Welcome to the third blog of our Investment series. This time we prepared an introduction to alternative investment trends and whisky investment.
As we have mentioned in the previous article, the alternative investment universe consists of so many various types of asset classes with different properties. But there are a few common elements in these type of investment assets, such as:
Longer investment horizon (more than 5 years);
Low correlation with traditional asset classes which makes it a good diversification to the portfolio;
Appraisal is not easily done with low liquidity and no available market data;
Most assets do not trade on exchanges, even if some do, they are not very liquid;
Direct ownership of tangible assets is riskier, but of course can yield higher returns due to higher risk premiums;
They require a higher investment amount than other traditional assets.
Recent trends in alternative investment
Most of us know about more commonly traded alternative investments such as real estate, private equity, and asset-backed securities. But what’s trending now are rare collectibles, wine, whisky, luxury bags, sneakers, cryptocurrencies etc, of which we know less about.
In the last year, governments all around the world have been increasing the money supply, and implementing loose monetary policy to support their struggling economies due to the Covid-19 pandemic. This has driven asset prices up, which resulted in an increasing number of ultra high net-worth individuals (UHNWIs) especially in Asia, where the number increased by 12% in 2020, whereas the growth was 4% in the USA and 2% globally to reach a total number of 521,000. Therefore, there is a rising demand for investment and luxury purchasing from affluent individuals all around the world.
To take one example, luxury handbag prices increased by 17% in 2020, which is the highest amount out of the composition of Knight Frank luxury investment index. The bag shown in the photo, Hermès Himalaya Niloticus Crocodile Retourné Kelly 25 was sold at Christie’s auction for USD 437,330 in November 2020, which broke the world record of the most expensive handbag ever sold. It is the result of increased wealth in Asia where the biggest handbag collectors are located, there are more accessible online auctioning platforms, and where there was a lower market value at the beginning of last year.
Also, due to the pandemic, the technology industry has seen a big leap in development, which made tech-based startups and cryptocurrency more attractive investment instruments in the eyes of investors. For example, Bitcoin has risen in value by about 80 percent since the beginning of this year. Moreover, investing is becoming easier thanks to all the apps and online platforms, where you can trade, participate in auctions, and purchase or sell assets from the comfort of your home or anywhere you are. This makes alternative investments more accessible and liquid which, in turn, raises the investment value and return.
Let’s take a look at the luxury investment index growth chart:
As you can see from the 10-year growth chart, the Knight Frank luxury investment index (constructed by a property consulting firm, Knight Frank) grew by 129%, handbags grew by 108%, cars 193%, and wine by 127%. Compared to all these assets, the rare whisky index grew by a shocking amount of 478%. It raises the question, how did this happen? Why did whisky grow almost 5 times that of other assets? Let us try to answer these questions.
Whisky was invented in Scotland in about the 1500s, when monastery monks used to make small amounts of whisky by distilling grains for medical purposes. The main ingredients of whisky are grains like barley, yeast and water, which are distilled in copper pots, and matured in wooden casks for a few years to make the final product, whisky, with its special color and flavor. What makes the spirit into quality whisky are water quality, distillation process, properties of the casks, maturation period and bottling process.
- Water and distillation: There are about 130 operating distilleries in Scotland. There are 5 main distillery regions in Scotland, which are Highland, Lowland, Islay, Speyside and Campbeltown. Each region has its own water and air quality, that gives their final spirit its own unique flavor and properties. For example whiskies from Speyside have sweet, caramel and fruity flavor, whereas Islay whiskies are more peaty and smoky.
- The cask: The most important factor of the flavor and quality comes from the cask it is matured in. Whisky casks are made of an oak and whisky is never matured in a brand new cask, but in a cask previously used for bourbon whisky (bourbon cask), or wine (sherry cask). The inside of the cask is torched by actual fire, which gives the initially transparent spirit its unique amber color and special taste that we know well.
- Maturation: Whisky value is positively correlated with the amount of time it has spent in the cask. Scotch whisky is legally a scotch whisky after 3 years of maturation. There are several significant years of age in a whisky such as 10, 12, 15, and 21. During these years, whiskies are the most valuable as most whisky is removed from the cask to be bottled to sell or consume beforehand. Also, there is a statistic that only 8% of the total cask whisky actually matures past that 15 year threshold. So by a simple law of supply and demand, whisky aged more than 15 years is most valuable on the market. One thing I have to also mention is that whisky is aged only in the cask, and it does not mature further in a bottle. That is why cask whisky value increases not just by market forces, but also by the passage of time itself.
- Bottling: Once the whisky has matured, there is one more critical stage where value is added, which is bottling. First of all, the ABV (Alcohol by volume) is very important. Whisky has about 63% ABV before it goes into the cask, and during the maturation process, 2% of it just evaporates into thin air every year. So, matured whisky coming out of the cask has more than 50% ABV. Now you can dilute it by adding water until it has 46% ABV before bottling, or you can bottle it by cask strength. I think it is not necessary to mention which bottle has more value.
Most bottled whiskies on the retail market are actually a mix of different casks and ages of whisky from that distillery. Even the single malt whiskies are blended when bottled. That means the unique and special property of each cask is lost during this process. Therefore, single cask whiskies bottled from one cask are sold for a much higher price than blended whiskies. You then can imagine how valuable it is to actually own a cask whisky with its truly unique taste and properties.
Scotch whisky making is almost an art itself in every process of distilling, maturing, and bottling. It is liquid gold where its value and demand increases by the passage of time, not driven by other market factors. Smart investors who know this have already begun looking at whisky as a valuable asset other than an alcoholic beverage.
Investment market of whisky
The biggest player in the whisky market, Scotland, has about 20 million casks of whisky sitting in warehouses. They exported about USD 7 billion worth of exports to other countries, and 42 bottles of scotch whisky are exported per second.
In 2020, the Frank Knight rare whisky index dropped by 4% due to Covid-19, but the cask whisky index made by Cask88 has seen 12.76% growth.
The most expensive bottle of whisky ever sold was a 60-year old Macallan that was sold at Sothesby’s auction in 2019 for USD 1.9 million. The most expensive bottle of 2020 was a 45-year old Japanese brand Yamazaki whisky which was sold for USD 795,000. As for the most expensive cask whisky, a 30-year old Macallan cask whisky that sold for GBP 428,000 in a 2019 Hong Kong auction holds the current world record.
If we look at the demographics of whisky investors, people aged 41–56 take about 47% of the total market, and millennials between age 25 to 40 are about 31%, which is an increase of 55% in 2020. This indicates that an increasing number of the younger generation are beginning to accept this market as an alternative investment asset class.
The pandemic is also affecting the whisky market, but in a positive way. During this turbulent time investors who are looking for a stable generating return that is free of market volatility are turning to whisky investment. The proof is 62% cask whisky investment return since July 2018, which is higher than the 58% physical gold return, which is considered the classic safe haven asset during market crises. We can see that investors consider whisky investment safer than gold investment. This argument is supported by the fact that cask whisky investment has very little downside, as it is fully insured as a legal requirement and backed by the physical asset, the cask itself.
I hope this article helped introduce you to some of the exciting alternative investment opportunities that are trending now. And we are very glad to offer you a chance to take part in the investment of the liquid gold that is cask whisky with our ORDA platform.
Thank you very much.
Financial analyst, Steppe Group