Alternative investments with potential: whisky, woodland and sports tickets
Outside the traditional investment world of equities, bonds, property and cash, you may have heard references to ‘alternatives’, a catch-all term for anything else. Experienced investors with high appetite for risk will hold a small portion of their portfolio in alternatives.
Traditional alternatives include:
- commodities such as gold and oil;
- hedge funds – aggressive investments that use complex financial instruments and are unregulated; and
- private equity – investments in small companies that aren’t listed on a stock exchange.
But the world of investment is far larger than that, and, if you’re willing to take a bit more risk, or simply invest in what you know, or love, then left-field investments might appeal. Besides the world of classic cars, luxury handbags and jewellery, it’s also possible to get your money growing on trees by buying woodland, or to find bonds that pay tickets to international sporting events instead of interest.
If this riskier approach doesn't appeal, you can always invest via more traditional routes. See our beginner's guide to investing for more.
What's the attraction?
The returns from unusual asset classes can be very attractive – the Liv-ex Investable Wine Index has outperformed UK equities since 1988, though that’s before charges, according to figures from Wealth Manager Sarasin & Partners, and forestry as an asset class has delivered double-digit returns every year between 2009 and 2014, according to the Forestry Commission.
As with more traditional alternative investments, another benefit for these investments is the diversification they offer. In theory, alternative investments can have a low correlation with traditional asset classes such as bonds and equities. In other words, the value of these alternative investments is less likely to rise or fall in sync with stocks and shares, so if global markets take a hit, there’s a reasonable chance these investments will not suffer to the same degree.
But on the other hand, these investments have some drawbacks over traditional investments.
What are the risks?
Firstly, most aren’t regulated to the same degree as stocks, shares or cash. Many of these investments aren’t covered by the Financial Conduct Authority (FCA) at all, so there’s little grounds for recourse if your investment doesn’t perform well.
Secondly, these investments can be very illiquid. Confusingly, liquidity can refer to the ease of buying and selling your investments, or what you’ll have to pay to do so. These alternatives can be illiquid in both senses of the word – limited options to buy and sell, and expensive dealing costs if you’re selling something at auction, for example.
Should you have a Picasso lying around in the garage, there may well be an art lover who is willing to pay £10 million for it. But good luck finding him or her, and convincing them to come and pick it up tomorrow. Instead, you’re more likely to have to sell through a dealer or an auctioneer, which can take time, and commissions are frequently north of 10% of the sale price.
Thirdly, many of these investments aren’t income creating. A traditional tracker fund that follows the FTSE 100 might charge 0.25% a year (cheaper and more expensive options are available), but also yield, say 3%, in dividends. Even savings accounts will pay 1% to 2% if you shop around for a decent account.
But assets such as precious metals, or more left-field investments including art, wine, classic cars or jewellery don’t pay a dividend or interest.
In fact, it’s quite likely you’ll have to pay to hold these investments, so the yield can be negative. Invest in luxury goods and you’ll probably want to insure them, or perhaps pay for a safety deposit box to keep them in.
Similarly, if you want to invest in a classic car and want to use it, there will be running costs to consider.
Instead, these non-income producing assets will only generate a return when you come to sell them. That leads to the final main disadvantage of these investments: tax.
For these reasons, alongside the fact that equities were by far the best performing asset class in the 20th century, according to the Barclays Equity Gilt Study, these alternative investments should only account for a small proportion of your portfolio, and you should prioritise filling your Isa first.
So what's out there?
As an alternative to the alternatives, here’s a look at three of the stranger ways to invest your money.
“Someone’s sitting in the shade today because someone planted a tree a long time ago,” legendary investor Warren Buffett once said.
His point was that investments over the long term can deliver massive returns over this time frame, and while he had equities in mind, it’s also true of woodland investments.
As an asset class, UK forestry has delivered positive returns every year since 2005, and a £1,000 investment in 2005 would have doubled by 2014, according to the UK Forestry Index, compiled by analysts at IPD.
You’ll typically invest in a plot of land, and receive a proportion of the profits made from selling wood for fuel, construction or paper, so unlike some other alternative investments it can generate an income.
You can buy directly (a small woodland plot in the UK might cost £50,000 to £100,000), though if you do this, you’ll need to either manage it yourself, or pay someone to do it for you.
The tax breaks can be appealing if you invest in the UK as returns (except rental income) are free from income or capital gains tax, but that shouldn’t be the sole basis for your decision. Woodlands.co.uk lists a range of forests for sale available all over the UK.
Alternatively, specialist investment funds exist that will invest in woodland, either in the UK or around the world. These niche investments are much more expensive than vanilla UK equity funds, and charges can easily be 2%+ a year, as well as additional performance fees in some cases. Performance over the past two years has been weak, as with other commodity funds.
One to consider is the iShares Global Timber & Forestry ETF. This seeks to replicate the performance of an index composed of 25 of the largest global companies engaged in timber and forestry business. It charges a relatively-low 0.65% a year.
Wine is a well-trodden path for the alternative investor, with plenty of options to invest in funds, Chateaux (the producers) or directly in cases of high-quality bottles that will mature over a period of five to 20 years.
Whisky is less popular, but also offers the chance of stellar returns. Unlike wine, whisky doesn’t mature in the bottle, so there’s less potential to buy up a case and wait for its value to rise, unless it’s a particularly rare case.
