probably cheaper than they would have been a decade ago, but it is not because inflation is lower.

Affordable property

Property is a classic inflation-resistant investment. But what kind should today’s cautious investors go for? Property addressing the UK’s housing crisis could be fruitful. Despite strong demand, there is currently a shortage of over 4 million homes.

Another interesting area for low-risk investors to consider could be affordable student accommodation. Applications to universities tend to rise during recessions. After 2008, they increased 31% in the UK. And since 2020, they have reached record-levels. KPMG anticipate a 16% increase in the number of undergraduates searching for rooms by 2030.

The risk is relatively low, as in many cases, the accommodation will be handled and managed by the university itself. Yields for investors average at around 5% for London-based lets and 4% for accommodation outside the capital.

But a word of caution, the buy-to-let market is becoming less lucrative every day, with high interest rates and increasing regulations. In the current climate, some are wondering if the money would be better placed elsewhere.

Chartering a new course

Record-levels of inflation are transforming the investment landscape. What made sense yesterday no longer adds up today.

This article aims to help spark ideas for wealth managers. It presents five potential lower-risk investments, that also have famous inflation-shielding qualities.

As wealth managers re-balance portfolios and seek new assets, they can also make the world a better place. Now is the ideal time to incorporate social and environmental factors into the investment strategy. After all, to truly future-proof portfolios, we need a healthy planet.

Discover five ways fine wine investments are good for the environment.

WineCap’s independent market analysis showcases the value of portfolio diversification and the stability offered by investing in wine. Speak to one of our wine investment experts and start building your portfolio. Schedule your free consultation today.

 

 

 

Categories
Learn

Fine wine as a value and growth asset

Fine wine value and growth asset

Fine wine offers the benefits of different asset classes. As a long-term investment, due to the inherent premise that it gets better with age, fine wine would traditionally fall under the ‘value asset’ category. This is especially true as investors tend to buy and hold wine for decades before selling at a premium. 

However, since fine wine is a highly sought-after and depleting investment, it shows tremendous growth characteristics too. Over the past year, fine wine has delivered strong returns, with some bottles increasing in value by as much as 550%. This makes it more akin to growth assets. 

Could fine wine be considered both a value and growth asset?

Value assets have intrinsic value and are usually undervalued

When investors talk about value and growth assets, they are generally referring to publicly-traded stocks. This could mean huge blue-chip corporations like Coco-Cola, Microsoft, or Tesla, or it could be little-known and up-and-coming stocks. Generally, the market is extremely efficient and so finding an underpriced stock is hard work. Those who dedicate time and research to discovering these undervalued assets are known as value investors. 

Warren Buffet is perhaps the most famous value investor of all time. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” he declares. For Buffet, seeking intrinsic value is the only real way to invest. Perhaps that is why he is such a fan of fine wine investments. Buffet has reportedly said that every portfolio should have at least a 1% allocation to fine wine. 

The value of fine wine can’t be measured the same way as a stock

To understand whether an investment offers good value or not, investors usually need to crunch a lot of numbers. But the process is a little harder outside of the stock market. Unlike traditional stocks and shares, analysts would be hard-pushed to calculate the price-to-earnings, debt-to-equity, or price-to-book ratios of fine wine. 

Firstly, this is because bottles, casks or barrels of fine wine do not offer “earnings” in the stock market sense. Bottles cannot pay dividends, and so buyers instead collect all their returns when they sell the asset.

Secondly, prices are variable. As fine wine is usually traded privately or through prestigious auction houses, the final sum is not always predictable – especially if you have two or more extremely passionate bidders in the room. As a result, bid-ask spreads are significantly greater than you’d find on the stock market. 

Finally, forecasting these values can be unreliable because in some cases wine prices are not always publicly available. However, as industry leaders, we do have a lot of this information. If you would like to get an insider idea of the latest auction results and performances, check Wine Track. 

While we may not be able to scrutinize the value of fine wine in the traditional sense, we can analyse the general trends and characteristics. From here, we can see how they hold up against traditional value stocks. 

Fine wine shares many of the long-term characteristics of value investments

As an asset class, fine wine behaves like a value investment. Some of the main characteristics are the “buy low, sell high” strategies, the long-term investment horizon, and stable financial returns. 

  • “Buy low, sell high” strategies 

Value stocks are generally underpriced on the market, meaning investors expect to make profits over time as the asset realises its true worth. This is remarkably similar to fine wine investments. Many purveyors will purchase the wine en primeur before it is even bottled to secure the best price.

At the time of writing, wines such as Domaine d’Auvenay have already delivered returns of nearly 8,500% over a ten-year period. This shows the incredible power of buying wine early, and holding. 

  • Buy and hold over the long-term

As the adage goes, fine wine gets better with age. High-quality Bordeaux, for example, takes 20-30 years to mature. Successful investors will generally buy and hold fine wine over the long-term. 

This approach mirrors the “value” philosophy perfectly. As Buffet himself warns, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”.

  • Steady returns

Stability is another key characteristic of value investments. These assets should be able to sail through all kinds of market storms with minimal or zero disruption. Fine wine has delivered exceptionally stable returns over the last year, holding up against recessions and incrementally gaining value despite stock market chaos. 

Fine wine has compelling growth attributes too

On the face of it, fine wine seems to be a value investment. It is a steady long-term asset which gains value over time. Yet, despite its famous stability, this investment has also delivered some impressive short-term returns and it is an alternative asset, which push it more into the growth category. 

  • Fine wine is an alternative asset 

Investors looking for growth assets tend to accept volatility risk, as part of the trade-off for superior returns. Because of this, they are more inclined to look away from the reassurance of the stock market to find new revenue streams. Increasingly, unlisted property, private equity, hedge funds, high yield credit, long-duration bonds and alternative debt are finding their way into growth funds and portfolios.

 As an alternative asset, fine wine seems to fit snugly into the “growth” category. Yet, unlike these investments, fine wine is generally not volatile. 

  • Exceptional short-term returns 

Wine can, however, deliver exceptional short-term returns. Over just five years, fine wines such as Hubert Lamy have seen values increase by 1,223%. This is an extraordinary performance. To put this it into context, it took value stock Coco-Cola 24 years to deliver returns like this. 

Some fine wines are even demonstrating market-beating returns in extremely short timeframes too. Some brands like Hubert Lamy have enjoyed increases of over 450% in just three months. If you’d like to explore the greatest gains and losses in the industry, Wine Track is a useful resource. As you read, please remember that experts do not recommend investing for less than five years. 

Fine wine offers the best of both worlds 

Fine wine is a fascinating alternative investment because it seems to offer the best of both value and growth without the downfalls.  

Fine wine is a buy-and-hold asset which increases in intrinsic value over several decades, while offering historically-superior returns. It also holds up well in recessions and fights back against inflation. These are all classic characteristics of value investments. 

Meanwhile, some bottles have proven to be extremely lucrative over the short-term. These boosts in value are likely to continue as climate change ramps-up demand for scarce flavours. High gains in short periods of time – especially from alternative assets – are usually more commonly associated with growth investments. 

Therefore, fine wine is an incredibly versatile asset, suitable for different kinds of investment strategies. Whether you’re looking for value, growth or both, fine wine could help you reach your goals faster. 

Explore your investment options