Tag Archives: Financial Economics

Driving Investment: The Missing Piece to your Investment Portfolio?

This blog was contributed by BSc Financial Economics student Paul Talbot and was originally written as an assignment for the module Quantitative Techniques for Applied Economics.

Picture of a classic car

Classic cars, an alternative investment that is rarely discussed when investors are looking for a strategy to increase ROI in their portfolios. Some prestige classic cars have increased over 400% in the last decade[1], but what sets these assets apart from status quo investing?

“Stories. That to me is the answer. Every car has its own history, its own adventures, its own japes and probably plenty of scrapes. Tales to be told and shared with fellow enthusiasts. Few other asset classes, however valuable or beautiful, can match it”[2]

The majority of investors would not be able to afford a 1960 Ferrari 250 GT, but investment growth has been seen across the majority of the classic car market. A more affordable sector is British classic cars, iconic cars such as the Jaguar E-Type or the Triumph TR6 has yielded over 50% returns since 2007, outpacing the heavyweight UK asset classes.

Graph showing price indices of UK classic cars

The classic car market also benefits from a favourable tax status, investors do not pay capital gains tax on profits as they are classed as “Wasting Assets” by HRMC. Movable assets such as classic cars can be gifted to family members, if no benefit is retained or lent, or for a period each year, to a car museum to avoid paying inheritance tax on death. If you intend to enjoy your investment on the road, they are also exempt from road tax and a MOT.

Tax relief of 20% on investment gains already drives these assets ahead of other financial instruments and it is no surprise that this is attracting some attention. The classic car market added significant gains to the UK economy last year[3] and is expected to continue grow from £940 Million in 2019 to £1.65 Billion in 2023.

Graph showing projected UK classic car market

Investing in classic cars does not come without a few speed bumps, it is not a case of purchasing any car and hiding it away for many years. Paul Michaels of Hexagon Classics notes “The very best cars — meaning those with full histories in exceptional condition, either completely restored or lovingly maintained with some age-related patina — will always command the highest prices.”

It is always advisable to get an expert opinion and the history authenticated before purchasing your investment and continue to keep your new asset lovingly maintained and stored away from the elements. All the above will add an upfront and annual running cost to purchasing the investment, reducing overall yield, but in turn, the better the asset is maintained and stored, the higher possibility of future gains.

The average global investment portfolio last year contained only 4% of luxury investments, this includes fine wines, collectable coins, art, jewellery and classic cars to name a few[4]. With climate change at the forefront of government polices banning the sale of petrol/diesel cars by 2030 and the rise of autonomous vehicles, will only make these investment stars a rarer commodity.

Pie chart showing global average asset allocation.

With central banks flooding the markets with liquidity, artificially supporting equities and driving down bond yields, parking a little piece of history in your garage and diversifying your portfolio will not only provide the perfect inflation and market correction hedge, but you may have some fun along the way.

Next time you look at your annual investment report, the immortal words of Wilbur Shaw may spring to mind.

“Gentleman, start your engines”

Further Information

[1] https://www.hagerty.com/apps/valuationtools/market-trends/collector-indexes/Ferrari

[2] HRH Prince Michael of Kent interview with Knight Frank November 2020

[3] FBHVC National Historic Vehicle Survey – https://www.britishmotorvehicles.com/news/fbhvc-national-historic-vehicle-survey-reveals-significant-contribution-to-uk-economy

[4]The Attitudes Survey is based on responses from 600 private bankers and wealth advisers managing

over US$3 trillion of wealth for UHNWI clients. The survey was taken during October and November 2018

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The silent extinction of the truffle kingdom

Could climate change lead to the complete extinction of truffles? BSc Financial Economics with Accounting student Nada Hinic explains.Mushrooms on a forest floor

         “All that is gold does not glitter,
          Not all those who wander are lost;
         The old that is strong does not wither,
         Deep roots are not reached by the frost.”

         (J.R.R. Tolkien, The Fellowship of the Ring)

Could climate change lead to the complete extinction of truffles? According to some scientists, it is quite possible: the increase of dry and hot weather in the regions of Italy, France and Spain can lead to a very serious situation for truffles, with the possibility of them disappearing completely in these regions by the end of the century. This would mean that the delicacy, which is already dizzyingly expensive and can be compared to the price of gold, would reach the value of an even more incredible level.

