At first glance, the idea of anyone considering a luxury asset as ‘essential’ may seem counterintuitive. However, ultra-high-net-worth individuals (“UUHNWIs”) are increasingly viewing these assets as an integral part of a diversified investment portfolio.
Tangible luxury assets, however, present significant risks and challenges which, if not appropriately mitigated and overcome, can see an investment become a financial burden, or even a significant loss.
The rewards
Luxury assets, including art, jewellery, vintage cars and private jets, can serve multiple purposes.
Classic cars, for example, present an opportunity for owners to join communities of collectors, enjoy the freedom of the open road, or the rewards from meticulous care of a well-preserved vehicle. In addition, the global classic car market is projected to increase by over US10bn in 2024, demonstrating the enduring appeal of these luxury assets. Notable sales included a 1962 Ferrari 250 GTO, which fetched $70 million at auction, making it one of the most expensive cars ever sold.
Alongside providing enjoyment, status, and a route for personal passions, luxury assets may also act as a hedge against economic uncertainty. As countries around the world grapple with inflation, market volatility and geopolitical risks, the stability and long-term value of these assets make them a compelling investment choice.
According to the Knight Frank Wealth Report 2024, 70% of UHNWIs have increased their allocation to luxury investments over the past year. This shift is perhaps driven by the recognition that these assets can offer strong returns. Despite a general negative -1% trend in luxury investments in 2023, five top performing luxury assets maintained or increased their value.
Unlike stocks and bonds, which are subject to market fluctuations, tangible assets like art, diamonds, and luxury real estate often retain or even increase in value during economic downturns. Since the Fancy Color Research Foundation (FCRF) started collecting data on coloured diamonds in 2005, the value of pink diamonds have increased by 399% and blue diamonds by 249%, reflecting their growing desirability.
Additionally, luxury assets can offer portfolio diversification in ways that stocks, bonds, or real estate cannot. Their performance is typically uncorrelated with traditional markets, providing a buffer against broader economic downturns. For instance, during periods of inflation, tangible assets like gold and art often retain or even increase in value.
As the global wealth landscape evolves, there is a growing recognition of the cultural and emotional significance of these assets. Collecting rare items, whether they are historic cars or masterpieces of art, connects investors to a legacy and history that goes beyond financial gain. This emotional connection, coupled with the financial security these assets can provide, underscores why many wealthy individuals now consider them essential components of their wealth management strategies.
The risks
From market crashes to unforeseen events, no investment comes without risk; each asset class has its own set of vulnerabilities that must be carefully managed. Luxury assets, however, are exposed to physical risks which traditional non-tangible assets are not, including theft, loss, improper storage, fire, and accidents. A high-value item can be devalued in a moment.
Reputational risks are also often a high concern for asset owners. Billionaire singer Taylor Swift received an onslaught of criticism after extensive travel by private jet with estimated emissions of 1,200 tonnes of carbon dioxide in 2023, with some arguing that her travel showed a disregard for environmental impact. Miss Swift later purchased more than double the carbon credits needed to offset her emissions.
With 10% of ultra-high-net-worth individuals seeking to reduce private jet travel, it is little wonder that new and pre-owned jet transactions are forecast to continue to decrease. Good news for the environment, but perhaps bad news for private jet owners.
Luxury asset ownership can also expose individuals to personal safety and security risks. Not only did Miss Swift’s private jet use clearly have financial, environmental, and reputational implications, her safety was jeopardised when her travel details were publicly disclosed.
The solution
The Taylor Swift controversy underscores the need for careful management of both the practical and reputational risks associated with high-value luxury assets.
Appointing a trustee to take ownership of luxury assets is a highly effective way to identify and manage risk. One of the primary benefits of appointing a trustee is their ability to implement robust risk management strategies. Professional, regulated trustees are skilled in safeguarding assets against physical threats. They can arrange for proper storage, insurance, and regular maintenance, mitigating the potential for asset devaluation. Additionally, trustees often have access to advanced security measures and professional networks that enhance asset protection.
Beyond physical risk management, trustees are also adept at addressing financial risks. With the input of specialist advisors, trustees can provide guidance on the valuation and sale of luxury assets, ensuring that transactions are conducted with transparency and in the best interest of the beneficiaries. Furthermore, trustees can navigate the complexities of legal and regulatory requirements, helping to prevent disputes and ensure compliance with relevant laws.
By engaging a trustee, UHNWIs transfer legal ownership of their assets. This arrangement not only shields the assets from legal claims and potential personal liability but also helps protect their reputation and privacy.
The potential risk for luxury asset owners lies in appointing a trustee with a proven track record in the protection and management of their specific asset class. It is crucial for high-net-worth individuals to thoroughly vet a trustee's experience with luxury assets to ensure they possess the expertise required to handle these high-value items effectively. Ensuring that a trustee is regulated in a leading jurisdiction with robust trust laws – such as the Cayman Islands, Channel Islands, or Switzerland - which has a demonstrated history of successful asset management will provide peace of mind and help protect the value and integrity of the assets.
Conclusion
Whether a luxury asset is considered essential for a diverse portfolio is a subjective decision made on a case-by-case basis by UHNWIs. While presenting significant risks, they also offer compelling benefits that extend beyond financial rewards. By leveraging the expertise of a trustee, UHNWIs can mitigate potential risks and ensure that these assets continue to be a strategic and rewarding component of their wealth journey.
