July 2018 Letter
Going once, Going twice….
A Look at Collectibles
Earlier this year, at a Gooding & Company auction at Amelia Island, FL, a 1966 Ferrari 275 GTB sold for $2.5 million. At the same auction, a Shelby Cobra sold for $1.35 million. What was unique about these two classics was the fact that they were discovered in a North Carolina garage, uncovered and, more importantly, untouched for nearly 30 years. Each car was found to have fewer than 20,000 miles on the odometer and both had intact original interiors. These two highly sought after marques became the latest “barn find” cars to clear over $1 million at auction despite (or maybe because of) being unrestored. Collector cars are just one subset of the overall collectibles market. Collectors around the world collect and trade everything from Barbie dolls to lunch boxes. Anywhere there is a hint of nostalgia and at least a bit of scarcity, you’ll likely find collectors. In this quarter’s letter we drill down a bit and focus on three of the largest and most liquid collectible markets: Cars, Wine, and Art. All three categories are supported by active auction markets and numerous publications tracking market values and telling stories like the latest “barn finds.” In addition, at the end we’ll cover a few of the important tax considerations for collectibles.
Ferraris, Red Hot
In early June of this year, CNBC reported that a 1963 Ferrari GTO changed hands in a private sale for $70 million, in what is believed to be the highest price ever paid for an automobile. The extraordinary value reflects the car’s racing history and the fact that it was never wrecked in competition. Scarcity was also a big part of the equation as only 38 GTOs are known to exist. But while the private sale market is hard to assess, the collector car auction market has been very robust in recent years and Ferrari has led the way, accounting for 25% of total auction dollar sales in the twelve months ended August 31, 2017. That statistic comes to us from the Classic Car Auction Yearbook 2016-2017 (CCAB). Every twelve months, the CCAB tabulates auction results from around the world into a 400+ page hardbound book. During the last auction season, the U.S. and U.K. combined for nearly 80% of the total purchase volume and the book covered everything from Scottsdale to Silverstone. At just under $1.1 billion, the latest season came in about 11% below the high-water mark set two years ago of $1.23 billion - three times the mark set in 2008-2009. Of the cars that rolled across the block, 75% were sold at an average price of $254,000. And, in a sign that the collector car market is drawing in a younger demographic, the average model year last season was 1966, up from 1952 on average ten years ago.
The top seller last year was a 1956 Aston Martin DBR1. Dripping with provenance, this DBR1 (DBR1/1) hammered home at $22.5 million, exceeding the pre-auction estimate of $20.0 million. The sale came last August at Monterey, CA, by RM Sotheby’s. This car was the first of five DBR1s produced and campaigned by the factory, winning the 1959 Nürburgring 1000k. Driven by Jack Fairman, the DBR1/1 broke the lap record sixteen times. Among the other drivers to pilot the DBR1/1 were Stirling Moss, Jack Brabham, and Carroll Shelby. The top selling American nameplate hammered away last year was a 1967 Chevrolet Corvette Sting Ray convertible selling for $1.98 million in January of 2017, at Scottsdale, AZ. A one-time piece of the Otis Chandler collection, this ‘vette’ was one of only ten L88 427 Corvettes built in 1967. While the top of the collector car market continues to bring eye-popping prices, the car hobby remains open to everyone with thousands of desirable entry level cars priced as low $15,000. Some of the fastest growing models in popularity are trucks/SUVs and muscle cars from the late 1960’s and early 1970’s.
Raise a Glass
The worldwide market for collector wines remained robust in 2017, with website winealpha.com estimating global auction results topping $336 million. Though the wine market in 2017 was up about 13% year over year, it still lagged the 2011 peak of $440 million. The top four auction houses, Acker Merrall, Zachys, Sotheby’s, and Christie’s combined to control about 80% of the auction market last year. Geographically, nearly 54% of the auction market was conducted in the U.S., 30% in Hong Kong, and the remainder in Europe. Wines from the Burgundy region of France led the way to the top of the price charts. Located in north, central France, Burgundy is one of the country’s best known wine producing regions, renowned for its Pinot noir and Chardonnay grapes.
