Classic cars, rare art, and even whisky attract younger buyers as auctions enter a new era

Collectibles As An Investment

Slightly more than five years have passed since our original letter on Passion Investing — a phrase that we define as investing in non-traditional items that appeal to both emotion and financial collectability, including art, coins, wine, stamps and one of my favorite categories: classic cars. Following one of the most unusual years on record, we thought it an appropriate time to revisit the subject and learn what has changed (and what has not) since 2016.

Since our original letter, Passion Investing still remains a narrow and obscure segment of the broader investment universe. Most people would not consider their vintage Patek Philippe collection to be part of their financial or investment portfolio, which makes it challenging to identify who participates (and to what extent) in the collectibles market. Perceptions regarding collectibles are starting to change, however, as the value of many collectibles has soared in recent years, and new and existing ecommerce platforms bring together individuals with shared and sometimes niche obsessions and interests. Also perpetuating the interest, collectibles are now more accessible than ever, expanding globally and reaching new income levels and demographics, led by the democratization of collectible investing through such websites as those of Bring a Trailer and Masterworks. As a growing number of individuals achieve greater net worth, interest in collectibles is expanding across both the high-net-worth and mass affluent categories. Increasingly, mass affluent buyers do not view traditional stocks and bonds as the only means to accumulate wealth; they are open to esoteric investments — look no further than the rise in cryptocurrency investing in 2020. Blockchain developers are willing to learn how to build a blockchain on substrate. Unsurprisingly, growth in both overall wealth and interest in collectibles translates into higher prices because collectibles tend to be scarce by definition. There are only so many vintage Ferrari’s produced during certain decades or years and only a small fraction of those are for sale now.

A recent Credit Suisse report suggests that the total value of collectibles in private hands was estimated to be $1 Trillion before the pandemic and may have increased to $1.2 Trillion post-pandemic once more information is available. The Attitudes Survey 2020 (Knight Frank, The Wealth Report 2020) suggests that ultra-high-net-worth (UNHW) individuals allocate between 3% and 6% of their wealth to “luxury investments”. Within the collectibles’ market, fine art is the most heavily represented category of collectibles (27%), followed by cars (17%), and jewelry (14%).

When an increasing volume of global buyers pursue rare collectibles, prices tend to rise — sometimes exponentially. Spurred by a tremendous seven-year rally that concluded in 2016, collectible classic cars top the performance charts, returning +246% between 2005 and 2019. Cars are followed by rare coins (+230%), fine wine (+199%), and classic watches (+126%) — (www.coutts.com). You would be correct to guess that not every collectible has appreciated in value over the past 15 years. According to the private banking company, Coutts, rugs and carpets have not been a good store of value, losing 20% cumulatively between 2005 and 2019. The “value” derived from collectibles is not always financial; sentiment and emotion can spur interest in any collectible, distinguishing this asset class from other investments for better or worse.

A Year In Disguise

Despite its myriad challenges, 2020 turned out to be a boom year for financial assets with the S&P 500 returning a surprising +18%, most of which was led by growth and technology stocks. Even a broad fixed income portfolio returned in the mid-to-high single digits last year, albeit fixed income returns are generally negative in 2021. The collectibles market overall held up very well in 2020, but several noteworthy sea-changes occurred within specific collectible categories.

At first blush it is difficult to understand how the collectibles category maintained its ground in 2020 given that much of the sales volume of collectibles occurs via physical auctions through legacy houses such as Sotheby’s and Bonhams. Physical auction sales declined an estimated 40%-60% in 2020, but as we experienced across so many industries last year, business owners wasted no time in expediting the transition of even the most physical of business models to the online world. As Winston Churchill famously said at the end of World War II, “Never let a good crisis go to waste.” Facing the risk of going under, auction houses quickly digitized the auction process and were joined or challenged by several new entrants. Sotheby’s recently reported that 70% of its auctions in 2020 were conducted online, generating enough volume to nearly offset the decline in physical sales. Moving the auction process from physical to digital also generated a surge in first-time buyers, who are younger than the average legacy client, thereby refreshing the client base. Approximately 40% of online buyers are new buyers, as estimated by auction houses, which responded to the younger audience by offering less expensive items and diversifying the categories to broaden appeal and accessibility.

