Violins as an investment -- you've got to be joking?
Earlier this summer there was a flurry of interest in the esoteric market of violins due to some recent academic research and a few fund launches with high profile advisers, such as Julian Lloyd Webber. In the respected international journal Pensions RAJ Campbell suggested pension funds buy violins as part of their risk diversification strategies.
One advisor went as far as to say; "People who have lost a lot of money on shares are scrambling to instruments as a safe haven." Hmm, I'm not that keen on scrambling eggs, let alone fiddles -- but I thought I'd look into it as part of my series on alternative investments.
"Violins" are different
In my earlier articles on alternative investments, I have written about the pros and cons of wine, art, and stamps. All of these are luxury, discretionary purchase items that appeal to High Net Worth Individuals (HNWIs). Part of the attraction of these as investments (rather than as possessions) is that HNWIs are a growing consumer segment (especially in emerging countries) and therefore demand is increasing while supply is strictly limited.
In one sense the same argument can be made for rare violins, except they differ in one crucial respect; they are the 'tools of the trade' for concert musicians. World class players will wait decades for a suitable fiddle, therefore violins are not purely subject to the spending whims of Chinese entrepreneurs and Russian oligarchs.
Put simply, if you want to produce, record and play fine music you cannot do without one of the masterpieces of Italian lutherie (fiddle making to you and me.) At least this is what the pro violin advisers claim, pointing to the near 35% collapse in fine art prices in the first quarter of 2009 and the stable prices of fine violins.
The investment case
Unlike the three alternative assets I have written about in the last week or two, there is no agreed index for violins. That makes it difficult to substantiate or refute the claims of the 'violinistas', for high performance, uncorrelated returns.
However, in June this year Kathryn Graddy and Philip Margolis, a respected academic economist and an expert, set out to examine objectively the performance of violins over the last 150 years.
Their exhaustive research concluded that since 1850 inflation adjusted returns have averaged 3.5%. Since 1980 returns have been 3.3%. Not only is this greater than the risk-free return, it was also achieved with low correlation to equity prices and attractive volatility levels.
The research calculated the average return from violins over every decade, but did not document an annual index. The reason for this is that (at this level) the violin market is extremely small and illiquid. There are only about 500 to 800 violins in the world worth over £800,000, and only a small fraction of these surface every year.
Graddy and Margolis reckoned that a reasonable assumption is that violins change hands every 20 to 30 years. By contrast wine and stamps have thousands of transactions on which to base transparent pricing information and indices.
There is very little other long-term robust research, although violin experts often quote average returns of 11% per annum and one investment vehicle, The Fine Violin Fund was targeting 15% per annum.
The case against
As with other alternative investments transaction charges can be very high. Graddy and Margolis calculated that if the average holding period was 20 years, annual returns would be reduced by 1.5% per annum. Suddenly their long-term returns don't seem that attractive, do they?
Annual management charges on managed funds can be as high as 1.5%, but sometimes include performance fees of up to 25% of any profits generated by sales. The illiquid nature of the market is further confirmed by lock-in periods of five years or more.
Once again my search for exposure to alternative assets that provide decent diversification has been frustrated by lack of price transparency, high initial investment levels, few long-term track records and lack of low-cost tracker funds. Oh well, next week the elusive search continues.
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