A minority of investors have always taken an alternative route to the standard approach to investing online into an ISA or SIPP. A traditional investment portfolio split between equities and fixed income assets, usually bonds, would be expected to return an average 5% per annum if exposed to a moderate level of risk. However, some investors are ready to both take on more risk with at least a part of their investment capital as well as pursue alternative investment classes such as collectables.
Alternative investments, particularly those that fall into the ‘collectibles’ category are controversial. Such investments are not strictly financial products and capital allocated in this way is not protected by the FCA.
Investing in collectibles also requires either specialist knowledge or a trusted advisor – preferably one that doesn’t have a direct vested interest, such as earning a commission, on transactions. There is a wide range of different classes of collectibles and some of the most popular are fine wine, rare whiskies, stamps and coins.
Classic cars are one alternative ‘collectibles’ asset class that has seen a boom in interest and prices over the past decade. The most recently published Knight Frank’s Luxury Investment Index indicates that classic cars have seen prices rise by 334% over the past ten years – an average of 33.4% a year. That made it by far the most profitable kind of collectibles, with fine wine in second place rising 192% over the same period.
There is not one single accepted definition for what constitutes a ‘classic car’ but the most concrete can probably be the definition by which HM Revenue and Customs applies tax rules specific to vehicles. Its definition of a classic car is one over 15 years of age and worth more than £15,000. More broadly, and practically, a classic car can be considered one whose value has begun to increase rather than decrease with age.
Many experts consider collectibles as ‘hobby’ investments and caution against relying on them to fund retirement or other fundamental financial needs. Unlike regulated investments such as shares, funds or bonds, collectibles are not ‘fungible’. That means each individual item is unique and not interchangeable with another unit in the way one share in Tesco or BP is the same as any other.
Collectibles also don’t have a universally accepted market value like traditional asset classes. While there are pricing trends that influence the price a collectible can achieve there is no guarantee and sales price boils down to what a buyer is willing to pay at the time. This means collectibles can be sold for sums above or below wider market trends. Collectibles are also illiquid as they cannot be sold over an exchange at the click of a button like most traditional investments. A buyer has to be found either through an auction, specialist websites or personal contacts.
The problem with making money from collectibles is understanding what influences the price buyers are willing to pay. This is usually a combination of rarity, demand and condition. One model of car with specific characteristics may fetch more than another very similar model of comparable age simply as the first is more sought after by collectors. Demand can often move in trends like fashion. At a certain point classic Porsche models may be in vogue, pushing prices up. 5 years later that trend may have been replaced by another, leading to prices dropping as demand weakens.
There are also some tax breaks that owners of classic cars can benefit from. Cars pre-dating December 31st 1977 are exempt from vehicle tax and capital gains tax is also not due on any profit made on their sale. Cars made before May 20th 1978 that have not undergone ‘substantial changes’ such as the chassis or engine being replaced are also exempt from the requirement to undergo an annual MoT.
2017 saw classic car price growth dip to just 2% after several years of particularly high growth. While some have called a bubble in the market many experts believe recent price growth has simply been the natural consequence of the internet meaning buyers have more information available to them.
While returns on classic cars can be very good, the specialised knowledge required, uncertainty of future market trends and illiquidity of the asset means that enthusiasts should really consider this kind of investment a ‘hobby investment’. Alex Robbins, used cars editor of What Car? And Autocar is quoted by The Times as advising the thinking buyers should adopt when it comes to classic cars as:
“If you choose well the returns can be great. It means that you can justify owning a nice car and enjoying it relatively guilt-free as the money you are spending looking after it you will see back when you come to sell it on.”
Classic cars or other collectibles shouldn’t be considered as an alternative to investing online into an ISA or SIPP. However, for anyone comfortably on target to meet their long term investment goals and with a little cash to spare, enthusiasts could find acquiring a well chosen classic car proves both a pleasure as well as a sound financial decision.