Average retail truffle prices in 2019

Source: https://truffle.farm/truffle_prices.html

We can find strong evidence in historical articles on culinary culture that 18th and 19th century Europeans consumed truffles abundantly, from which it can be concluded that this fungus was not expensive. In the last 100 years, crops in the regions of Italy, France and Spain have decreased from a harvest of 2,000 tonnes a year to just about 20, due to global warming, acid rain, and, more recently, heat waves and reduced rainfall.

Scientist Ulf Buntgen, in his latest study ‘Black truffle winter production depends on Mediterranean summer rainfall’ (for which he used 49 years of continuous harvest and climate data from Spain, France and Italy) claims that truffle production rates from November to March significantly rely on previous rainfall from June to August, and that too much autumn rain adversely affects the later winter harvest.

The question might be asked how the market manages to survive. The logical answer would be that dealers have turned to alternative sources. Truffles themselves are not uncommon. Many sources in Europe still under the radar are producers in Croatia, Poland, Serbia, Albania … where they grow the same species as in the three most popular European regions. Why is that so? Truffles that are claimed to come from France or Italy (regardless of country of origin) achieve a premium price.

China has been, for several years now, the largest producer and exporter of truffles in the world. However, the quality of Chinese truffles is not satisfactory to any world standard, so their market price is very low. Australia and New Zealand are also on the horizon, but their production only covers their local demand. With the greatest sadness, one must also ask: will the Australian truffle market survive the devastation brought by the recent forest fires? The US has also entered the market recently, but it cannot be considered a serious competitor to the Europeans as yet.

All the sources combined are not enough to keep up with the demand for this delicacy. In 2019, a pound of quality black truffle cost about $650, and white almost $2000 (however the price soared again in November 2019). In 2017, due to too much drought in the previous year, the yield of white truffles was so weak that the price of one pound of white truffles skyrocketed to $4000.

Average white truffle prices (USD/lb)

Source: https://truffle.farm/truffle_prices.html

London restaurateurs charge around £5 per gram of truffle shavings, claiming they make no profit on truffle, but the reason for the offer is the quality of the dish: ‘only few shavings can turn the dish from ordinary to extraordinary’.

Because of their hidden underground life cycle, truffles have aroused the interest of many scientists and many mysteries about them have now been revealed, though not all.

Truffles are hypogenous fungi: that is, unlike mushrooms on stems, they grow underground. Buried, their interaction with the rest of the living world is very complex. They depend on their hosts on which they feed, which are primarily oak and hazelnut trees and fir trees. The development of truffles is a wonderful harmony between the tree and the truffle itself: the tree provides the truffle with sugar and the fungus gives the tree nutrients from water and soil. Fertilisation depends on the animals they can feed with their trunks, not on the wind, to spread its spores. To attract the attention of animals, when truffles mature, they turn on their spectacular scent, sending signals to anyone available to them that they are ready to be excavated so they can be dispersed.

But if truffles are so rare and desirable, why not just grow your own? The answer is that truffle cultivation is harder than it looks, and many scientists have addressed the issue. In recent decades, techniques have been developed to vaccinate tree seedlings with truffle mycelium, but the process is still difficult and does not necessarily guarantee that truffles will mature. Italian white truffles do not respond to these techniques at all, while French black truffles, on the other hand, are more susceptible to domestication.

Leading countries by truffle production in 2017 and 2018

Source: Leading countries by mushroom and truffle production 2018 (source: https://www.atlasbig.com/en-us/countries-mushroom-truffle-production) Leading countries by mushroom and truffle production 2017 (source: https://www.worldatlas.com/articles/the-world-s-top-producers-of-mushroom-and-truffle.html)

The irrigation technique remains a safe method to preserve the survival, especially of the white truffle, as Buntgen observes in his work, but this also has its limitations. Recognising the vulnerability of the sector, there is a need to further foster stronger connections between farmers, politicians and scientists in order to maintain environmental and economic sustainability under the predicted climate change in southern Europe.

Further Information:

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