Smart Investor: Off the Wall Investments

Smart Investor, October 2011

The world is stuffed. I think that’s well understood. World stock markets are treacherous; sovereign bonds which were once considered rock-solid now risk default; and it’s a brave investor who can call where house prices are going next. What to do?

At Smart Investor, we don’t advocate you taking any investment without professional advice, and this is especially true the odder the investment. But in this feature we reveal some of the more off-the-wall investment classes that are out there to allow you to diversify away from the tried and tested into the weird and wonderful. And you know what? Some of them, while looking very strange, actually have very good track records.

To see the article as it ran – featuring a large moose – click here: Offthewall 1

1. Agricultural Oddities.

There was a time when you couldn’t move in Australia for investment products gearing you into wine, timber, olives, truffles, cricket bat willow plantations and the like. Agricultural investments thrived chiefly because of their tax advantages – it was no coincidence that they started selling like hot cakes around April every year, then went quiet again by July – but investors and promoters started to get too fixated with the tax and not enough on the investment. The collapse of Great Southern Plantations and Timbercorp in 2009, with debt loads they couldn’t service, seemed likely to sound a death knell on these managed investment schemes.

But the truth is these schemes are still widely sold today. Macquarie Forestry Investment has been selling investments annually every year since 2003, giving exposure both to trees and the land they are grown on. Other examples are Elders Forestry (which had problems of its own in 2009) and DGC Asset Management.

There’s nothing wrong with the premise of timber and agriculture investments: a long-term exposure to an asset that is obviously in increasing demand. But it is vital, as 2009 shows, to ensure that you know exactly what you’re getting, that the scheme is not in too much debt, and that interests of holders and trust are aligned. Tax should be your last consideration. And invest for the long term, or not at all.

Smart Investor verdict: There are good products out there, but buyer beware.

2. Art

Very few of us really know what we’re doing when it comes to art investment: knowledge and experience clearly gives you a vast edge, and most of us lack it. Did you know, for example, that turnover of Aboriginal art in Australia today is well under half what it was in 2007 – but that it’s at record levels in France? Market knowledge like this translates into investment returns.

That’s why most people considering diversifying into art do so through a professional. That might mean getting help in an auction of a particular artist or medium; or approaching a collector to build an art portfolio from scratch with a pre-agreed budget.

“Anyone can buy art,” says valuer and adviser Brenda Colahan. “Anyone can enter the marketplace, where once it was the domain of the wealthy.”

“But I think it’s very wise to seek professional advice: in 2007 at the height of the market a lot of people rushed in and overpaid for things at auctions where, if they had good advice, they would have realised they were paying too much,” she adds. “There are so many traps for the novice.” That said, the drop in art prices since then does make this a good point in the cycle to be buying, she says; her recommendation is for contemporary artists, such as Rick Amor and Sally Gabori, over the more famous names of the 60s and 70s.

“It’s a long-term hold,” she adds; traditionally eight years is seen as a good time to wait before considering a sale. “But the liquidity isn’t there like shares and you can’t ring up your broker and ask them to sell today. It can take several months to realise a sale.”

After a lengthy period of uncertainty around the Cooper Review, it’s now clear that self-managed super funds will still be able to hold art – but with some major catches. The most obvious one is that you can’t hang the art on your wall: it has to be stored, as well as valued professionally once a year. That rather defeats the point of investing in something you actually enjoy and appreciate. “All this beautiful artwork going into storage,” says Colahan. “The art world thinks it’s stupid.” It also adds storage and valuation costs, which over a reasonable collection are likely to add several thousand dollars a year; a valuer typically charges about $200 an hour, or $600 a day as a consultant.

Smart Investor says: A good diversifier for a long term investor, but don’t go anywhere near art without professional advice.

3. ATMs

“Want to own your own ATM earning an income of 20% p.a.? Now you can!” So reads the tagline on ownyourownatm.com.au. It sounds too good to be true. Is it?

This investment class got moving in 2009 when the Reserve Bank of Australia abolished indirect fees banks charge each other for transferring money between accounts to ATM machines. One knock-on effect was that more and more ATMs in Australia are private – not operated by the banks – and therefore can be bought.

