Alternative Investment: Necessity Is The Mother Of Transformation
One of the most striking but overlooked outcomes of the pandemic has been its acceleration of global trends. The technologies that allow remote working, for example, have been around for a while now but may have taken another decade to fully mature into new ways of working. Today, this tech is essential and everywhere. What seemed years away in the spring is a reality in the fall.
This rapid transformation is mirrored in the investment world, as risk drives investors to the whiskey bottle (or in our case, the cask). While obviously delighted, I'm also intrigued to understand what lies behind this focus on alternative investments. What I've discovered is a new breed of investors pursuing a new breed of investment strategy.
Alternative Investments Appeal
I'm always keen to understand buyers' motivations and commissioned research as part of my company's annual Cask Whiskey Buyer Report, a survey of 505 investors. Market volatility traditionally sees investor flight to safe havens, but the research shows that diversification — not withdrawal — is the defining response to risk. More than 40% of survey respondents with £100,000 or more to invest look to alternative investment markets as a way to spread risk. In addition, well over half seek returns in excess of 10%, which is a ballsy ambition given the current economic environment and the fact that annual FTSE 100 returns over the past decade have averaged around 8%.
Alternative investments are fast emerging as an option to balance investors' desire to mitigate risk against healthy returns. So what is an alternative? While definitions vary, these are generally investments that fall outside traditional categories, such as stocks, bonds and currency — and are often physical assets.
The alternatives market has grown impressively, and ongoing uncertainty is likely to accelerate its emergence into the mainstream. Even before the pandemic, FT Adviser reported that alternative assets under management doubled between 2008 and 2017 and were projected to hit $14 trillion by 2023.
Alternative Investment Performance
All of this tells us that investors are increasingly interested in alternatives, but not so much why. The simple answer is performance.
Research from Knight Frank provides some interesting insight here. The company's 2020 Wealth Report details growth in key alternative investment sectors. Over the past decade, wine has grown by 120%, art has increased by 141% and coins leapt by 175%.
Whiskey — which is my bailiwick — is the star performer. Rare whiskey grew by 564% in the same period. It is, however, important not to confuse rare whiskey with premium whiskey, or indeed cask with bottle.
Alternative Investment Awareness
As with all investments, due diligence is essential. This is a huge subject that demands an article to itself, but to summarize, investors need to understand everything they can about the asset before they commit. This is more important than ever in an alternatives market, which is likely to be unfamiliar territory.
Again, I can only speak to what I know, but in the cask whiskey world, not all whiskeys are created equal. Quality alone is no guarantee of returns (though it is a necessary prerequisite). A whiskey's brand, age and rarity all combine to determine its value. A bottle of 12-year-old Macallan, while undeniably good, is relatively plentiful, so it's unlikely to generate much in the way of profit. The distillery's Queen's Diamond Jubilee release, however, limited to just 2012 bottles, sold on its release for £350: Today, just eight years later, it's selling for £8,000.
The same rules apply to casks, where returns can be eye-watering. In 2018, a cask of 1989 Macallan sold for £242,000, with the original owners paying just £2,700 for it in 1994. In 2019, a cask of 30-year-old Macallan set a new record, selling for $572,000.
Brand dominates mainstream whiskeys, too, with a cask of 23-year-old Laphroaig selling for around £89,000. At the bottom end of the market, whiskey from an unbranded commercial distillery is not — and will never be — rare, so it only sells between £5,000 and £15,000: ROI will never be great, even after 30 years. The golden rule for investors is to buy from a distillery with a strong brand that sells limited volumes.
We are witnessing a move toward quality in the Scottish market, where once-dominant cheaper blended whiskeys are being reeled in by premium single malts. It's estimated that the value of Scotch single malts will grow by more than 11% between 2018 and 2022, while blends will fall by well over 3%.
The smaller but even faster-growing Irish market (up 300% in the past decade) is set to mirror the trend. Irish Distillers's premium Redbreast single pot still whiskey, for example, is growing at 25%, and the company now sells close to 100,000 cases a year.
Understand The Alternative
Due diligence — taking the time to understand the asset — is good business sense. It means that an investor not only uncovers an alternative's risk but also discovers its opportunities.
Our research survey decided to test this theory. Understandably, respondents indicated that they felt more comfortable investing in the "less alternative alternatives," such as the art, wine and antique sectors. The less familiar alternatives, such as cask whiskey, were featured further down on their wish lists.
We provided respondents with a brief, neutral summary of the cask whiskey market and then asked if this had any impact on their intentions. More than half stated that, with additional insight, they were more interested in cask whiskey investment (and results are even more dramatic when you slice and dice the data by age).
Which brings me back to the beginning. Familiarity, it seems, breeds confidence — not contempt. While the cask whiskey market may have taken a decade to bed down in investors' portfolios, a desire to diversify will see it reach maturity far more quickly.
In the alternative investment space, as in so many others, necessity is proving to be the mother of transformation.