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Q2 Fractional Performance Recap: The Downside of "Just Like Stocks"

Q2 Fractional Performance Recap: The Downside of "Just Like Stocks"
July 5, 2022
Dylan Dittrich

Amidst the booming speculation of the last few years, a common refrain could be found in taglines. Trade [XYX] just like stocks. Trade sports cards just like stocks. Trade art just like stocks. Trade NFTs & crypto just like stocks. Trade sneakers & luxury items just like stocks.

Some of these assets come with historical track records of performance that deviate favorably from equities and traditional financial instruments. In many cases, though, those track records were established in times of vastly greater friction - when five and six figure pieces couldn’t be sold with little logistical effort or cost within hours, days, or even weeks.

Today, we live in a world where collectible assets of all kinds can be bought and sold easily, with significantly lower friction. We live in a world where shares of those assets can freely change hands on a digital trading floor.

Just like stocks, they said.

Well, in the midst of the worst first half performance for equities since the Nixon administration, collectible assets trading fractionally performed…just like stocks.

Now, that's perhaps an oversimplification of the similarities in performance. Different track records, different volatility, different liquidity. But the reality is this: given the speculative nature of collectibles as investable assets, investor psychology plays an incredibly vital role in their short-term performance. While in eras past, the level of friction and inability to move in and out of these asset classes at a moment’s notice may have spared investors from their worst impulses, that’s no longer the case. Investors and collectors alike are free to sell low, to sell into minimal liquidity, and to abandon ship at what might just be the worst moment. When the hope is that these assets will provide differentiated performance, very similar performance in the time of most stress is...not ideal.

That’s not necessarily to say speculative collectible assets shouldn’t perform poorly in moments such as these, only that short-term correlations with traditional risk assets may prove much higher than we’ve been used to. And still, there are many true grail assets that you wouldn’t expect to change hands at auction in a moment like this - the types of assets that make fractional so attractive - and those have perhaps been thrown out with the bathwater. Whether fractional investors will adjust to remain patient in times like these and steadfast to a longer-term time horizon remains to be seen. What we know for sure is that, at this moment, long term time horizons are few and far between, sentiment is remarkably low, and there’s little silver lining in the numbers (unless you’re a long-term investor spotting opportunity).

Speaking of the numbers, let’s dig in.

The Altan Insights 100 closed June down almost 9% and the third quarter down over 19%, producing a year-to-date decline of over 22%. The “experienced” members of the fractional community (i.e. those that were around a whole year ago) will recognize that those numbers are somewhat similar to the close of June 2021, when the index lost 13% on the quarter and was down 19% on the year. The index came roaring back in the third quarter and eventually closed 2021 at a modest 4% gain. In fact, 6/30/21 was the literal low for the index, and it stood as the lowest point in its existence….until June 29th of this year. Can 6/30 mark the bottom again?

The problem is: 2021 was a bit different. In the spring of 2021, assets cascaded 30-40% lower for little rhyme or reason, often completely independent of comps. Losses begot more losses until, eventually, the tide turned. The rising tide was led in part by a slew of buyout offers, as sharks circled the suddenly appetizing valuations on grail comic books in particular. These offers served to ground markets in a greater sense of reality, reminding investors that there was indeed considerable demand for these assets outside of the fractional world.

Believe it or not, there were just as many buyout offers this quarter (15) as there were in the same quarter a year ago. That came on the back of a first quarter which was the most active buyout environment on record. But this time, the offers didn’t turn the tide for markets broadly. There are two reasons for that. First, the disconnect between fractional markets and asset values this year was not nearly as broad. And second, this year’s sell-off comes against a backdrop of risk assets of all kinds plummeting as monetary policy tightens and the threat of recession looms. In that environment, and in a world of lower friction as detailed earlier, auction activity is more quickly reflecting a weakened appetite for those items removed from the top tier of rarity and prestige. So, while markets may reverse course, the same rapid burst off of the bottom feels less likely this time around. The Altan Insights 100 has not had a positive week since March, though, and with the breadth of selling, surely some relief is on the way?

"Breadth of selling" brings us to our analysis of performance at the asset class level. Not a single asset class is positive on the year, and not a single asset class was positive in Q2. Two asset classes that you would expect to hang in there did just that in Q2: Art and Wine & Spirits (at least on a relative basis). It’s worth noting at this point that the Art index does not include Masterworks assets (which trade bulletin board style) and that the Wine & Spirits index, like all of the other indices, measures price return. The art market largely roared on for much of Q2 (see our report here), and wine is up 10.3% YTD as measured by Liv-Ex. On a total return basis, we’d see slightly stronger fractional performance for wine than is depicted here, as Vint recently completed its first distribution in the Champagne Stars collection.

Other categories that minimized downside in Q2 were Books, which were already soundly beaten down in Q1, and Sports Memorabilia, which continues to command headlines and prime position in recent auctions. For the most part, though, Q2 was a rout. The negative sneaker performance is mainly the result of the Nike Air Mag on Otis reaching a wildly inflated value at the end of Q1 (sneakers are the best performing category YTD). The bloodbath in NFTs and Video Games, though, is very much a representation of the reality in these categories. Several assets in those asset classes were initially offered with valuations at or beyond the peak of the market, and chasing hot categories has resulted in immense pain in 2022.

Even comic books, a bastion of strength and resilience in Q1, succumbed to broad market weakness in Q2. The assets remaining on fractional markets are, for the most part, not on the same level as the many grails that departed in 2021. As the most recent Signature event at Heritage showed us, while prices are still generally well above where they were a year ago, many have reset lower as the steam escapes a market that ran very hot the last few years.

The results are not particularly different when you look at the average ROI by asset class. Remember: the indices are market cap-weighted, so these figures provide more equal-weighted measures of how assets are performing.

On the topic of equal-weighted performance, we also compile an equal-weighted index which reweights all assets currently trading to the same weight at the end of each month. In practice, this would have the effect of buying losers and selling winners to revert to equal weights. Typically, in a falling market, that would generate outperformance versus a cap-weighted strategy. And that has been the case year-to-date, though more outperformance was generated in Q1, when there were more pockets of upside. In Q2, when very few assets were safe, the outperformance was a bit less pronounced.  

Now for perhaps the most jarring representation of just how few assets were safe. The proportion of assets that have gained ground this year is incredibly low across asset classes. In fact, across the fractional population, just over 18% of assets have registered positive returns in 2022. For what it’s worth, that’s actually not far off of the 2022 positive constituency of the S&P 500, which sits at 21%.

Finally, performance across marketplaces was remarkably similar in both June and the second quarter, which seems to be another indicator of widespread and indiscriminate selling activity.

If the market is indeed a voting machine in the short run, as Benjamin Graham once said, then fractional investors have broadly voted yet again they're not willing to stomach the risk of these assets as the pain increases. When the dust settles, the question becomes which assets have been unduly caught in that exodus. With the breadth of drawdowns, surely there are some. The other looming question is whether the fractional investing population, almost certainly culled in this drawdown, emerges from the rubble once again with a larger and sharper base.

Those questions will be answered in the coming days, weeks, and months, but for the moment, there is little to do but dress wounds. Just like stocks, they said. In Q2, just like stocks is exactly what we got.

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