The proportion of wealth held in treasure assets varies widely between countries. Respondents from the United Arab Emirates top the list, with 18% of their wealth held in treasure, followed by those from Saudi Arabia and China at 17% (see chart 1). These findings hold even when gold, a popular asset class in the Middle East and Asia, is excluded.
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Although there are exceptions to this rule, one general theme seems to be that respondents from economies that have more volatile or less developed financial markets and high per capita incomes tend to hold higher proportions of treasure in their portfolio. Treasure in these markets can often be embedded in the local culture and perceived as something that is portable. It may be considered to be a more secure store of value than paper assets, hence its popularity as a gift at weddings. The wealthy may also see it as a hedge against inflation, which remains high in some of these countries.
A focus on treasure is not limited to emerging markets, however. In general, our survey suggests that the proportion of wealthy individuals who own treasure assets has increased compared with five years ago (see chart 2). But care must be taken when interpreting this data. For one thing, the individuals in the survey would have been younger and probably less wealthy five years ago, and hence it is natural that they will have acquired more treasure in the intervening period.
Anecdotal evidence also points to an increased focus on alternative assets, however. Phillip Hoffman, chief executive of the Fine Art Fund, says that he has seen a significant increase in the number of wealthy individuals seeking to own alternative assets, like art, as part of their portfolio. “In the old days, clients just wanted equities, bonds and a bit of real estate, but now they want a very wide distribution of assets and are looking to put a proportion of their wealth into categories of alternative assets like art,” says Mr. Hoffman.
Increased allocations to treasure assets could be attributed to a variety of factors. The impact of the financial crisis is certainly one. Concerned about the stability of traditional financial assets, a growing number of wealthy individuals perceive that treasure, such as paintings or jewellery, could offer a more stable source of value. “In times when paper wealth is seen to be more risky, investors are drawn to real, tangible assets,” says Vikram Mansharamani, a Lecturer at Yale University and Author of Boombustology.
Dr. Greg B Davies, Head of Behavioural Finance at the Wealth and Investment Management division of Barclays, says that this growing focus on treasure is just one example of a familiarity bias that has become more pronounced since the financial crisis, whereby individuals focus on investments that they feel they understand. “We have seen evidence of wealthy investors moving closer to their home markets when investing and into simpler financial instruments,” he explains. “The increased focus on treasure assets is part of that same trend and represents a general move toward simplicity, familiarity and tangibility.”
Precious jewellery is by far the most popular category for wealthy individuals to own followed, at some distance, by fine art and antique furniture. When asked in a 2012 survey what they owned five years ago, 57% of wealthy individuals in the survey say that they owned precious jewellery but, when asked what they own today, the proportion rises to 70% overall, and 81% amongst women. The percentage of wealthy individuals owning fine art paintings, antique furniture, precious metals and wine has also increased fairly significantly (see chart 2), although again, this may reflect increased wealth and age in general, in addition to an increased preference for treasure assets.
Jewellery has long been popular for its “intrinsic value” — unlike cars or real estate, for example, it does not require upkeep and will generally not deteriorate over time. In some cultures, there is also a tradition of holding a proportion of wealth in assets, like jewellery, that can be easily transported in the event of an emergency.
Rising prices for precious metals and gemstones have added to the appeal. In 2011, demand for gold exceeded USD$200 billion for the first time, according to the World Gold Council. Precious gems have also risen in value and achieved record prices at international auctions. In 2011, a huge diamond known as the “Sun-Drop Diamond” sold for USD$12.4 million. ”People are buying jewellery because it’s a safe haven that continues to increase in value,” says Elizabeth Von Habsburg, Managing Director of the Winston Art Group, the largest independent art appraisal company in the United States.
Vintage or estate jewellery has grown in popularity and value. In December 2011, the collection owned by Elizabeth Taylor went under the hammer at Christie’s in New York. The auction, which ran for two weeks, achieved a new world record for a jewellery collection of USD$156.8 million. This is more than three times the previous world record for a jewellery auction, when a collection belonging to the Duchess of Windsor was sold in Geneva for USD$50.3 million in 1987.
On average, the wealthy individuals in the survey who own precious jewellery have a collection that is worth around 5% of their entire net worth. Precious jewellery is particularly popular in India, where 98% of respondents say they have some in their treasure collection (see chart 4). “Wealthy Indian families have owned enormous stocks of gold and jewellery since time immemorial because it’s portable, safe and not subject to confiscation,” says Felix Salmon, Finance Blogger at Reuters.
Although jewellery is the most popular treasure asset, it is not necessarily the most expensive. Collecting classic cars, while pursued by just 19% of wealthy individuals, is the most costly treasure pursuit by some margin. Amongst those who own classic cars, the average collection is worth 7% of their net worth, which is equivalent to USD$637,000 (GBP£395,321).
