Business Personal Finance

Thursday 17 October 2019

Despite lure of exotic investments a diverse portfolio is still the best bet

Peter Flanagan and John Mulligan

There is a memorable scene in the film 'Wall Street' where antihero Gordon Gekko meets his comeuppance. He had bought up stock in Bluestar Airlines with a plan to take it over, but the stock tanks and he has to sell his holding at a huge loss. With the look of a man who has just been beaten up, Gekko instructs his broker to "dump it, dump it all" before slamming down the phone.

Any investor who has been involved in traditional financial products over the last four years has become acutely familiar with that feeling.

The hitherto relatively safe world of stocks and bonds has proved anything but.

In May 2007, the ISEQ Overall Index topped 9,914. Since then it has lost more than two- thirds of its value, and so have the investments of thousands of people who either invested in the ISEQ directly or through tracker funds.

It's been a similar tale elsewhere.

Germany's DAX Index is off more than 25pc in four years, while the FTSE 100 is down 15pc. In the US it's not much better. The Dow Jones Industrial Average is off 14pc since October 2007 and the S&P 500 is nearly 20pc lower in the same timeframe.

And as for bonds, well, we are only too familiar with the difficulties in that sector since 2008.

In this climate, when the idea of a "risk-free asset" is just a dream, what is an investor to do? For some, shares and bonds are no longer the only option. Gold has long been seen as a safe haven, but safety is now being sought in assets far beyond what the regular investor may think of.

Cars, jewellery, art, even fine wines have all received publicity as "safe" assets for your money, while the World Whisky Index was launched in 2007 for the trading of rare spirits.

But should the everyday investor be putting money into these asset classes? In the long run, will he or she really be better off in there as opposed to the stock market?

Mark Daly, the head of wealth management with Investec in Dublin, cautions against the "average punter" putting too much cash into the so-called "alternative" investment market.

"If you invest in wine or art or anything else like that, you are relying on gut instinct to a certain extent. Historic trends and charts can only tell you so much when it comes to these," he says.

"The other thing people don't always realise is that alternatives such as those are highly illiquid assets. They don't pay an annual dividend or a coupon, so you don't receive anything until you sell the asset," he adds.

The lack of an annual income is one of the biggest challenges an investor will face if he or she wants to dabble in alternative investments. A company share price may fall, but if the firm is still paying a solid dividend that can be enough for some. Buying cars or jewellery is a straight bet that the price will increase and you will be able to sell at a profit down the line. That's something that will not suit everyone.

James O'Halloran, the managing director of the respected Adam's auction house in Dublin, agrees that anyone buying a painting as an investment -- or any piece for that matter -- needs to obtain good impartial advice before they do so. But he says that as an investment choice, art remains a hugely popular and very legitimate option.

He also says that a person should be prepared to hold a painting, if it's bought as an investment, for at least 20 years before selling it.

"You should be buying the best piece of work you can afford. Just how much of a return you'll eventually see on it depends on a number of factors, including when you sell it in terms of what the market wants at a particular time, and where you sell," he adds.

He points out that an auction held by Adam's last week of work by Irish artists generated €2m in sales. Mr O'Halloran notes that 80pc of buyers were Irish, and most buyers at auctions are generally business people, and those involved in the medical profession, for instance.

"They're repeat buyers and know what they want," he explains. "They're also the people who were buying before the boom and then stood back during it and said they weren't going to get involved."

The Adam's boss says that during the boom it was not uncommon to see some pieces by living artists sell for prices significantly more than what the artists may have been offering those same pieces for in their gallery prior to auction.

Mr O'Halloran reckons the prices commanded in the marketplace for works by living Irish artists have fallen by between 30pc and 50pc on average in the past few years.

As for potential returns on deceased artists, Mr O'Halloran points out that a 1929 painting by Jack B Yeats -- Jazz Babies -- was sold by Adam's last week for €480,000. It was acquired in 1981 at an auction in Slane by a previous owner for the equivalent of €14,000. That made for about a 3,400pc return over the painting's recent lifetime.

Last night, Adam's held an auction of fine jewellery. Mr O'Halloran said there has been strong interest in the sale. He also noted that despite the current economic climate Adam's had barely seen any items come to it for auction where the sale was a distressed one.

But if art isn't quite your cup of tea, there are alternatives.

Investec, for example, runs an airline leasing fund that leases planes to airlines, thus producing steady income. But it requires a serious amount of capital in the first place and would probably be beyond most people's financial capacity.

That is the other big challenge to getting into these markets: having enough capital to make a worthwhile investment, says Mr Daly.

"The old adage of having a diversified portfolio is as true now as it ever was, so investments like these should really be only about five to 10pc of your portfolio. "The entry level for these assets are quite high. If someone is using investments for their pension, say, they might have up to €200,000 in capital.

"That would suggest they would have up €20,000 to put into this sector, which may not be enough to earn a big enough profit to make it worth pursuing," he reckons.

There are also logistical issues. It's one thing to have the cash to spend on a collection of fine wines, or a classic car or two, but then you have to worry about storage. You can't just leave a collectable car in the driveway exposed to the elements, and you can't leave an expensive wine collection on a rack in the kitchen.

Unfortunately, it seems the more exotic asset classes are largely best left to the high net worth individuals who can afford to take a loss if their bet on single malt whiskey prices goes wrong. For better or worse, a diverse portfolio in equities, bonds and cash still appears to be the least worst investment.

But last week's Budget continued the penalisation of people for saving. Deposit interest retention tax (DIRT) was hiked from an already punitive 27pc to 30pc. Finance Minister Michael Noonan pointed out that people didn't need any incentive to save when saving levels were already historically high. He wants people to get spending, not hoarding their cash.

DIRT has now been raised by 20pc in just over a year, making interest returns on savings accounts that bit less attractive. The 30pc rate applies to interest payments made annually or more frequently than annually, but a higher 33pc rate applies to payments made less frequently.

People over the age of 65 can reclaim any DIRT deducted from the interest they receive, however.

However, those under 65 should still be listing the interest they actually receive on their tax return, although the interest itself isn't subject to any further tax take.

And while dividends may now be a rarity among many Irish stock market-listed firms these days, investors still need to be aware of their responsibilities to the taxman. A 20pc withholding tax is deducted at source on Irish and British dividends paid to investors, but the income still needs to be declared to the taxman.

Depending on your total income, you may be liable to pay additional tax on those dividends at the higher tax rate. You also have to pay the universal social charge on the dividend income. All that can make stocks an even less attractive prospect for the average punter.

But there are a number of entities exempt from paying the withholding tax, including companies and pension schemes. That leaves the window open for astute investors to bypass the tax burden.

Buying government or other bonds (Tesco Bank has previously offered 5.2pc bonds to retail investors, for example) is also an alternative route for investors.

Some financial institutions have tailored products to enable you to invest in bonds, but it's also possible to buy some bonds -- such as German and French paper -- directly from either the German finance agency Bundesrepublik Deutschland- Finanzgentur, or France's Agence France Tresor.

But before you do anything -- investing in art, bonds or that fancy old Ferrari -- do one thing, get proper advice.

"The most valuable commodity I know of is information." At least Gordon Gekko got that right.

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