How collectible cars provide an effective, low-correlation hedge against inflation

Your key takeaways

• As traditional financial markets are regularly hit by severe crises, investors need to adopt a modern, flexible and well-considered portfolio strategy
• Alternative assets are a great portfolio diversifier because they have a low correlation with traditional investments and offer stable returns outside the stock markets
• Some alternative investments, such as gold bullion, real estate, limited edition sneakers or vintage cars, are tangible and classified as real assets
• Because of their physical nature, real assets offer investors a sense of security and stability, especially in times of rising inflation and market volatility

Whether it was the bursting of the dot-com bubble in the early 2000s, the collapse of US investment bank Lehman Brothers in 2008, or more recently the outbreak and global spread of the highly contagious coronavirus, financial market participants are regularly confronted with crisis situations that require a modern, flexible, and thoughtful portfolio strategy.

Events that seriously disrupt the structure of the global financial system are nothing new and have occurred since the inception of money and trade. However, increasingly cautious investors are seeking forms of alternative investment that preserve wealth and provide stable returns outside of traditional finance, a market currently pressured by high levels of inflation and general uncertainty.

Against this backdrop, collectible vehicles have become increasingly popular as real assets among investors looking for new ways to allocate capital and hedge against emerging problems in equity markets. Simply put, many of the stocks and ETFs that have performed well in recent years are not even beating rampant inflation today - let alone cash.

Investing in iconic collectible cars offers an effective solution. These assets have a low correlation to stock markets and have appreciated significantly over the past decade. The fact that a beautiful automobile can be seen not only as a means of transportation, but also as a great investment opportunity, a potent store of value, was also recognized early on by the company Drivers Hall.

Berlin-based Drivers Hall is dedicated to managing highly exclusive collections of ultra-rare supercars and iconic vintage and young timers. The company not only provides storage services, but also assists clients in building and managing their very own car collection. In addition, Drivers Hall offers scouting, consignment, consulting, maintenance, and more, made possible by their competitive advantage of deep industry experience and a broad network of contacts.

‍HAGI Top Index tracks the financial performance of collectible cars
‍So, is it worth investing in collectible cars? Does an investment in a vintage Porsche 911 or a perfectly restored Mercedes 280 SL Pagoda really allow investors to protect or even grow their money when traditional finance is shaken in times of crisis? An answer to these questions can be found by comparing the performance of the collectible car market with the performance of relevant stock indices such as the MSCI World and S&P 500 during periods of economic hardship.

The Historic Automobile Group International (HAGI) Top Index, based on data collected from individuals, marque specialists, dealers and auction houses around the world, is updated regularly by the organization and tracks the overall market performance of exceptional historic automobiles.

The financial crisis of 2007-2008, triggered by the collapse of the US housing bubble, is considered the most severe financial crisis of the 21st century. While many companies and financial institutions were brought to the brink of total collapse, the MSCI World Index lost a whopping 60% of its total value (S&P 500 -55%, DAX -54%) before slowly recovering in early 2009. In sharp contrast, the HAGI TOP Index rose by more than 50% during this period.

When the COVID pandemic hit the markets in early 2020, the MSCI World Index fell 35% in just one month (S&P 500 -35%, DAX -38%). According to an article by Knight Frank, a renowned UK alternative investment consultancy, the HAGI TOP index in May 2020 was down only 4% from its peak in the fall of 2018. This was mainly explained by the disruption of distribution channels, as well as the cancellation of automotive events due to the global lockdown.It is also known that the devastating effects of the pandemic led to very high inflation rates, reaching around 10% in Germany and 8% in the United States for October 2022. While international stock markets have suffered further significant losses since the beginning of the year, the HAGI Top Index has risen by a further 21%. In this tense environment, collectible car investors not only outperformed inflation, but even enjoyed a nice return on their four-wheeled assets.

‍Real assets are a sensible addition to any portfolio, and it gets even better
‍The results show that in this young century there have already been serious crisis situations in which stock market investors lost a considerable amount of money. The collectible car market, on the other hand, has performed well and delivered stable returns. Why is that? It can be explained by the fact that real assets (also known as real world assets or RWAs), as a special form of alternative investments, typically begin to shine when traditional markets turn down.

RWAs are tangible assets that have their own physical value - independent of the stock and currency markets. Thanks to their unique characteristics, real assets are a powerful tool for building investment portfolios that can withstand even harsher conditions. High-quality RWAs retain their real intrinsic value while TradFi markets are under pressure from inflation and price fluctuations.

Investing in real assets can therefore serve as a portfolio safety net, a useful addition to a broad portfolio, but it also comes with challenges that need to be considered. Here are four exciting facts about RWAs:

• RWAs are exciting and super diverse. The topic of real assets as meaningful investments becomes especially interesting when it comes to collectibles. A box of rare wine, vintage Nintendo games, an exotic Porsche roadster. Not to mention old cheeses, dinosaur teeth, contemporary art, musical instruments - if there is demand, it has value.
• Emotion. An important component of any collectible investment is emotion. For example, when people buy an ultra-rare 1962 Ferrari 250 GTO, they are paying not only for the car itself, but also for the history behind the asset. Was the item important to the success or even survival of the brand? A world-famous previous owner? The higher the historical significance, the higher the perceived emotional value among collectors, the higher the price.
• Expertise and networks are key. Finding the right real asset for an investment can be difficult. For example, sourcing a classic car that will not only retain its value but also appreciate in price requires expertise and connections in a relatively small market. With this in mind, companies like Drivers Hall offer a solution to those seeking to invest in valuable classic and supercars by assisting clients throughout the entire process, from sourcing the asset to storage and maintenance.
• RWAs + tokenization = mass adoption of luxury ownership. In a previous article, we explained that fractured ownership allows investors who are not necessarily super-rich to participate in the ownership and associated benefits of luxury real assets. This is now taken to another level with the development of blockchain technology and the concept of asset tokenization. All rights and obligations associated with the ownership of an asset (or fraction thereof), which are precisely defined, are digitally stored in a token on the ETH blockchain. These tokens are peer-to-peer tradable, without financial intermediaries, making the trading of RWAs faster, cheaper, safer and more transparent. Interested? Coming soon!