23rd December 2011
Any consideration of alternative investments needs a caveat. The price of all luxury goods – from fine wine to art – is supported by wealthy people. These asset classes cannot therefore be immune from a weaker economic climate because a weaker economic climate means fewer rich people to support prices. Therefore, while these assets seem like they should be uncorrelated to equities or bonds, there is a relationship.
That said, there are a number of alternative assets that have proved relatively immune from the wider economic gloom and continue to offer some protection in 2012.
Wine merchant Berry Brothers & Rudd, says that the economic malaise hit wine prices in late 2008 – notably those of the top 2005s but that the fine wine market was back to full strength throughout 2009 and 2010: "Demand for the top wines… is as strong, if not stronger, that it was during the boom of 2005 – 2007. To put this in perspective, 2005 Château Lafite-Rothschild was released en-primeur in June 2006 at £3,760 per case in bond. By the summer of 2008 it was fetching just under £10,000 per case in bond. In November 2008 brave buyers could buy the same wine at just under £6,000 per case in bond. The wine was trading in January 2011 for more than £12,500 per case."
The key advantage of wine investment is that supply is limited. The famous chateaux only make a limited number. There is also growth in underlying demand. The Chinese have developed a taste for, among other luxury items, Bordeaux wine, which has supported prices.
Recent performance has been weaker and there is no doubt that a slower economic climate will hurt prices, whatever the quality of next year's crop. However, if it doesn't work out as an investment, at least it can be drunk.
Fine art has a similar appeal to wine. If it doesn't make any money, at least it may look pretty on a wall. However, the sector is not without its critics: "art is not an easily sold asset but it is also touted as another area for nervous investors: "The idea of contemporary art as a safe haven is a joke," said the entrepreneur Luke Johnson. "It is particularly illiquid, transaction costs are enormous, there is clearly no income and capital growth prospects are at best uncertain.""
However, the idea of buying a painting of a modern day Van Gogh and then selling it years later for millions is seductive. Many art dealers and experienced investors fail to do so, but that is not to say there isn't money to be made. There are plenty of advisers and one fund in this area has a respectable track record.
This piece suggests ways in which investors may participate directly in modern art. The MA shows from the major art schools are there for those who believe they have an eye for the next Damien Hirst.
Timber lacks the glamour of modern art or wine, but has proved a strong, non-correlated investment in recent years. This piece outlines the trajectory of timber investment: "The Savills UPM Tilhill report says that UK timber prices have been supported by the exchange rate, with the pound's fall in value attracting overseas buyers.
"The report says: ‘Over the last year we have seen timber prices rise on the back of strong demand for home grown timber. The strength of this demand is impressive and is at levels not seen for more than a decade. A weak pound has a lot to do with this rise; it makes imports expensive, exports valuable and home grown timber good value.'
"The rise of green energy projects has also helped, with wind turbines, solar panels and hydro-electric schemes providing an alternative use for land and pushing values up."
The indices provided by the Forestry Commission show that various parts of the timber market were up as much as 16% in real terms in the year to end September 2011. Its longer-term performance may not be correlated to equity or bond markets, but will depend on the factors mentioned above continuing. It should also be said that some of the discounts on forestry investment trusts widened out considerably during the downturn on liquidity worries.
Agriculture – Investing in land
Agriculture has been billed as a potential long-term investment success story. This sums up the investment case: "Extreme drought and unprecedented heat in the US farm belt, the eurozone debt crisis and political unrest throughout the Middle East – the threats to and concerns over world food supplies are everpresent. Political and natural disasters have driven agricultural commodity prices to record highs. But many experts predict longer-term rises as food production will need to increase by 70% in order to feed the world's population of 9 billion people by 2050.
"Clive Hopkins from real estate agent Knight Frank told CNBC : "During the recession, land has been pretty stable and resilient compared to other markets. We think the capital value of land will increase considerably in the short to medium period."
There are certain tax advantages in the UK of investing in land. It can be a means for high net worth individuals to avoid inheritance tax. But agricultural prices are vulnerable to the caprices of the weather. It may be uncorrelated to bond and equity markets, but that does not mean it is without risk. Investors can leave investment to the experts and there are a number of agricultural specialist funds.
Alternative investment may be more interesting, but there are relatively few undiscovered investment opportunities. If investors really want to go alternative in 2012, they may be better off simply buying something they like and then any increase in price would just be a happy accident.
More from Mindful Money:
Sign up for our free email newsletter here, for you chance to win an Amazon Kindle 3G Wifi.