Investment update 12 March 2018

Last week in the markets

Over the past week Australian shares rose 0.9% while small company shares were up 1.3%. Shares in developed countries rose 2.8% with the US market up 3.5%. Shares in emerging markets were down 2.1%. The Australian dollar increased 1.1% to 78.44 US cents. The Australian 10 year bond yield increased to 2.78% while the US 10 year bond yield increased to 2.89%. The oil price rose 1.3% to 62.04 US dollars per barrel.

Diamonds are forever - but companies make better investments

Recently, the Credit Suisse Research Institute published the 2018 edition of its yearbook of global investment returns. The report was authored by leading academics from the London Business School, involved 118 years of data and is freely available on the internet.

Many non-financial assets, including classic cars, stamps, rare wines, art and jewellery, are considered ‘investments of passion’. So do the average inflation adjusted or real returns from ‘investments of passion’ compare well with those from shares? The chart below is taken from the Credit Suisse 2018 yearbook. Care is needed when interpreting the chart because each horizontal line is ten times the size of the line below.

Prices indexes
A few calculations reveal the average real returns for these assets, outlined below.
Investment update

On the surface these numbers provide both an expected and yet surprising picture. Expected because shares comes out on top, but surprising because two assets that generally don’t mix well, cars and wine, aren’t too far behind.

But the numbers aren’t telling the full story.

Investments of passion come with overheads. Classic cars need to be garaged; artworks, stamps, rare wines and violins must be stored in controlled environments; and jewellery might require a safety deposit box at a bank. Then there is insurance, and in the case of cars, ongoing maintenance.

The returns shown in the graph don’t reflect these costs. Car maintenance can cost thousands and parts for classic cars can be difficult to source. Storing $30,000 of jewellery in a safety deposit box will cost about 1% per annum. Never mind the insurance. A temperature-controlled environment, with insurance, for 12 bottles of rare wine worth $1,000 each will shave about 0.7% from returns.

Companies are different. Unlike investments of passion, shares provide income or dividends. Companies innovate, develop technologies and invest in projects, growing their income and improving their value. As the economy changes they adapt or fade away and new firms surface. Importantly, share transactions are swift and easy and share markets are well-regulated.

Now consider diamonds. They provide no income, are expensive to store, don’t grow or adapt and their prices are subject to the simple laws of supply and demand. They’re difficult to trade and their quality is difficult to ascertain without expert analysis. Diamonds are forever but shares make better long-term investments.

So besides passion, why would someone invest for the long term in assets such as diamonds, classic cars and artwork?

The key reason for investing in diamonds is likely that they are a compact way to store value  and are easy to traffic. What about that 1966 Ferrari Dino? That is likely an investment of passion, as it is a rare trophy asset and has a special place in automotive history. Similarly, a small Picasso painting can provide its owner with a pleasant talking point.

At Mine, we’re passionate about providing our members with excellent retirement outcomes – not trophy assets. We categorise the returns from all assets into three sources; income, growth in income, and changes in valuation. We also consider the tax implications of the return’s composition. We value ‘liquidity’, the ability to transact easily, and we look to diversify risk.

Signing off

Sean Anthonisz | Senior Quantitative Analyst

Past performance isn't necessarily an indicator of future performance.

Data sourced from Bloomberg and Credit Suisse.