One business, Ownyourownatm, offers a range of ATMs from $14,000 to $37,500, depending on whether it is a business hours machine or through-the-wall. Agreements are between eight and 15 years, again depending on the type of machine. You then get 30 cents per transaction, or a minimum 20% per year return on capital, whichever is higher. The deployer (ownyourownatm works with six deployers of ATMs) covers expenses for operating and maintaining the ATM. “Your ATMs will be the best employees you could ever have – never late for work, needing holidays, requiring sick leave and can cheerfully work 24 hours a day, seven days a week.” You can even buy them through a self-managed super fund.

What’s the catch? In theory, a change to rules around ATM fees could penalize you during the term of your investment. But what’s more important is to remember it’s not a bond – you won’t get your initial investment back at the end because you will have been receiving repayment of principal along the way, although you can sell the machine back to the deployer for 10% of the machine’s original cost. And though you can sell it along the way just like a lease, don’t expect a lively secondary market – be comfortable buying for the whole term or not at all.

Smart Investor verdict: Has a lot to recommend it as a stable source of income. Just don’t confuse it with a bond that will repay the whole initial investment at the end of the term.

4. Car parks

The Lanner Car Park Fund might not be the most exciting name in the world, but it has big ambitions: it aims to achieve a yield of 12% a year while generating a capital increase in the value of its assets. All from car parks.

The Lanner fund, a Channel Islands Stock Exchange-listed product promoted by a group called Best Group in the UK, holds its assets in Dubai, but actually it is far from alone in spotting the usefulness of car parks as an asset class. Macquarie, needless to say, has been doing it for years; back in 2007 its European infrastructure fund bought the UK’s National Car Parks offstreet, airport and railway station car parking businesses for GBP790 million, calling it “an outstanding business that displays all of the characteristics we look for in an infrastructure asset.” And before that, in 2004, the car park of the Sydney Opera House was the key asset in a trust launched by a group called Mariner Infrastructure.

What’s so special about a car parking space? Think about it. Regular, stable, predictable income. No shortage of demand (when was the last time you had a really easy time finding a CDB parking space?). And low overheads: once a car park is built it’s not as if it needs the same frequency of maintenance as a shopping centre.

When the next incarnation inevitably comes along in Australia, the things to look at will include the quality of tenant (look for a long term commercial client renting car spaces, for example), the location, and the precise terms through which the fund is related to the car park (does it own it? Lease it? How long’s the lease?)

Smart Investor: Some of the best investments are boring. In a well-structured fund, car parks look the part.

5. Gold coins

The Perth Mint is as close as you can get to a treasure trove in Australia: gold bullion, pieces of silver, even jewellery. But everything it sells is also an investment class – and in some ways the most straightforward, solid investments you could ever find.

Gold coins come in a total of nine sizes, from one twentieth of an ounce to 10 kilos (yes, you read that right). They are 99.99% pure gold and also come in two designs: some are embossed with kangaroos, others with designs from the Chinese lunar calendar. All are priced at a margin over the gold price, and the Perth Mint maintains a buy/sell spread just like any other commodity. It’s quite a spread: at the time of writing it was selling a half ounce gold coin for $953.22, but will only buy it back again for $858.95. If you want you can keep your coin in your home – the lunar calendar designs are clearly designed to appeal as gifts – but there are also depositary services available.

As an investment, it all comes down to your view on gold: it’s at an all time high in US dollar terms, reflecting its role as a safe haven in uncertain times. The question is if it can go any higher.

Smart Investor verdict: Worth its weight in gold.

6. Livestock

Ask any investment bank strategist about the big themes that will drive the world in the years ahead, and sooner or later they will mention increasing role of meat and dairy in world diet, particularly in China. Australia, with its huge livestock industry, is one of the countries best placed to benefit from this trend, but it’s surprisingly difficult to get exposure to it.

Needless to say Macquarie has had a go, setting up the Macquarie Livestock Company in 2007 to buy Australian agricultural land through the Macquarie Pastoral Fund; now operating as Paraway Pastoral, it now holds 23 properties, aggregated into 17 large scale pastoral businesses, holding over 3 million hectares of land with the capacity for more than 200,000 cattle and 200,000 sheep. But that investment is not currently open to new money.

