As part of this growth, the British luxury goods market has also seen increased demand. This is due to many diverse factors such as the “Olympic effect”, the relative weakness of the pound, the increasing wealth of the global “super-rich”, the high-profile Queen’s Jubilee and Royal Wedding and the emergence of an affluent middle class from emerging markets.
As a result, commentators believe that there is potentially long-term growth in the sector. So how can investors invest in the British luxury goods sector?
Investing in luxury brand companies
Luxury brand companies offer a way for investors to enter the market. For many investors the most accessible way to do this is to acquire shares in listed companies. Such investments are susceptible to general stock market fluctuations and the performance of the companies themselves.
One area where performance has improved is through the use of online marketing, a source of sales which some British luxury brands were initially slow to embrace. However, luxury brands are becoming increasingly aware of the potential for online marketing to unlock global sales and companies are finding innovative new ways to use digital and social media to engage with consumers.
An alternative to listed luxury brand companies is acquiring interests in privately held companies. Although these require significantly larger investment and are not often publically available, they can be a route to access the sector for larger investors (for example, family offices and fund investors).
Direct investment in luxury products
Direct investment in luxury goods can offer investors access to the sector and has been one of the more traditional routes to market.
Depending on the type of goods, this can now be done easily and for a relatively modest outlay. Certain luxury goods can also offer attractive tax breaks for individual investors; items sold for less than £6,000 or which are deemed to have a limited life (such as cars, clocks and watches or wine) have the added advantage of being potentially exempt from capital gains tax.
Investment in luxury brand funds
On a larger scale, there has been an increase in funds investing in luxury goods. Such funds either acquire interests in luxury brand companies (similar to other private equity or public equities funds) or acquire interests directly in luxury goods, for example, specific funds established to invest in wine and art.
Whilst funds offer investors access to markets they may not be able to invest in individually, it is important that investors are aware of the risks associated with fund investments; luxury goods funds come with their own particular risks which need to be considered carefully before investing.
For example, carrying out proper due diligence is key (such as authenticating the goods and investigating the provenance and condition of those goods) and obtaining reliable valuations can be difficult as the valuation methods used may not be as transparent as the methods used for valuing other types of assets. Risks surrounding custody and conflicts of interests are also particularly relevant for these sorts of funds.
Tax and regulation
It is also important to ensure the fund investment is as tax efficient as possible (the general rule being that an investment in a fund should be no less than tax efficient than investing in the underlying asset directly). Ensuring the fund management team also has, or can access, the necessary industry expertise, is important with any fund, but this is particularly the case for funds investing in luxury goods, where knowledge of the asset class and the industry is critical.
From a UK regulatory perspective, the operation and promotion of funds in the UK is regulated. Financial advisers discussing these products with their clients will need to consider carefully whether investments of this type are suitable for their clients and bear in mind both the Retail Distribution Review rules and the recent consultation by the Financial Conduct Authority about restrictions on how funds are promoted to certain types of non-institutional investors.
Luxury brands are, unsurprisingly, susceptible to changing trends and it can be difficult to predict which investments might offer the greatest potential to perform well. What can be said is that with the growth in the British luxury brand sector the ways in which investors can gain access to the market has increased.
Even so, how these investments are structured from a tax, legal and regulatory perspective needs to be carefully considered before investments are made.