Collectors are certainly willing to pay high prices for the right car. In 2011, a 1957 Ferrari 250 Testa Rossa Prototype sold for USD$16.4 million making it the most expensive vehicle ever sold at auction. According to the Historic Automobile Group International (HAGI), which created several indices that track classic cars, auction prices rose by 20% in 2011.
Dietrich Hatlapa, founder of HAGI, argues that the historic car market is relatively liquid compared to other collectors’ markets and is also characterised by some investors who are constantly trading up and seeking to improve their collections. “Classic car collectors can border on the obsessive and are never satisfied,” he says. “They always want something rarer and more collectible.”
But investors must be extremely cautious when acquiring classic cars as an investment. Fashion can change, affecting valuations, and cars, unlike jewellery, can depreciate in value as a result of dents, scratches or rust. The cost of upkeep, maintenance and insurance can also be considerable, as can the transaction costs when buying or selling at auction.
Despite these risks, collecting cars is a hobby that looks set to increase in popularity. When asked which categories of treasure they want to own in the future, classic cars top the list of categories where individuals do not own one now, but would like to do so in the future (see chart 5). This suggests that classic car collecting, like the ownership of fine art sculptures, is seen as a particularly “aspirational” type of treasure whose high entry costs and level of cachet make it particularly appealing for some individuals.
There are certain categories of treasure that increase in popularity with age. Fine art and antiques tend to be more popular amongst respondents aged 55 and over, while those under 45 prefer cars, wine, precious metals and jewellery (see chart 6). In general, younger individuals also tend to hold a higher absolute amount of assets in treasure and a higher proportion of their wealth in treasure assets (see chart 7), even when the effects of gender, net worth and wealth are taken into account. “Younger investors are more willing to adopt higher-risk strategies and that makes them well suited to seek financial return from collectibles as part of a diversified portfolio,” says Rachel Pownall, Adjunct Associate Professor at the Tilburg School of Economics and Management.
Decluttering and the endowment effect
Looking ahead to the next five years, respondents generally say that they will reduce the number of types of treasure they hold. This holds true in the case of all categories, with the exception of fine art sculpture and classic automobiles (see chart 2). The motivations for this decluttering will vary, and may encompass a desire to liquidate assets, realise returns or carry out estate planning. It may also reflect an expectation that broader financial markets will eventually prove to be a better investment than treasure assets once a sustained economic recovery takes hold. As fear recedes, investors may return to the markets and see less need to hold their wealth in tangible assets.
Despite these intentions, behavioural finance tells us that the reality may be somewhat different. Dr. Davies highlights the planning fallacy as one reason why individuals may not go through with their intentions to declutter. “Whenever people plan projects, they are invariably over-optimistic about the time it will take and the cost they will incur,” he explains. “People may think they are going to get rid of their treasure, but I suspect that we will see a similar pattern in five years’ time, with individuals moving into some categories of treasure and out of others but with no real net reduction in the quantity they hold.”
Another factor is the endowment effect, whereby people demand a higher price for an item before being prepared to sell it than they would be willing to pay for it. “Once people own something, they start to ascribe value to that object simply through having owned it and that means that they are not willing to sell it at the same price for which they would buy it,” explains Professor Pownall. “This is one reason why people might think that they are going to offload their treasure, but in reality they don’t because their attachment becomes too great.”
Certainly the price increases individuals would require before they would sell their treasure are extremely high. For example, respondents say they would require an average price increase of more than 60% in the first year of owning an asset to trigger the sale of fine art or paintings, and just over 50% to prompt them to sell a wine collection. The fact that individuals are only willing to sell at these levels suggests that financial gain is not the primary reason why individuals own these assets.
As individuals grow older, their attachment to treasure grows, suggesting that decluttering happens less frequently than individuals think. Respondents in their 70s, for example, will typically require a greater increase in value from their treasure assets in order to trigger a sale than those in their 30s (see chart 8). This is consistent with the fact that younger people are more likely than older people to use their treasure as a financial investment. Their emotional attachment is therefore lower, and they will be more willing to buy and sell in order to seek a return. “Wealthy individuals can benefit from a regular appraisal and periodic cataloguing of their treasures,” explains Anthony Ruscigno, Director in the Wealth Advisory business of Barclays. “A personal assessment of collectibles is particularly useful for individuals with a significant number of personal holdings. By doing this, they are able to provide a ‘roadmap’ of items owned which is helpful for personal, familial and insurance purposes.”
