Passion Pays

How did investments of passion perform in 2022?

Author

Will Stern
March 28, 2023

Every year, Knight Frank releases their annual Wealth Report — a highly-researched look into the year in alternative investing & the trends to look out for on the horizon.

Generally focused on HNWI and UHNWI (defined as individuals with a net worth > $1M & > $30M respectively), the data is an invaluable glimpse into the often opaque world of the spending and investing habits of the wealthy.

Why should anybody care what the rich are doing with their money?

Well, as a firm believer in the wisdom of the 1976 film “All the President’s Men,” it’s important to “Follow the Money.” While the rich may not be any smarter than the rest of us (anyone who is reading this with a net worth of > $1M, please hit up my venmo @WillStern1), they have historically been ahead of the game when it comes to driving the alternative investment category. Especially as it pertains to the ‘Passion’ investments which I’ll be highlighting.

The following is based on the 2023 Knight Frank Wealth Report, and more specifically, the Knight Frank Luxury Investment Index (KFLII), which tracks 10 investments of “passion.”

Those investments of “passion” tracked by the index are:

  1. Art

  2. Cars

  3. Watches

  4. Handbags

  5. Wine

  6. Coins

  7. Jewelery

  8. Furniture

  9. Coloured Diamonds

  10. Rare Whisky Bottles

High Level Takeaways for 2022

  • The KFII rose by 16%, beating out gold & equities

  • Half of the asset classes in the KFII grew by double digits

  • Art surged 29%

  • Classic Cars returned 25%

  • Watches were up 18%

Let’s Get Into It

Art

Considering its relative maturity as an investment class and status as an accepted segment of a modern investment portfolio, it should come as no surprise that art led the way in 2022 amidst turbulent market conditions.

Growing 29% in 2022, art as an investment class was buoyed by mindblowing sales paid for blue chip art, such as Warhol’s Shot Sage Marilyn, which set an auction record when it sold for $195M in May 2022.

The other notable event of the year in art came in November 2022, when the late Microsoft co-founder Paul Allen’s collection achieved $1.6B at auction — a record for any single-owner sale. Featuring the works of Seurat, Van Gogh, Klimt, and more, five lots from this auction alone achieved $100M.

This appetite for high-end art is likely a reflection of UHNWIs fleeing the public markets to park their cash in an asset class that has been lauded for its history as an inflation hedge (the index is up 91% the last 10 years).

Cars

For most cars, they drop 50% in value the second you drive them off the lot. But for classic cars sought after by collectors, they’ve behaved more like works of art than your mom’s Honda Odyssey.

In its best performance in nearly a decade, classic cars returned 25%. Leading the charge was a record-breaking $143M sales of a Mercedes-Benz Uhlenhaut Coupe.

The Historic Automobile Group International (HAGI) points out that unlike art, the relationship between classic cars and inflation is less straightforward.

“Broadly, the classic car market has neither a positive nor an inverse correlation with other sectors. In other words, the classic car sector generally marches to the beat of its own drum. That’s a feature which many collectors find attractive.”

According to HAGI, “high-end collectors are back in the market after the Covid-19 pandemic saw the postponement of many sales.”

Watches

The third top-performing sub-index in the KFLII was watches, which reported an 18% return on the year. Perhaps more interestingly, “the watch market at the top three auction houses grew 33% in 2022 to a total of £475 million. This included 40 watches that sold for over £1 million, 12 more than the previous year.”

The report notes that this trend was led by a small number of models: The Patek Philippe Nautilus, Audemars Piguet’s Royal Oak, and the Rolex Daytona.

Just last week, a Patek Philippe ‘Sky Moon Tourbillon' sold for $5.8M during a Christie's auction in Hong Kong. Considered one of the most complex timepieces in the world, it now holds the record for the highest price paid for a watch in an online auction.

Wine & Whisky

Wine’s performance of 10% was evidence of a resilient market, though it is a drop off from the prior year’s 16% gain.

The report includes the historic 80% five year rise of Burgundy (and recent slow down) as a key headwind for the market.

Whisky, which is the KFLII 10-year leader (+373%), faltered in 2022 with a mere 3% return.

Much of this downward movement can be credited to lower ends of the market, which have attracted buyers more apt to flip bottles for quick gains (and seemingly failing).

Sentiment

Using data collected by Knight Frank on the big baller UHNWIs, there’s some basis for predicting the future of these markets, both in 2023 and beyond.

A survey of over 500 private bankers, wealth advisors, and family offices, revealed 71% of their (American) clients are likely to invest in art in 2023, 43% in wine and classic cars, 33% in watches, and 29% in jewelery and luxury handbags.

With NFTs firmly on the backburner after the euphoric highs of 2021 and early 2022, it’s interesting to note that 34% of HNWI still believe NFTs have potential, while 64% of Chinese respondents hold a positive outlook.