If you are curious to know which collectibles performed well in a unique year such as 2020, Knight Frank’s Luxury Investment Index reports that luxury handbags — specifically Hermés — were the top-performing luxury category in 2020, returning +17% for the year. Unsurprisingly, given the amount of time spent at home in 2020, fine wines performed very well during the pandemic with the category appreciating +13%. Classic cars returned to growth in 2020, appreciating 6% after a challenging 2019 that saw a rare decline in prices. Rare watches (+5%) and furniture (+4%) rounded out the top five categories. Though not on everyone’s collectibles list (but perhaps it should be), rare whisky cooled in 2020 (-4%) after a meteoric rise in popularity. Knight Frank reports (via www.rarewhisky101.com) that rare whisky as a category appreciated nearly 500% over the past decade!

Despite the financial difficulty that 2020 represented for the major auction houses, they still had several record-setting sales. Below are a few notables:

• $85 million spent at Sotheby’s for one of Francis Bacon’s Triptych series.
• $12.7 million for a 1934 Bugatti Type 59 sports car
• $10 million for William Shakespeare’s 1623 collection of Comedies, Histories, & Tragedies
• $8.4 million for a rare 1822 Half Eagle $5 US coin
• $5.5 million for Paul Newman’s Rolex “Big Red” Daytona watch (third highest price paid for a Rolex)
• $1 million for six Methuselah-sized wine bottles from Domaine de la Romanée-Conti

Blue Chip Slower But Pre-War and Value Shine In 2020

The classic car market broadly appreciated in 2020, but like any asset class, it had pockets of strength and weakness and an acceleration of many underlying nascent trends.
Car club and insurance company Hagerty is just one example of a company that has skillfully segmented the collectible car market to better distinguish underlying sub-categories and trends. Hagerty publishes several collectible car indices designed to track sales of a limited number of vintage and collectible automobiles.

Haggerty’s Blue Chip Index includes 25 of the most “sought-after collectible automobiles of the post-war era.” The vehicles included in the composite would represent one of the world’s premier collections if housed under a single roof. Among those 25 cars are two authentic Shelby Cobras (1963 and 1966), three vintage Ferraris (1958, 1963, and 1968), a 1965 Aston Martin DB5, an ultra-rare BMW 507 (only 252 were produced) and the increasingly appreciating Lamborghini Miura. The index generated a modest mid-single-digit return in 2020 but remains off its peak value (reached in January 2019). A look at underlying car-by-car prices highlights that most of the 25 vehicles have experienced a 5%-10% cumulative decline since 2018, with only a select few rising in value — the Lamborghini Miura for example.

Vehicles as prestigious as the constituents of the “Blue Chip Index” fall out of favor on occasion, but the rarest collectible vintage cars continue to be sought after. In 2016, when we published our original letter on Passion Investing, the highest price ever paid at auction for a car was $38 million for a 1963 Ferrari 250 GTO in 2014 at Bonhams Quail Lodge. That mark was eclipsed in 2018, when a 1962 Ferrari 250 GTO, chassis 3413, sold for $44 million (ex-buyer’s premium) at RM Sotheby’s Monterey.

The Ferrari 250 GTO tops the list of high-priced collectible cars sold at auction — and for good reasons — Ferrari made fewer than 40 250 GTOs, and they are as beautiful as any painting ever produced and a lot more fun to enjoy. Factor in a vehicle’s unique racing heritage and a who’s who of prior owners, and the sky is the limit for what someone might be willing to pay for such a rare collectible. It is possible that the $44mm price level has been eclipsed via a privately negotiated sale where transactions are less reported. The world’s largest car auction, the Pebble Beach Concours d’Elegance, is due to resume in August and may be the venue wherein a new record is set.

Many collectible car categories have been sluggish since peaking in 2019, but Haggerty’s Affordable Classics Index is an exception, returning +18% over the prior 12 months. This index tracks collectible car sales at the lower end of the market (i.e. cars priced under $40,000) and includes cars manufactured between the 1950s and 1970s. This group has experienced significant appreciation since 2015, with the Datsun 240Z, Porsche 914, Triumph TR6, and Chevy Camaro leading the group of most desirable vehicles. Interestingly, the index includes a few muscle cars which continue to attract interest and generate high-dollar sales at auction. Given the shifts in the auction market and personal behavior over the past 18 months, we are not surprised to see the lower end of the market gain momentum.

