Hobbies as investment in portfolio

Misc | admin | January 15, 2012 at 9:26 am

Investment assets are usually not perceived as objects of desire. They are simply looked upon as a means to earning a return. These assets, however, provide a dual benefit – a lot of joy and satisfaction by virtue of ownership and also by earning the owners a return on their investments. Such investments are referred to as passion investments.

Investment types and avenues

Various investments would fall under the category of passion investments A short list could include investments in art, jewellery, watches, antiques, collectibles, wine, luxury automobiles, luxury yachts, sports clubs, cinemas, scientific research labs, technology, ventures oriented towards social welfare and philanthropy, health, history, nature, travel, music, performing arts, spirituality… the list could go on.

Not just returns

The prime motive behind most passion investments is not just return. While factors such as risk and return do play a part in the investment decision, the primary deciding factor is often the investor's preference for ownership and participation in the asset itself. Interestingly though, there is also the aspect of trying to fulfil desires that have not been a reality so far or trying to live the experience through some sort of participation. This is mostly true in cases where billionaire investors spend a lot of money on owning sports clubs. It could merely be a fascination for the sport or it could also be that they were not able to pursue the sport in their time and, hence, derive a sense of participation and satisfaction from owning a club.

Place in investment portfolio

Passion investments fall under the broad category of alternative assets. The exposure to such investments has to be kept limited and should be ideally be around 10% to 15% of a portfolio's total value. A lot of such assets including art, wine, collectibles, etc, have shown a fair amount of negative correlation to traditional assets such as bonds or equities. Such assets are, therefore, ideal to diversify one's portfolio. In times of economic uncertainty, bad news is often good news for collectors and sellers. Therefore, when typical investments are down and when the stock market seems jittery, art, wine, and fine jewelry can be great investments.

Low investment yields in traditional asset classes and market volatility are causing investors to look elsewhere for investment opportunities. Tangible investments, which yield a decent long-term return and provide enjoyment, are becoming increasingly popular. The Capgemini and Merrill Lynch World Wealth Report 2010 found that high-net-worth individuals are returning to passion investment as 'investor-collectors', seeking out those items that are perceived to have tangible long-term value. According to the report, the two categories found to be the most attractive were art and 'other collectibles' such as coins, antiques or wines.

Disadvantages

These investments, however, come with their own set of issues. They are relatively hard to incorporate into a traditional portfolio. Firstly, they are subject to fads and fashions that keep changing. They are also hard to classify.

Therefore, passion investments – be they old master paintings, vintage cars or cases of Bordeaux wine – remain an area of fierce debate among financial advisors. Passion investments could at times turn out to be high-risk investments with no or low liquidity, inefficient price discovery mechanisms and high gestation periods.

Trends, current scene in India

With rising disposable incomes, more and more HNIs are turning to passion investments to diversify their portfolio and satiate their desire for the finer things in life. The report mentioned above states that Indians invest the most in jewellery, gems and watches followed by art and luxury collectibles. Interestingly, Indian HNIs mostly restrict their passion investments to tangible assets. Gold in the form of jewellery, bars and coins or luxury purchases is a favoured avenue. The fact that gold prices have run up substantially because of the uncertainty in the global economic meltdown has helped such investors. In addition, gold being a liquid asset that can act as a hedge against inflation and currency risk has sparked a renewed rush for the metal.

Along with the above mentioned investments, there is also an increasing trend of investors coming together to pursue investments in areas of their liking or expertise. Groups of private angel investors comprising individuals who take a keen interest in particular fields and are willing to back aspiring start ups have been proliferating in various cities in the country.

In conclusion, therefore, it can be said that passion investments are an important area for wealthy investors and wealth managers alike and are gaining increasing prominence in investment portfolios throughout the country.

Source: Economic Times