Some people, of course, may never be willing to sell their treasure. For them, the motivation for owning an item is not financial, but emotional. They may want to keep hold of an item, save it for the next generation as an heirloom, or ensure that it is available for others to enjoy in museums or their own homes. Some categories of treasure are more likely to be considered priceless than others. Just under half of respondents who own antique furniture, precious jewellery, fine art sculptures and wine collections consider their treasure to be priceless. Far fewer hold a similar view of the more commodity-like categories, such as coins or precious metals (see chart 9).
Women and treasure
Around the world, the number of female high net worth individuals is on the rise. Women are playing a more prominent role in business, finance and entrepreneurship, and are taking greater control of their finances and wealth management. Research from the World Bank suggests that women account for up to 80% of purchasing decisions and that, by 2014, they will control a GDP that is bigger than that of India and China combined.
In the coming years, this trend will have significant implications for collectibles markets. Overall, women in our survey tend to have a stronger preference for treasure assets than men. On average, they allocate 11% of their net worth to treasure, while the corresponding figure for men is around 9%. For now, the absolute amounts held by men and women are broadly similar, but as female wealth grows, demand for treasure could increase if the proportion that they allocate to these assets remains stable.
The motivations for holding treasure differ between men and women. In general, women respondents are less likely to consider their treasure to be a financial investment, or to own it as financial security if conventional investments fail. They are also less likely to agree that there is a duty to share valuable possessions for the good of society. For women, it seems, treasure is something that is deeply personal, and that is tightly bound up with its aesthetic qualities, rather than financial motivations. The types of treasure that women collect reflect this preference. In general, women respondents are less likely to own the “commodity-like” treasure assets, such as precious metals, than men, and they are more likely to prefer aesthetic treasures, such as jewellery, antique furniture and fine art tapestries.
The personal motivations for owning these assets also means that women are more likely to hang on to them than men. The decluttering phenomenon that we observe from the broader survey is less pronounced amongst females. For them, it seems, these assets are more likely to be “treasured” over a lifetime, and have a deep intrinsic value that forms an important part of their overall wealth.
Well-meaning parents may think that they are benefiting their dependents by leaving treasure to them, but the reality can be very different. Expensive works of art, sculptures and furniture can cost significant sums of money to insure, store and maintain. They can also be subject to inheritance taxes, which can be high in some countries, like the U.S. and U.K. The burden of owning this treasure means that respondents who have inherited their wealth are much more likely than those who acquired it through other means to say that they have either sold it, or plan to do so in the future (see chart 10).
Ms. Von Habsburg confirms that selling on inheritance is the rule rather than the exception. “In our experience, most of the inherited works of art and collectibles are sold,” she says. “The inheritors may hold on to one or two pieces that have a strong sentimental connection but, in most cases, they wish to sell, often quite quickly.”
There are several reasons in addition to the cost of upkeep that are driving this trend. “Tastes change,” says Ms. Von Habsburg. “And the inheritors often have their own ideas of what they like and want to collect. Collectibles that may be popular with one generation may not be popular with the next. Also, inheritors may be very keen to monetise the assets and put them into their preferred asset class. Inheritance tax issues can also be an important driver of monetisation.”
The tendency for wealthy individuals to sell treasure when they inherit it highlights the importance for individuals to plan carefully when bequeathing treasure to dependents. Passing an art collection down the generations can create a wonderful legacy, but it can also be an unwanted burden. In some cases, it may be better to liquidate these assets prior to bequeathing them although, of course, they may want to enjoy them into old age and therefore be unwilling to do this. At a minimum, family members should engage in a candid discussion regarding their plans for the inter-generational transfer of treasure, and the associated interest and desire that the next generation has in receiving these items. “We often find that inheritance adds a completely new dimension to owning treasure,” says Mr. Ruscigno. “This is especially relevant when emotions and attachment to valuable assets comes into play. Individuals and family members should anticipate this so they understand the key estate planning aspects surrounding the retention, sale or transfer of treasure across generations.”
Ms. Von Habsburg notes that attitudes are changing over time and she believes that more and more of the current generation of collectors that are planning for the future realise that their collection may not be of interest to their offspring. She notes that it is possible, for example, to set up trusts where tax is deferred on collectibles. Before any decision is made, however, she recommends that a correct appraisal needs to be done. “Too often, decisions can be made in terms of insurance appraisals without having a current fair market value, which means that decisions get made on an incorrect basis. You need to establish the correct level of value at the outset.”
As we discuss in the next section, these difficulties with valuation have much broader implications. The fact that valuation can be so subjective is precisely what makes investing in treasure so risky, especially if an individual’s motivations are primarily financial.
These figures are based on a self-estimated calculation of treasures that individuals own.