In November 2020, an Hermès handbag sold at Christie’s for a cool HK$3.4 million, or US$437,330. It set a new sales record for a handbag of any kind according to the auction house, which described the item as being made from the hide of a rare white Nile crocodile.
Designer handbags have gained acceptance as alternative investments along with other tangible assets, some examples of which include art, fine wines, classic cars and more.
Such assets are often favored by high-net-worth investors (HNWIs) because they serve as portfolio diversifiers and can have high returns. Plus, they’re great to show off.
At the same time, these assets—like conventional investments—can have risks. They’re difficult to value, illiquid and unregulated.
Why not, then, just buy stock in the companies that make the handbag or wine or car?
That was the question I asked myself as I skimmed through Knight Frank’s annual report on wealth and luxury investment. Now in its 15th edition, this is the first Wealth Report that’s come out since we launched the Global Luxury Goods Fund (USLUX), so I took particular interest in what it had to say about the luxury market in 2020.
According to the British consultancy firm, high-end handbags—those manufactured by Hermès, Louis Vuitton and others—were the top performers for the second year in a row, their value increasing by 17% in 2020, based on the Knight Frank Luxury Investment Index (FKLII). Fine wines were a close second, up 13%. Five asset types lost value during the year, including rare whiskeys, down 4%, and art, down 11%.
Luxury Stocks Have Delivered Competitive Returns
I was curious to see how these tangibles stacked up against equity in luxury companies. I wasn’t disappointed by the results. The S&P Global Luxury Goods Index, which tracks around 80 companies that are engaged in producing or distributing luxury goods, ended 2020 up 36%, or more than double what handbags returned.
Source: Knight Frank (“The Wealth Report 2021”), , U.S. Global Investors • Returns for physical assets compiled by Knight Frank Research using data from Art Market Research (art, coins, furniture, handbags, jewelry and watches), Fancy Color Research Foundation (colored diamonds), Historical Automotive Group International (cars), Rare Whisky 101 and Wine Owners Limited (whisky and wine). A Flourish chart
Granted, that’s just for one year, and it’s fair to assume that the pandemic, not to mention the economic pullback that came as a result, dented demand for certain tangible assets. Due to lockdowns, auction houses had to cancel or postpone lives sales. Art galleries around the world reported an average 36% drop in sales in the first half of 2020 compared to the same period in 2019, according to analysis by Art Basel.
But even when we extend the comparison out 10 years, we see that luxury stocks remained highly competitive. The index of luxury goods increased 227% for the period ended December 31, 2020, more than any other tangible tracked by Knight Frank except rare whiskeys, up 478%.
Source: Knight Frank (“The Wealth Report 2021”), , U.S. Global Investors • Returns for physical assets compiled by Knight Frank Research using data from Art Market Research (art, coins, furniture, handbags, jewelry and watches), Fancy Color Research Foundation (colored diamonds), Historical Automotive Group International (cars), Rare Whisky 101 and Wine Owners Limited (whisky and wine).A Flourish chart
I don’t know about you, but this makes me wonder if luxury stocks aren’t a more thoughtful gift for a loved one than a new watch or jewelry.
The actor Michael B. Jordan must have had the same idea. It was reported that, during a Valentine’s Day dinner last month, the Black Panther and Creed star gave his girlfriend Lori Harvey shares in Hermès International.
The investment was well made. Since Valentine’s Day, Hermès is up more than 3% as of March 11.
Betting on an Increase in HNWIs and UHNWIs
As I’ve said before, one of our goals for launching the Global Luxury Goods Fund (USLUX) was to seek to track the spending habits of HNWIs and UHNWIs, whose incomes have historically grown at a much faster rate than earners in lower brackets.
When we announced we would be coming out with a luxury mutual fund on July 1, 2020, many market watchers questioned the timing. The pandemic has been hard on the pocketbooks of people from a wide range of earners.
That hasn’t necessarily been the case for ultra-high-net-worth individuals (UHNWIs), or those with incomes over $30 million. This cohort rose 2% between 2019 and 2020, according to Knight Frank. Asia, and particularly China, ranked number one at 12% for the continent, 16% for the country.
The U.S., by comparison, added ultra-wealthy individuals to its population at a rate of 3%.
I’m thrilled by how well USLUX has done since its inception, despite the challenges. The fund increased more than 36% through March 9, 2021, beating its benchmark, the S&P Composite 1500.
Source: Morningstar, U.S. Global Investors • Past performance does not guarantee future results. You cannot invest in an index. A Flourish chart
We continue to be bullish on the luxury market, especially now as the end to the pandemic is starting to come into focus. The $1.9 trillion rescue package, recently signed by President Joe Biden, may also be constructive for retail sales in general and luxury sales in particular.
Before splurging on that Hermès handbag, though, I invite you to consider USLUX.
To learn more about the fund, click here.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Foreside Fund Services, LLC, Distributor. U.S. Global Investors is the investment adviser.
Past performance does not guarantee future results.
Performance data quoted above is historical. Past performance is no guarantee of future results. Results reflect the reinvestment of dividends and other earnings. For a portion of periods, the fund had expense limitations, without which returns would have been lower. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any direct fees described in the fund’s prospectus which, if applicable, would lower your total returns. Performance quoted for periods of one year or less is cumulative and not annualized. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS.
Mutual fund investing involved risk. Principal loss is possible. Stock markets can be volatile and share prices can fluctuate in response to sector-related and other risks as described in the fund prospectus. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Companies in the consumer discretionary sector are subject to risks associated with fluctuations in the performance of domestic and international economies, interest rate changes, increased competition and consumer confidence.
Knight Frank's Luxury Investment Index (KFLII) tracks the performance of a theoretical basket of selected collectable asset classes, such as art, classic cars and wine, using existing third-party indices. Each asset class is weighted to reflect its relative importance and value within the basket. The S&P Global Luxury Index is comprised of 80 of the largest publicly traded companies engaged in the production or distribution of luxury goods or the provision of luxury services that meet specific investabilityrequirements. The S&P Composite 1500 combines three leading indices, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600, to cover approximately 90% of U.S. market capitalization.
Fund portfolios are actively managed, and holdings may change daily. Holdings are reported as of the most recent quarter-end. Holdings in the Global Luxury Goods Fund as a percentage of net assets as of 12/31/2020: Hermès International S.A. 0.65%, LVMH Moët Hennessy Louis Vuitton 0.77%.
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