Offbeat investments: cars, wine and football may pay off
Throw caution to the wind
Friday 30 November 2012
They are the investments that are off most people's radar but have the potential to deliver decent returns. Here we focus on 10 to consider if you're tired of putting all your money in shares and unit trusts, and are willing to be taken out of your comfort zone.
Exchange Traded Funds
Exchange Traded Funds, or ETFs, are one of the fastest-growing areas of investment. They are traded on stock exchanges in a similar way to quoted companies and give investors access to a huge variety of regions, asset classes and investment styles.
The primary attraction is their cost-effectiveness. In their simplest form they provide a cheap way to track specific indices, such as the FTSE 100. As stock market-listed vehicles, they can be bought and sold easily, with their prices changing in response to market movements.
However, a breed of more complicated ETFs has emerged in recent years that have caused a fair degree of controversy. Therefore, investors need to know the aims of the ETF, how it is constructed, and whether it holds actual assets or achieves replication with derivatives.
Patrick Connolly, a certified financial planner at AWD Chase de Vere, comments: "It is important that investors understand how their funds work and to what risks they are being exposed."
It may be unfair to class investment trusts as alternatives but the fact is they are a lot less popular than unit trusts and OEICs. These products are known as closed-ended because they are companies, floated on the stock exchange, that will only ever have a set number of shares available.
This structure enables their managers to take a longer-term view with the construction of the portfolios rather than having the challenges of dealing with redemption demands from investors when markets go through a tough time.
According to Geoff Penrice, a chartered financial planner with Astute Financial Management, a main benefit that investment trusts have over unit trusts or direct equity investments is the ability to borrow. This means they can "gear up" if the manager believes it's a particularly good time to invest. Of course, this also works in reverse so if the manager gets the calls wrong it can be damaging. "Investment trusts tend to outperform unit trust or direct share investment in a rising market and underperform in a falling market," he adds.
Venture Capital Trusts
These investments put their money into entrepreneurial businesses at an early stage. This means you will be taking on a lot of risk in exchange for the possibility of enjoying spectacularly high returns should any of these businesses prove successful.
Investors benefit from income tax rebates of up to 30 per cent; put in £100,000, for example, and you could see £30,000 knocked off your tax bill. Up to £200,000 a year can be invested in VCTs but you must hold on to the shares for at least five years in order to keep your rebate. In addition, when you dispose of your VCT, any gains will be exempt from capital gains tax.
The idea with sporting memorabilia is collecting items such as autographs, programmes, posters and entrance tickets that you believe will rise in value. For example, the signed shirt of an up-and-coming footballer who will eventually ply his trade in the Premier League and represent England.
The value of esoteric investments is usually dependent on limited supply and fluctuating demand. This is generally influenced by fashion that can change in a heartbeat, according to Andy Gadd at Lighthouse Group. Proof of authenticity will also be very important to valuations.
"Generally there is only CGT to be paid when disposing of esoteric investments as they do not usually generate an income," he adds.
"However, the tax situation regarding any particular investment should be ascertained before a purchase is made."
You only have to watch an edition of BBC One's Antiques Roadshow to see that older, overlooked items around the house might be worth a small fortune. Investing in them, however, is another matter entirely as you need to know what you're looking at and where to buy them at the right price.
The concept of buying items such as plates and vases as investments has become increasingly popular over the past few years as a result of the financial crisis and the widespread disillusionment felt by those watching the value of their traditional portfolios diminishing overnight.
The golden rule is to only collect items that you like and not what you think has the best chance of rising in value.
This is because if you're wrong you'll be left with something that not only isn't worth much in monetary terms, but is something you hate the sight of in your living room!
Enterprise Investment Schemes
EIS are similar to Venture Capital Trusts, just arguably even riskier because the money is invested in the shares of single companies rather than a fund. An income tax rebate of 20 per cent is given on investments of up to £1m, provided the shares are held for at least three years.
Mr Penrice thinks they should only be considered for those with substantial amounts to invest that have already used up their annual ISA and pension limits. "By their nature these small companies are high risk and there is the potential for severe losses as well as large gains, so VCTs and EISs are only for adventurous sophisticated investors," he says.
When you decide to help fund a community-based or social project then enjoying a return shouldn't be at the top of your list of concerns. However, it is possible to earn a modest income by backing projects such as Oikocredit (www.oikocredit.org), which offers a dividend of up to two per cent.
This organisation lends working capital to microfinance institutions across the globe. This money is then distributed in the form of potentially life-changing loans to poor and disadvantaged people, with a special emphasis placed on rural areas and women.
As well as a positive feeling that your investment will be used to help transform lives, there is also the prospect of seeing your money grow modestly in value.
What could be better than getting to enjoy driving around in a beautiful classic car that is increasing in value at the same time? After all, polishing a Bentley or Mercedes certainly beats dusting a folder of share certificates.
According to Patrick Connolly at AWD Chase de Vere, investors have been attracted to alternative investments by the prospect of superior returns at a time when the returns from other asset classes have been lacklustre. However, he feels the downside risks outweigh the potential benefits.
"These assets don't produce any earnings or income and so price fluctuations are based solely on supply and demand," he says. "This means there can be some big upward or downward price movements if a certain type of asset comes in or out of favour."
Such markets are notoriously difficult to understand, let alone predict, so expert advice is essential.
The definition of buy-to-let is a form of residential investment where you buy a property, normally with the aid of a specialist buy-to-let mortgage, and then rent it out.
As well as generating an income from the rent, potential investors hope the capital value of the property will rise over time.
The idea is great but there are potential disadvantages surrounding costs, tax efficiencies, diversification, and general day-to-day stresses that you need to bear in mind, warns Andy Gadd, head of research at Lighthouse Group.
"Although various tax allowances and strategies can be used to mitigate them, both income tax on the rent received and capital gains tax if the property is sold may be liable on the property," he points out.
"There will also be a lack of diversification if you only own one buy-to-let property."
Potential charges are another concern.
"You have to factor in costs such as stamp duty, solicitor's expenses, decoration, repairs, maintenance and potential void periods, even though certain expenses will be tax deductible," he adds.
Mr Penrice says the tax benefits are attractive. "As wine doesn't provide an income there won't be any income tax," he says. "Wine is defined as a 'wasting asset' by HMRC, so there is also no capital gains tax to pay on any growth, so the returns are tax free."
However, buying, selling and storing wine can be expensive and, like any asset, there's always the risk its price has risen too quickly and is set for a painful correction. For those with more limited funds, it might be worth buying into a fine wine fund instead.
"The likelihood is that as the world gets richer the demand will grow more rapidly than the supply and prices will tend to increase," adds Mr Penrice.
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