5 August 2024
The prior five year investment cycle has been interesting to say the least. It has bared witness to the Covid crisis, the sharpest interest rate hiking cycle since the 1970s, a major regional war with global implications (Russia/Ukraine), the U.S turning increasingly isolationist, and the rise of artificial intelligence, a game changer for humanity.
This begs the question. Which types of investments have delivered the best performance during these major events and changes? In order to answer the question, we wanted to expand our investment universe and include asset classes not typically included in more mainstream performance charts.
For example, how well have the prices of classic Ferraris, Porsches, Art, Rolex watches and Kruger Rands held up relative to more typical investment classes like listed equity and property?
Chart 1: Annualised 5 year performance to stated dates at end of article. All performance in USD from public sources. Past performance is not a guarantee of future results.
The best performing asset by far over the prior five years has been Bitcoin, followed by Cryptocurrencies in general. The third best performing asset is the Nasdaq Index, primarily driven by the rise of Artificial Intelligence software and hardware requirements.
Surprisingly, in fourth place we have the Kruger Rand in U.S. Dollars which has outperformed both the S&P500 Index as well as Gold Bullion, trailed closely by the MSCI All Countries World Index. Collectables, such as Rolex watches, Classic Ferraris, Classic collectable cars in general, and Art have not fared all that well. In fact, both Rolex watches and Art have had an extremely poor performing year, dragging down longer-term returns.
Performance is, however, only one part of the equation. We also have to look at the risk taken to achieve the return. More typically, as a measure of risk taken, investors look at the degree to which the performance has fluctuated along the way, called volatility. A simpler metric for the purposes of this article, is the maximum performance drawdown.
A maximum performance drawdown is simply the maximum decline from an investment’s peak level to its subsequent lowest level, whereafter it shows an uptick, and a new maximum decline must be measured from the new peak. The below table shows the maximum top to bottom drawdown of each investment over the prior five years:
Table 1: Maximum drawdowns in USD over prior 5 years up to 30 July 2024.
Clearly, cryptocurrencies have experienced the deepest drawdowns. Classic cars, classic Porsches and classic Ferraris have barely experienced any negative performance. Investors buying these cars are rarely forced to sell them at prices below their purchase prices.
If we now take the five year annualized returns of each investment, and divide each by their maximum drawdown over the most recent five years, we end up with a statistic called Return on Maximum Drawdown, or RoMaD for short, as shown in the below table. The higher the RoMaD statistic the better the performance for the risk taken to generate that performance:
Table 2: Most recent 5 year annualised returns adjusted for maximum drawdown over the most recent 5 year period as at 30 July 2024.
The best risk-adjusted investments have been Classic Cars (including Ferraris) and Gold (including the Kruger Rand). The worst investments have been Rolex watches, Art, South African equities (in USD terms) and listed U.S. Real Estate.
Whilst classic Ferrari returns have remained relatively stable (table 1), they have not been great in absolute terms over the prior five years, as shown by chart 1. It is also difficult to partake in the returns that a specialised asset class like this provides. The prices do not fluctuate wildly because they are primarily set at auctions which take place at set intervals (these cars don’t sell often, but when they do they tend to sell for a price higher than the original purchase price).
Noteworthy, is that the RoMaD of Bitcoin, and cryptocurrencies in general, tend to be in line with the Nasdaq and S&P500, respectively. As such, an investment in the Nasdaq or S&P500 indices may be better suited to the general investor’s portfolio on a risk-adjusted basis relative to investments in Crypto. Whereas Crypto largely has one source of return, i.e. one has to hope someone else will buy it at a higher price at some future date, the Nasdaq and S&P500 indices at least have implicit earnings growth and dividend yield from the underlying companies in each index, thereby supporting the underlying prices that make up the index.
Whist both Gold Bullion and Kruger Rands have delivered good risk-adjusted performance over the latest five year cycle, longer-term the risk-adjusted performance tends to rank significantly lower than public equity markets.
This brings us to our next criteria. It doesn’t matter if the risk-adjusted performance of the asset class has been good if one cannot practically invest in it. We therefore have to ask whether each of the asset classes have high minimums investment amounts, are easily accessible as investments, liquid, and with low transaction & storage costs:
Clearly, there are fewer asset classes that allow investors practical, cost efficient access to their return potential, despite ranking high on our risk-adjusted performance table.
The key statistic is RoMaD. If we include the two Fintax Funds in the discussion, their RoMaD, or risk-adjusted performance would rank in line with the MSCI All Countries World Index, despite not being equity mandated funds over the full five year performance cycle. A decent result over a five year period that has been so eventful.
In addition, the funds are liquid, with low minimum investments, easily investable, and with low transaction/storage costs.