Investing in cars: the case for portfolio diversification
It’s a question many have pondered – which is the best way to invest in Ferrari? By buying shares in the Italian sportscar manufacturer (the boring but arguably least-emotionally involved option); by purchasing a Ferrari for the pleasure of driving it (while, it is hoped, enjoying its appreciating value alongside its other qualities); or by investing in a portfolio of Ferraris and other cars, for ownership purposes (yes really) rather than to drive?
The answer, of course, depends in part on how much of a petrol-head the investor in question happens to be.
Hugo Reyneri, a portfolio manager at HSBC Private Bank in Geneva, had his own solution: He co-founded a car investment firm, Honoris Cars, last year.
Honoris, he says, is the realisation of a long-held dream, as he has been involved in the automotive sector since he was young, having spent years on race tracks and attending historic car rallies.
While a portfolio manager at Lombard Odier and then later, while working for HSBC, he also “bought and sold a number of cars”, Reyneri admitted recently, in an interview.
And even then, he says, he was “already advising” others, including clients, on the acquisition and sale of cars.
As Reyneri sees it, the automotive sector is increasingly splitting into two categories.
“On the one hand, there will be cars for daily use, such as electric cars or Google cars, and on the other hand, there will be classic cars bought by passionate individuals.
“The less people will drive, because of the robotisation of cars, the more classic cars will be seen as art pieces,” he explains.
And as this happens, classic cars will increasingly be seen as a viable investment diversifier, he says.
“I am convinced that over the [next] 15 to 20 years, cars will [form] part of a classic asset allocation, as [they] provide investors with returns that are [un]-correlated from traditional investments.”
Classic Car Fund
Also in Switzerland, but in the German-speaking region rather than around Geneva, and a few years earlier (2012), another classic car enthusiast named Filippo Pignatti Morano (pictured above) decided to indulge his passion for automobiles by launching a car hedge fund which he called, simply, the Classic Car Fund.
His decision to combine his passion for classic cars with his knowledge of financial services followed two decades spent in private banking, Pignatti Morano says.
“Classic cars have been the most profitable asset in the last 10 years, and this will be the case in the next 10 years, with a lower volatility than the FTSE,” he told International Investment.
“Just think about the BRIC nations, the baby boomers. Every year there are more and more billionaires [around the world], and China will soon open its doors to the import of classic cars.
“[At the same time, supplies of] classic cars are limited.”
And while car-makers may still be making models that are capable of quickening the pulse of even the most dedicated “classic car” aficionado, Pignatti Morano expresses some uncertainty about whether electric cars will, in 30 years’ time, be capable of being considered “classic cars”.
Who invests in car funds?
For Honoris Cars’ co-founder Reyneri, cars remain an illiquid asset class that suits high-net-worth individuals better than institutional clients. This is in spite of the fact, he notes, that investors can sometimes achieve remarkable gains in the sector – citing examples of individuals who had bought cars for CHF30,000 (US$30,800, £23,500) only to resell them only a few years later for CHF150,000 (US$154,000, £117,660).
“Some individuals aged 35 to 40 years old have started to form car collections with cars of the 1090s/2000s, with an initial budget of CHF30,000,” he adds.
Not all classic cars increase in value equally, he adds, pointing to a “dichotomy” that exists in the market.
For example, “Ferraris have seen a 500% rise in value between January 2007 and May 2017, (Hagerty data), while Chevrolet models have seen their value [rise just] 20% in the same period”.
Pignatti Morano says investors in his fund tend to be family offices, banks, asset managers and individuals.
“The biggest investor at the moment is an asset manager, followed by a bank,” he adds.
Diversification key attraction
While classic car enthusiasts may talk of “investments of passion”, Both Reyneri and Pignatti Morano stress that what makes the classic car investments they facilitate practical is their ability to diversify the average portfolio.
Pignatti Morano says his investors see classic cars – and thus their investment in the Classic Car Fund – as a un-correlated investment, relative to the financial services marketplace generally, and thus one that adds a needed diversification element to their portfolios.
“Diversification is the basis for all asset managers, as this is the only way to reduce the risk associated with an unsuccessful investment,” he explains, although he notes that “by putting [all of one’s] financial resources… into collector cars, it is hard for us alone to reach an adequate level of diversity to make a profit”.
“We approach each car emotionally, often by focusing on models of a particular brand during our free time.”
It also, he says, draws on an audience of big classic car collectors, who enrol their cars in the fund, with the aim of asset protection.
“The fund gives these collectors the possibility to continue driving and storing [their] cars in their garage[s] if they wish to do so,” he points out.
As for Pignatti Morano’s own garage, he admits that it currently tallies 12 classic cars, including a Lamborghini Espada; a Ferrari Daytona; a Ferrari 308 GTB fiberglass (only 712 of these vehicles produced, he notes;, a Ferrari Testarossa (bought for CHF80,000, which he says would now sell for more than CHF120,000).
All these cars have been purchased with a team of consultants, he says.
Choosing cars worthy of investment
According to Reyneri, there’s no shortage of data on car prices in the open marketplace, but amateur classic car enthusiasts in particular, he warns, need to view these with care, as they don’t always reflect accurate transaction prices.
“My two main ways of finding [the] right cars at the right value are [making use of] my network that I have been building for years, and [consulting] people involved in car auctions,” he says, “because assessing a model is really uneasy by ourselves.”
For his part, the Classic Car Fund’s Pignatti Morano says his team screen classic cars’ sales prices reported by independent providers, in order to assess the market’s overall condition, and to spot the emergence of market trends.
Both experts agree that the top investment criteria, when considering any car, is always the rarity of the model in question. The rarity is followed by the general desirability of the car; its original value; its condition; its provenance, and, in what is no doubt a difficult quality to quantify, how pleasurable it is to drive.
Proper due diligence in every case is essential, they add.
“You have to know what to buy, [although] this is very difficult, as at the moment, [because] most of the classic cars are at their highest price,” Pignatti Morano says.
“Therefore you have to buy under the market price, and know how to add value to the car you will buy.
“The global classic car market is based around restorers, vendors and private collectors, dealers, auction houses and associated events.
“Grassroots support of the market comes from magazines and clubs, where steady demand is produced. This moves through specialised dealers and collectors, and on to auction houses and, more recently, to classic car investment funds.
“The market is relatively well established and [at this point] has attained a certain maturity.”
Reyneri observes that an important yet potentially overlooked downside of investing in cars remains the running costs.
“To sum up, these costs, [which] include compliance and maintenance, form 10% of a car’s value,” he says.
That said, Pignatti Morano notes, the cost relative to the cost of the car in question can vary hugely: “The garage and oil change costs for a $10m car and a $100,000 car are exactly the same.”
Returns and regulation
Pignatti Morano says he aims to hit a return in the next few years of 8% to 12% with his Classic Car Fund, once its assets under management are more substantial. In the meantime, since 2012, he says, his fund has delivered annual returns of more than 5%.
“In 2015, the fund generated a net return of 9.5%, a 10.23% alpha over the S&P 500 (minus 0.73%).”
Long term, Reyneri says he believes that lawmakers will begin looking to place more controls on the classic car investment market – for example, as part of heightened efforts globally to crack down on money-laundering.
“Some high-valued cars are still paid [for] in cash sometimes,” he notes.
On the other hand, he points out, the market doesn’t lend itself to such strategies, because of the one-of-a-kind nature of the assets that lie at the heart of it.
After all, he notes, you can hardly speculate on the classic car market by buying large quantities of a specific model.
Objects of Desire:
The Knight Frank Luxury
Investment Index (to Q4, 2016)