The Finer Things – Investing In Classic Cars – Part One
What is a classic car? To some, it’s any marque and model from even the recent past that they admire.
More precisely, classic cars are any older car with the pedigree, character, and significance to warrant preservation.
To pundits, it’s a car with all three virtues, but which was built after 1945.
Cars that go boom
The sector has boomed over the past decade, although prices had been rising steadily, sometimes strongly, for long before.
Compared with mainstream savings assets (equities, property, gold), only the Dow Jones index has performed better since the mid-1990s.
However, 2015 saw a peak and prices have since fallen by more than they slipped during the Great Financial Crisis (2008-2009). Why?
First, some context. The Kidston 500 and Hagerty indices, shown above, track auction prices (so, excluding private sales) achieved only for those marques and models deemed intrinsically collectible.
These are the ‘blue-chip’ names: Ferrari, Porsche, Jaguar, Mercedes-Benz, and the like, for which values of the most desirable models typically start at £250,000 or so.
The charts therefore represent only the most valuable names, for which public and speculative interest has been at its highest.
Significant macroeconomic shift
Buying in this category has tended to be increasingly dominated by opportunistic attempts to cash in on the well-publicised uptrend, i.e., ‘dumb’ short-term speculation, rather than ‘smart’ investing for the long-term.
There has also been a significant macroeconomic shift as central banks, especially in the US and the UK, the two biggest classic-car markets, have reined in their post-recessionary buying of financial assets, known as ‘quantitative easing’ (QE).
This policy change has reduced the flow of cheap money into investors’ pockets and simultaneously initiated a reversal in the long downtrend in interest rates (see chart, below).
Classic-car investing does not pay interest, so buyers tend to be deterred when returns from cash are rising.
An important test for the top end of classic-car values will come this August, when RM Sotheby will auction a 1962 Ferrari 250 GTO, the Holy Grail of classic cars: only 36 built and acclaimed by enthusiasts as the greatest sports-car of all time.
It’s expected to set a new world auction record of over $45 million, surpassing the previous record of $38 million set in 2014, also for a 250 GTO. Should it fail to reach that target, there could be a setback in prices, which, after their fall since mid-2015, have recovered a little in the current year.
1962 Ferrari 250 GTO, chassis no. 3413, body by Scaglietti.
Even if this car does achieve a record price, there seems limited scope for further significant price gains for high-end classics.
On one hand, any acceleration in economic growth – normally, a helpful development for prices – will probably be restrained by a concomitant further rise in interest rates as central banks try to choke off any resurgence in inflation.
On the other hand, if most major economies merely continue their currently feeble rate of expansion, as is widely forecast, it’s hard to see how private wealth can continue to grow sufficiently to boost classic-car prices.
Worst of all would be a relapse into recession, possibly caused by the nascent trade war that the Trump administration seems determined to foster by imposing tariffs on US imports from China and Europe.
The market for classic cars is esoteric
That action threatens to drive those regions to respond with tariffs of their own, thereby undermining the international trade growth that provides the foundation for economic expansion and, by extension, for higher classic-car prices.
In any case, should one really be a classic-car investor at all? Rather like fine art, and completely unlike stocks and bonds, the market for classic cars is esoteric, occasional, and opaque.
Much of it takes place in private sales, rarely recorded.
For example, another Ferrari 250 GTO was reported recently to have been sold privately for $70 million, making it the most valuable car in the world.
But how significant for the overall market is a deal between a single willing seller and a single determined buyer, as opposed to the open bidding competition of a public auction?
In such a market, investors rarely feel in control or even properly informed.
1963 Ferrari 250 GTO, chassis no. 4153. Sold for a reputed $70m, June 2018
Then, there are the costs.
While almost every kind of investment entails fees and charges, ever-growing regulation ensures that, in public markets, at least, such costs have to be declared.
The investor knows, both in advance and throughout the tenure of their investment, exactly what will be paid in commissions, management charges, custody fees, and so on.
For collectible cars, however, there are no regulations governing fees or commissions, while the continuing expense of maintaining a collection is pretty much unquantifiable.
Even if the cars are rarely driven, they will have to be stored where humidity and temperature are constantly monitored and controlled.
They will also need to be insured, serviced, fettled, and cleaned if they are not to be eaten away gradually by corrosion and decay.
Machines last and work better if they are used regularly.
One could invest in one of the several funds that have been launched over the past few years.
Take them for the occasional spin
That would ensure some transparency over costs, but these funds are usually established offshore, outside the jurisdiction of more demanding regulators, and investors in them have only limited recourse if something goes wrong.
Besides, what is the point of investing in historic cars if one cannot take them for the occasional spin, nor even enjoy bragging rights on Facebook or Instagram?
By all means, therefore, enjoy your wealth and buy a classic car, even several.
However, following the exceptional rise in prices over the past ten years, it’s probably best to do so for the love of the machines themselves, rather than in expectation of further stellar returns, at least, not in the short-term.
After all, what more pleasant ‘dividend’ can there be for the petrolhead than to enjoy a summer’s day by blasting along country lanes in something as rare, irreplaceable, exciting, and beautiful as Ferrari, Mercedes, or Jaguar from the 1950s or ‘60s?
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
