Investors tend to be cautious.
Indeed, the majority of them take a traditional — and conservative — route with their portfolios, combining assets such as stocks and bonds, IRAs, cash, money market accounts and maybe some real estate holdings.
Then there are those who put money into investments that aren’t easily liquidated or that are considered risky, complicated or offbeat.
Enter the sophisticated investor with money to spare and time to wait for potentially spectacular returns.
Local wealth management experts who work with this upper echelon of investors — often referred to as alternative or enhanced investors — are seeing a surge of activity in illiquid investments such as art, wine, coins, antiques, horses, clubs and restaurants, timber and farmlands, and private equity.
Bryan Fastenau, senior vice president and portfolio manager within the Nashville office of U.S. Trust, a wealth management division of Bank of America, said alternative investors usually fall into one of two categories: those who become experts in their investment niche and those who partner with experienced portfolio managers who know the intricacies of the markets or who have access to people who do.
“If you are going to play in that space, you need to have expertise,” Fastenau said. “The better you get [at becoming an expert in a niche], the better your investments get.”
Fastenau describes the portfolio of a high-net-worth individual who includes alternative investments in a portfolio like a pyramid.
Low-volatility investments that pay the bills are at the bottom of the pyramid, and medium to long-term investments are placed in the middle. A sliver at the top of the pyramid contains riskier ventures that can’t be instantly liquidated. The average high-net-worth investor puts 10 to 30 percent of assets into the top of the pyramid, Fastenau said.
Fastenau is seeing a rising interest in high-end art collections and in timber and farmlands. U.S. Trust has assembled a network of art specialists — dealers, appraisers and major auction houses — who help clients locate sellers and determine the value of the art they have identified for their collection. Wealth managers at U.S. Trust also manage more than 163,000 acres of timberland for investors.
Nashville-based businessman Tim Ozgener, the former CEO of CAO Cigars and an active investor in fine art and restaurants, falls into the category of self-made investor/expert. He’s deeply involved in his alternative investments and calls them “passion projects.”
“There’s a knack to this kind of investing,” Ozgener said. “When it comes to art, it’s best to believe not only in the art but the person behind the art, whether it’s actual art or a creative business like a restaurant.
“I think of restaurants as art, too,” he added. “The best restaurant owners view themselves as artists. They are about so much more than drink and food. [Fine dining] is really not so different than a painter mixing pigments.”
Ozgener said he makes investments in ventures that have a good business plan. Yet he’s willing to lose the money he sets aside for these projects.
“I invest in concepts that I want to be a part of, but I also have to be willing to face the worst-case scenario if they blow up,” he said.
Many savvy art collectors build collections that have the potential to appreciate dramatically over time, said U.S. Trust’s Fastenau. But he warns that art investing (U.S. Trust actually offers a lending program that allows fine art collectors to use art as collateral for a loan) is a complicated arena that requires knowledge of — and relationships with —dealers, appraisers and major auction houses. When high-ticket art pieces are sold or transferred, that triggers significant tax consequences.
“We can help clients understand the tax implications of selling all or part of a collection, to passing it on to children or to donating to a museum,” Fastenau said.
Ben Hanback, president of Brentwood-based human resources firm The Hanback Group, began investing in alternative ventures 10 years ago when he became one of the financiers of B.B. King’s Blues Club.
B.B. King’s, which has venues in Las Vegas, Memphis, Nashville and Orlando and West Palm Beach, Fla., has been through ups and downs, including a Chapter 11 bankruptcy. Hanback — who said the future looks bright for those Nashville live music venues and clubs located within close proximity to the new convention center — sees club investment as a positive one, despite the difficulties.
“I would only recommend [investing in a club] to risk-takers,” he said. “You only put in what you are willing to lose, but it’s also true that these kinds of investments are about a lot more than money.
“I’ve been able to take clients and friends to the club, and I’ve met B.B. King,” Hanback said. “It’s a lot of fun.”
Hanback also invested in a racehorse — Tight Storm — from 2006 to 2008. Although the horse wasn’t a big money-maker, Hanback considers the investment a success because Tight Storm won races that paid for her upkeep and training.
Although investors such as Ozgener and Hanback essentially became their own experts, some alternative investments are best undertaken with the services of a professional expert. Fastenau puts timber into this category. Timber investing typically yields strong returns over time — about 15 percent. But purchasing, managing and selling timberland is a complicated long-term process. Many who are successful in timber markets work with a variety of experts, and it can take 15 to 20 years for the investments to provide income and appreciation, Fastenau said.
Bill Spitz became an expert in alternative investments during his tenure from 1985 to 2007 as Vanderbilt University’s treasurer and vice chancellor for investments.
Spitz, now a director at Diversified Trust, a Nashville-based wealth management firm, presided over a tenfold increase in endowment assets, in large part because of alternative investments.
“There are two reasons why they are good,” Spitz (pictured above) said. “They provide diversification, but they don’t track along the same curve as the stock market. They are like opposites of one another; while one zigs, the other one zags. When stocks and bonds are lower, chances are the alternatives will be up.”
Spitz says his typical high-net-worth client has 25 to 30 percent of her or his portfolio in alternatives — everything from timber to energy to private equity to coins. He said there has been increased interest in alternatives since the recession.
“We’re in a terrible environment, with single-digit returns on everything. Some are calling it the new normal,” Spitz said. “Many would like to find something else to give stability.”
The recession also hit alternative investments, but not as severely as the stock market, he said.
“You can still get pretty decent returns,” Spitz said.
POSTDATA: WARRANTY DEEDS