Whiskyinvestdirect.com offers a way to get exposure in your portfolio. The website lets you invest in whisky while it’s maturing in the barrel, ultimately selling to big drinks companies such as Diageo, which will blend it into brands including Johnnie Walker.
That means you’re investing in the mass market, so not at the whims of luxury investors. Chief executive Rupert Patrick says the long-term returns are strong, and the outlook is good.
Whisky takes many years to mature, making it tough to keep up with growing demand in emerging market countries, particularly India.
Whiskyinvestdirect.com has a trading platform where you can buy and sell shares in a barrel at any time.
The company is registered in the UK. The nature of the investment means the company isn't regulated by the FCA, but assets are ring-fenced so there are legal protections for your investment. In the worst-case scenario where the barrels you’ve invested in are damaged, they’re fully insured, so you’ll be paid the current market value for your investment, though it’s possible this will be lower than the price you bought for.
Anyone for tennis?
If an investment that gives you tickets to watch the likes of Roger Federer play in a Wimbledon quarter-final sounds more appealing than the negative interest rates you’d get for investing in a bank account in his home country of Switzerland, a debenture might appeal to you.
Halfway between a corporate bond and a luxury season ticket, Wimbledon Debentures are five-year public listed bonds that give the owners a book of tickets to the first 10 days of Wimbledon for each year they’re held.
The club has been running the scheme since 1920 to raise funds to develop facilities, and the next one will fund a retractable roof for court number one.
The next issue will be released after this year’s tournament when the current number one court debentures mature, returning £500 for each debenture held.
Last time they were issued at £13,700, though this time they will be higher. That might sound like a poor investment, given the final value, but debentures and the tickets they yield can be freely traded and are highly in demand, unlike most tickets for the competition.
Corporate entertainment companies are particularly keen to buy up the tickets, as Wimbledon is one of the most popular events of the sporting calendar, and Numis Securities also runs a market where debentures can be bought and sold.
One investor made a killing selling their Centre Court debenture in 2014 for £90,000. As it had just two years left to mature, they got £3,462 for each remaining ticket, and a huge return over the £27,000 initial cost (Centre Court debentures are typically more expensive than Court No. 1 issue). That’s partly because debenture holders also get first refusal the next time tickets are sold, guaranteeing them the chance to renew.
Prices for the next ballot will be announced on 22 April, and you’ll need to register to enter by 27 May at Wimbledon.com/debentures. One thousand will be sold, and last time there were two applications for each debenture, so the chances of successfully investing are higher than you think.
How do I know if an investment is legitimate?
The vast majority of alternative investments aren’t covered by the Financial Services Compensation Scheme, and most are unregulated completely, meaning there’s little, if any, consumer protection.
As such, you need to be extra careful when working out if a product you find is suitable, or even legitimate. While products might not be regulated by the Financial Conduct Authority (FCA), the firm may be registered or authorised. Check at Register.fca.org.uk. Beware copycat firms that masquerade as genuine companies. If you’re not sure, call the company back using the number listed on the FCA register.
Companies that aren’t register with the fCA should be listed at Companies House (Companieshouse.gov.uk), and the same copycat warnings apply.
A company’s online reputation can also flag dodgy firms. See if it features in conversations on websites such as TrustPilot.com, or if it’s a company that’s been covered at Moneywise.co.uk. Watch out for ‘astroturfers’ - those who pose as grass-roots supports for firms by posting glowing reviews.
As with anything, if you’re not completely confident about what you’re buying - don’t. As a general rule, be very sceptical about anything offering ‘guaranteed’ returns, especially if they’re in the double digits. If you have found a business or potential investment you’re not sure about, drop us a line at email@example.com.
“I’ve invested about £600 in whisky”
Wyn Morgan, a former investment analyst who now invests and looks after his children while his wife works, chose to invest in Whiskyinvestdirect.com.
“I like the odd drop, but I’m not a big whisky enthusiast. I wouldn’t want to invest in a cask – it would take me a lifetime to drink!
“But I’m always looking for interesting things to invest in, and wanted to diversify. I’ve invested about £600. I’m accumulating, almost like an Isa, and I’m looking to sell it back in 10 to 15 years’ time. It’s a small part of my portfolio. The vast majority is in equities.
“The platform isn’t difficult – it’s much of a muchness with any trading platform. It’s a little different to an investment platform, but is very intuitive.
“I showed it to a friend who’s not a financial person, but likes whisky. It didn’t take him long to get his head around it.”
Usually charged as a percentage of returns for performance above a specified benchmark, such as an index. The fee can range from 10% to 20% of total investment returns on a low starting benchmark such as Libor and investors could find themselves paying extra fees for merely average performance. Note that these funds do not compensate investors when the manager underperforms the benchmark.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A sophisticated absolute return fund that seeks to make money for its investors regardless of how global markets are performing. To that end, they invest in shares, bonds, currencies and commodities using a raft of investment techniques such as gearing, short selling, derivatives, futures, options and interest rate swaps. Most are based “offshore” and are not regulated by the financial authorities. Although ordinary investors can gain exposure to hedge funds through certain types of investment funds, direct investment is for the wealthy as most funds require potential investors to have liquid assets greater than £150,000m.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.