A look back at the top vintage sales in 2020 reveals some interesting shifts in collector behavior, including renewed interest in pre-war autos, a category whose following had declined in recent years. An iconic name in automobile racing, Bugatti had a strong showing in 2020 with five pre-war models topping the list of the most expensive collectible car sales for the year. Bugatti has a fascinating history and has had many lives since the company was founded in the early 1900s. All of its top-selling automobiles in 2020 were manufactured between 1928 and 1937 and came from collections with illustrious histories.

At arguably the last live auction before the pandemic took hold, a 1932 Bugatti Type 55 Super Sport Roadster sold for $7.1million at Amelia Island in March 2020. Bugatti manufactured 38 Super Sports and only 11 are known to still exist. The car was known for its perfect blend of style and performance with an engine that delivered 180 horsepower through a four-speed transmission — in 1932! Collectors have a love-hate relationship with pre-war cars which are often fickle and plagued by mechanical challenges. Plus, there is the obvious question: where do you drive a car like this? After paying $7 million for this car, perhaps the simple answer is that you do not, although the prior owner of this specific car was believed to have routinely put the car through its paces. Notwithstanding the challenges of owning a pre-war automobile, this car and other pre-war models are emblematic of arguably one of the greatest renaissance periods in car and coachwork design.
Moving beyond the pre-war Bugattis, other top auction sales in 2020 included the following:
• $4.3 million for a 2001 Ferrari 550 GT Prodrive
• $4.3 million for a 1971 Lamborghini Miura P400 SV Speciale
• $4 million for a 1955 Aston Martin DB3S
• $3.9 million for a 1965 Shelby GT350R Prototype

Going Digital

One of most promising developments in recent years that accelerated in 2020 is the democratization of classic car buying through ecommerce platforms such as Bring a Trailer (BaT). BaT was founded in late 2007 as an ecommerce platform to bring automobile auctions to the masses. Since its launch, the website has gained incredible popularity, but it reached a new high in 2020 as physical auction sales shuttered and more consumers shopped from their couch.

The allure of BaT is the range of cars available. No matter your age, preference, or price point, BaT has a car for you. It is not uncommon to see a 1974 AMC Gremlin auctioned alongside a classic Ferrari, Dusesenberg, or even a rare BMW 507 – which remains one of the most expensive cars ever to appear on the website. The high bid of nearly $2 million was not enough to secure the car in its 2020 auction debut. It might be considered lunacy to spend a million dollars on a car sight unseen, but the premise of the website is to bring together knowledgeable buyers and sellers in a forum that promotes transparency and community. On BaT, it is not uncommon to see more than 300 pictures detailing every inch of a vehicle’s mechanicals and exterior, as well as photos of carbon paper service receipts from three decades prior. These photos and documentation are meant to increase buyers’ confidence in the product, which is reinforced by forums of dedicated car enthusiasts, contact the KenjiROI professionals for this— many of whom have no intention of bidding on the car but whose interest compels them to provide education and guidance. Transparency and community surround each specific auction lot, inspiring confidence in the bidding process.

In addition to offering a unique digital experience, BaT attacks the traditional buyer’s premium commission model, which has long been associated with the big auction houses. At a traditional auction house, it is not uncommon for the buyer to pay between 10% and 12% in commission (known as the buyer’s premium) to the auction house. BaT undercuts that legacy model by charging a 5% fee on the final sale price, not to exceed $5,000. In other words, buying a $1 million car costs the buyer an incremental $5,000 through BaT versus an incremental $100,000 through a traditional auction house. This cost savings is significant, although through BaT, buyers must accept the risks associated with not seeing the car in person prior to purchase.

Following the Money

Like other collectibles, classic cars are an eclectic asset class with trends that continually shift based on buyer demographics including net worth, age, and price point, as well as the cars’ scarcity value. Buying trends for classic cars as opposed to other collectibles are heavily influenced by a person’s age or the decade in which they grew up. This is not the case with rare coins, wine, or watches — no one desires to own the same watch or coin that was popular when they were a teenager. The excitement to own a collectible car can be heavily influenced by what was deemed “cool” during a person’s younger years. It is not a coincidence that prices of American muscle cars began appreciating about 15 years ago, when teenagers from the 1960s and 1970s achieved the buying power to own their dream car from decades before. For my generation, Gen X, that implies rising prices for the supercars of the 1980s, including the Ferrari Testarossa, Lamborghini Countach, Porsche 911, and DeLorean, and even some Corvettes. The Lamborghini Countach might have been the number one poster car for the Gen Xers, and prices have tracked the aging of that demographic. In 1998, I spoke with a European car mechanic in Jupiter, Florida, who was selling a mid-80s Countach for roughly $80,000. For obvious financial reasons (I was 25), I had to pass on the sale, and today Countachs are selling for $400,000 or higher depending on condition.