Among the best of the best in the Burgundy region are wines from Domain de la Romanée-Conti, DRC for short. DRC is widely considered one of the premier estates in Burgundy with a history that predates the French Revolution. DRC’s flagship Pinot noir, Romanée-Conti, and sister Pinot, La Tâche, are among the most sought after wines in the world. And, again, according to winealpha, DRC wines brought big money at last year’s auctions. At a Sotheby’s auction in September, a 1990 Romanée-Conti brought over $44,000 per bottle. At the same sale, vintage 1999 La Tâche settled at just over $7,000 a bottle. Near the end of last year, a 1999 DRC assortment case sold for more than $76,000. In all, John Kapon, CEO of auctioneer Acker Merrall, estimated that the DRC label rose by about 30% in 2017. Like car collecting, wine collecting is open to beginners at low price points, but importantly you’ll need to properly store your wine. To adequately preserve wine, it should be kept in a place that is consistently cool and damp year round, preferably 52°F with 75% humidity. One place to start might be The Wine 101 Guide at winefolly.com.
Art of Collecting
“Barn finds” aren’t unique to the classic car market. Rare and unusual items of any sort can turn up anywhere, especially in the largest and deepest collectibles market of all: art. In May of this year, the website artnet.com told the story of a rare Chinese vase found in an attic in France. The homeowner, unaware of the vase’s value, stuffed it in a shoebox and took it to Sotheby’s Paris office for an evaluation. There, examiners determined it to be a one-of-a-kind porcelain vase handcrafted in China in the mid to late 1700s. The homeowner believes it has been in the family for at least three generations. As most known similar pieces are held in public collections, the find created a rare opportunity for an auction sale that Sotheby’s believes could bring nearly $1 million.
A report by Art Basel and UBS pegged the worldwide art market at $63.7 billion in 2017, a 12% increase from 2016 and down slightly from ten years ago. Overall, values were up as the number of transactions was up 8% year over year. The U.S., China, and the U.K. accounted for 83% of total global sales. Post War and Contemporary art accounted for 46% of sales and Modern art made up 27% of the total. The global art market is fairly evenly distributed between dealers (53%) and auction houses (47%). The auction market was dominated by high value works as lots sold at $1 million or more were 1% of transactions, but nearly two-thirds of the dollar volume. At the top of the charts was an Impressionist/Post-Impressionist piece titled “Twelve Landscape Screens” by Qi Baishi that was hammered away in China for $141 million. But, like the car and wine markets, there are price points for everyone as over 60% of the lots sold last year were priced under $5,000.
There is, however, a dark side to the collector art market - theft and fraud. The FBI estimates art thefts total as much as $5 billion a year. Perhaps the most famous heist of all occurred in 1911 when the Mona Lisa was stolen from the Louvre in Paris, France, in what Time magazine called one of the ”Top 25 Crimes Of The Century.” In a patriotic bid to return the Mona Lisa to Italy, Louvre employee, Vincenzo Perugia, stole the painting and was later arrested trying to sell it to an Italian gallery. Forgery is another big problem in the art market and it was thought, at the time, that Perugia’s theft was part of a broader plan to inflate the market for fake Mona Lisas. Enforcement activity and prosecutions are rising around the world and closer to home, the Los Angeles Police Department (LAPD) operates the nation’s only metropolitan police division dedicated to art crimes. The LAPD art division has recovered over $123 million of stolen art since 1993.
The Tax Man is a Collector too!
Naturally, with collectibles being somewhat unique, they have unique tax considerations. This is by no means a comprehensive review of collectible taxes and, as always, we suggest you discuss specific issues with your accountant, but we will hit some of the high level considerations. First, long term gains on collectibles are taxed at up to 28%, not 20% for other capital gains. Like other short term investments, short term collectible gains are taxed as ordinary income. Additionally, the 3.8% Medicare surtax may apply. Next, IRAs are barred from holding collectibles with the list including: artworks, rugs, antiques, precious metals, gems, stamps, coins, alcoholic beverages (sorry would-be wine collectors), and certain other tangible property, thought to include collector cars. Interestingly, an IRA can invest in one, one-half, one-quarter, and/or one-tenth ounce U.S. gold coins or one ounce silver coins minted by the Treasury department.
The usual gifting rules and limits apply to collectibles, but as for donations to charitable organizations it is critical to be sure the donation is used for the organization’s tax exempt purpose and that an appraisal is completed. An appraisal resulting in an overvaluation can be met with IRS penalties. A charitable remainder trust would allow a donor to leave art on his or her wall until death and enjoy a current tax advantage. Again, check with your tax preparer.
As the auction results show, collectibles can be good investments as well. They can be a form of “alternative” investing that offers some diversification from the financial markets. The risks, though, are less liquidity and emotional attachment. Selling a treasured car into a frothy market may be the wise thing to do, but some enthusiasts can’t bear the thought of an empty parking space. With all this in mind, it’s time to go clean out our garages and attics. Happy collecting!