There is, though, something called the Beef Stock Market, which allows you to buy, sell and even fatten cattle over the internet. You don’t have to go anywhere near a cow if you don’t want to: The market will buy the stock, fatten it and sell it again for you.  In exchange it charges grazing fee of $1.15 per kilo the cow gains in weight, and 4% of the sale amount. You’re also liable for veterinary expenses if your animal gets sick.

Look on the site for costed examples of how returns might work; various examples based on live prices come out at between 4% and 18%, but in reality it will be heavily dependent on the cattle market of the time.

Smart Investor verdict: A big market for experts, but a bit unpredictable for mum and dad investors without specialist knowledge.

7. Odd infrastructure

This is not so much about things you might buy, as things you might not know you already own through your super fund. Industry funds in particular have taken to buying major pieces of infrastructure, since their long-term nature suits an equally long-term fund.

Among the more obscure bits of hardware you may be exposed to are Gdansk Port in Poland (MTAA super fund); Thames Water, through Kemble Water Holdings (Australian Super); and Birmingham Airport (Victoria Funds Management Corporation).

Smart Investor verdict: fine for a long-term fund, but not exactly liquid.

8. Storage boxes

What’s in a box? A sound investment, apparently. Self storage facilities can be anything from 5x5metre units to multi-storey buildings with over 100,000 square metres of rentable storage space. They usually offer rental on a monthly basis, with customers having sole access. There are various other typical parameters around climate control, security systems, perimeters and resident managers, but the overall premise is very simple.

In the US in particular, storage is seen as a discrete arm of property investment, driven by demand for space. As selfstorageinvesting.com, a US site, puts it: “Self storage businesses generate massive amounts of passive income… without the hassle of tenants, toilets or trash.”

It’s earlier days in Australia but the industry is growing: according to Self Storage Sales Australia, the industry has grown 20% in the last two years. This company allows people to buy self storage sites and businesses, and advises them on how to do it. The logical next step – investment trusts that hold storage assets – is probably not far away.

Smart Investor verdict: Safe and steady commercial property opportunity.

9. Student accommodation

Brandeaux is a UK fund management group with some curious specialities: student accommodation and residential ground rent in the UK. We focus here on its student accommodation fund, launched in sterling in 2000 and since relaunched in US dollar, euro, Singapore dollar and Swiss franc share classes too. It invests in university student accommodation.

The idea of the fund is that it offers low volatility and limited correlation to other asset classes.  In the UK, many universities have purpose-built student accommodation. That obviously provides extremely stable income, and is underpinned by the fact that higher education in the UK has grown dramatically over the last 10 years, increasing the need for student housing. Brandeaux has been doing this for so long that it has close relationships with the universities themselves and gets involved in the planning of accommodation needs.

Smart Investor verdict: Has worked very well for Brandeaux: (performance number to follow)

10. Taxi licences

Every Australian state issues taxi service licences that allow the holder to provide a taxi service in a defined area. The thing is, the owner doesn’t have to be the person who runs the taxi; and the licences can be transferred and hold a capital value. That means a taxi licence can be seen as an investment – a passive investment, in fact, in which you don’t have to go anywhere near the taxi, much less drive anyone around in it.

There are groups in Australia that will help you with taxi management and operating; an example is AMB Australia, which has a staff of drivers and can help with consultancy and even financing. Groups like this tend to charge $50-100 a month as a management fee depending on where you are.

According to AMB, taxi licences currently generate between 5.5% to 8.5% a year, not counting any capital gain that might be made along the way (and that can be impressive in its own right: an average annual increase of 7.4% for Melbourne licences between 1989 and 2009, for example). If you lease your licence to a taxi fleet company, current lease prices vary between about $1,500 per month in Perth and $3,000 in Melbourne. There are some tax advantages too, but they are not straightforward and you will need advice. Be aware in some states there will be a need for an operator certificate or accreditation in order to hold a licence.

The catch? Licences aren’t cheap. A Melbourne taxi licence will cost you $490,000, Sydney $430,000, and Perth $320,000.

Smart Investor verdict: A decent return, but high up-front costs