Beyond the poster cars of the past few decades, the collectible car market is always shifting in unexpected directions. Investors looking for value in the collectible car market should pay attention to the constituents of the Hagerty’s Affordable Classics Index. Some of the top performers in that index over the trailing year have been late 1960s and early 1970s Camaros. Ford Mustangs from the 1960s in decent shape can still be had for under $25,000. On the other end of the affordability scale, vintage Ford Broncos from the mid/late 60s have developed a cult-like following in recent years leading to one of the swiftest price appreciations in recent memory. Sales prices for well-maintained or recently restored Broncos are routinely eclipsing $100,000 at auction after hovering in the $40,000 range a few years earlier.

As exciting as it is to follow the sales and histories of these rare collectibles, it is discouraging to an equal degree to watch the prices head ever higher with each slam of the auction gavel or click of a mouse. Those individuals who have a desire to start or build their car collection but lack the financial means to buy one of the blue-chip classics should keep an eye on the following: front-engine Porsches, Toyota Supras, vintage Ford F-150s, Honda S2000s, Datsun 240Zs/280Zs, Ferrari 328s, Acura NSXs, and Mazda RX-7s. We think they will continue to appreciate over the next decade, and most of them are still available for well under $50,000. Focus on low-production variants of the base models and low-mileage examples.

The Future of Collectible Car Investing

As we enter a new dawn of technological innovation that includes the electrification of the automobile, you have to wonder: What does the future hold for the collectible car market and gasoline-fueled engines?
The future of the combustible engine has yet to be determined and still might be in question a decade from now. The United Kingdom has taken an aggressive policy position by legislating a ban on the sale of gasoline and diesel-powered vehicles by 2030, far earlier than virtually any other major developed market country. Although most Britons agree with the intent underpinning the legislation to reduce carbon emissions, there has been significant resistance to the proposal with many saying that the costs of owning an electric vehicle or hybrid remain onerous relative to the costs of owning gasoline-powered autos, and that the electric vehicles’ driving ranges are still too low – especially for those living or working in rural areas. It is possible that given more time, technology, and economics address both these concerns. Electric vehicles’ cost and driving range will achieve parity with combustible engine vehicles at some point, but no one knows when. Will battery technology continue a linear development path, or will there be a technological “last mile” barrier that is challenging to solve? The UK legislation does not address how the government will attend to the existing combustible-engine car fleet. Will these vehicles by left to fade away through mechanical attrition, or will the government take a more direct approach, such as taxing the emissions from legacy automobiles? Could vintage or collectible cars be the exclusive domain of the wealthy (more so than today) due to excessive taxation that fewer people can afford?
Traditional automakers are under intense pressure to keep up with innovators and government regulation, so some are applying technology not only to solve for the future but also to address past problems. Porsche, for example, is currently producing a synthetic fuel called eFuel which is made by combining CO2 and hydrogen to produce methanol. Methanol burns similarly to oil-based fuel but without carbon emissions. Porsche is producing limited amounts of eFuel at a wind-powered plant in Chile, and although it is probably too early to determine eFuel’s economic feasibility as a carbon substitute, this alternative fuel provides hope that combustible engines will have an opportunity to thrive in a world converging to zero emissions.

The risk exists that relics from the prior century, whether it be books, art, coins, or classic cars do not appeal to the next generation of buyers — it is not a foregone conclusion that the interests of younger generations align with the prior generation or that we seek to collect the same things. This is an ever-present risk in owning an object with little intrinsic value. In researching the collectibles market for this update, we are pleased to learn that interest in collectibles and Passion Investing has continued to thrive over the prior five years, successfully transitioning into the online era. In a strange way, the pandemic may have had a positive impact on the collectibles market by bringing younger buyers into the market — a demographic that will be essential to carry the collectibles’ baton from the older generation. Underpinning the entire collectibles market is the continued generation of wealth globally that is critical for price stability as many of our passion investments are only worth what the next person is willing to pay. As we say: beauty is in the eye of the beholder when it comes to collectible investing.

On a side note, I will be attending the 2021 Pebble Beach Concours d’Elegance in August and would love to meet our fellow car enthusiasts. If you happen to be attending, please send me an email at dsabo@edgecappartners.com. Thank you for reading!