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A look into alternative investments

Scotch Whisky has historically delivered average returns of 12% per annum over the last decade.

Articles written by investment industry participants about investment trends and opportunities tend to focus on the obvious assets such as stock and bond markets, cash deposits and properties. As these markets are the biggest and most liquid, it makes sense that these markets take up most of the space in the media.

But what about looking at alternative investment assets outside of conventional financial market instruments?

Alternative investment assets will never take the place of investors core investments in global financial markets, but there is a place for alternative investment assets.

Let’s consider assets such as rare classic cars, antique furniture, art or wine amongst other assets of this nature. Many of these types of assets are traded by collectors at auctions held around the world.

Do these types of investments provide a return on capital invested?

Is there a way to invest in these types of assets where there is a low entry-level, where the capital growth is attractive and where the risk for the smaller investor can be reduced?

In this article, we are going to discuss investment in Scottish whisky barrels as an example of alternative investment assets.

Scottish Whisky is considered to be a luxury product and can also be a collectable asset. This makes whisky desirable globally.

The 2019 Knight Frank Wealth Report

London-based property company Knight Frank annually produces a luxury investment report known as the “Knight Frank Wealth Report”.

The Knight Frank Wealth Report named Whisky as 2019’s top-performing luxury investment. With an increase of 40% on rare bottle values in the last 12 months, it far outstrips the well-established asset investments of art, wine and cars.

Whisky casks are a store of wealth. They’re increasingly sought AFTER as a reliable hedge against times of economic uncertainty

Good returns from whisky maturation have been achieved for decades. Investors are now able to participate in this market, by buying quality casks at wholesale prices.

To be legally sold as Scotch Whisky, New Make Spirit (the clear, potent liquid formed by fermenting and distilling malted barley, water and yeast) must mature in a wooden cask, in Scotland, for a minimum of three years. A cask is then laid till maturity in a Her Majesty’s Revenue and Customs (HMRC) approved bonded warehouse, insured for 10 years against theft, accidental damage, spoilage. The time spent in the cask creates a substantial increase in value, as Cask Maturation means the spirit can now be legally sold as Scotch Whisky.

Scotch Whisky has historically delivered average returns of 12% per annum over the last decade and is the undisputed king of whiskies, growing in export value by 7.8% in 2018. It’s a tried and tested maturing asset – the longer the whisky matures, the greater its value.

Why distilleries need private investors

The costs of providing secure storage for millions of pounds worth of casks is immense. Then there are insurance fees and the cost of capital – outlaid before buying grain, paying staff, importing barrels, and paying distillery overheads.

Without help from investors, many distilleries, especially the smaller or newer ones, simply could not afford Cask Maturation. By selling a limited amount of new-make spirit, it generates a reliable, steady income stream ‘which helps keep the lights on’ as they say.

For a whisky bottler or brand that do not own their distillery, holding whisky for its three+ years Cask Maturation period takes up a lot of cash resources. They prefer to purchase aged whisky that is already matured, as this reduces cashflow constraints – they can buy an aged cask, bottle the whisky within days and not years, and send it straight to resale.

Whisky collection is on the rise, and not just for the ultra-wealthy. Anyone passionate about whisky, who is hoping to own an eight-year-old Whisky Cask, is far more likely to purchase a cask that is already passed maturity – for a premium – than wait the full eight years.

The global demand for scotch whisky outstrips supply.

AGED WHISKY IS ALWAYS IN DEMAND BY GLOBAL WHISKY MARKET.

Security

Fraud surrounding rare, bottled whisky and wine is commonplace. Yet fraud in whisky casks is virtually non-existent. HMRC’s tight measures control the industry, from the moment your cask is filled, it is given a unique identification code. This code stays with it through every step of its lifetime. The code is recorded at the distillery, by transportation companies and recorded at the bonded warehouses.

A bonded warehouse is a tax-free storage location. Duty and tax payable on goods held there are deferred until the goods are purchased and shipped out. This is usually by a professional blender who acquires your whiskey for bottling when it is mature.

Warehouses are licensed by HMRC and closely monitored by the government. They are among the most tightly controlled locations in the country.

ADVISOR PROFILE

Michael Haldane

Global & Local Investment Advisors

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