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For a recent edition of Alts & Ends, we dug into the most recent eBay earnings release, which sent the stock reeling. It got us thinking though: are there publicly traded companies that could be used as proxies for an investment thesis in a collectible alternative asset class?
For instance, if you were bullish on sports cards, could exposure to eBay provide similar outcomes to actually buying and holding some blue-chip cardboard? Would Sotheby’s - back when it was publicly traded - have been a good proxy for top tier fine art exposure? Could a positive outlook on watch values be expressed in recent years through a bet on Watches of Switzerland…or perhaps could luxury titans like LVMH and Hermes similarly benefit from increasingly positive sentiment on luxury items like watches?
You get the idea.
And boy, wouldn’t that be convenient? If you’re not a collector at heart, you don’t want to dive into what to buy, and maybe fractional isn’t for you, but you’re optimistic about the future for a collectible category, wouldn’t it be nice if you could just buy a stock - same as ever - to adequately represent that exposure?
We’ll set out to see if it could have been done in various categories with various proxies over recent years or even decades. We’ll look not only at absolute price return outcomes, but also at correlations to find out if the equity used as proxy would offer similar exposure.
Before we begin, a few caveats:
Alright, enough of that, let’s dive in, starting with the longest tenured comparison we can draw. Sotheby’s, the auction house mainstay, was publicly traded from 1988 until 2019, when it went private. Of course, its private status means the mainstream investor can no longer use it as a proxy for the art market even if they wanted to, but the longevity of its trading, in tandem with the long tenure of art indices, make it an interesting study. It’s also worth adding that at the beginning of 2022, the house was said to be exploring a return to public markets via IPO.
We compare BID (great ticker) performance to the Masterworks All Art, Post-War and Contemporary Art, and Impressionist and Modern Art indices for the full years of 1989 to 2018. Could one of the focal points of art commerce serve as a proxy for the growth of the art market and the rise in value of key works? After all, as the market rises, so too does volume and therefore fees.
Over the period, BID kept pace reasonably well with Impressionist and Modern Art, as well as the All Art Index, though to a lesser extent. Around the turn of the millennium, Post War and Contemporary left the field in the dust amid changing tastes, as has been well documented. Investors in BID, then, would have missed the explosion in those values but would have received a decent approximation of the broader market. For what it’s worth, BID significantly underperformed the S&P over the period (by about 4% annually), and Post War and Contemporary significantly outstripped the S&P (by about 3% a year).
BID’s annual returns showed modest correlation to the Impressionist and Modern Art index (0.33), lower correlation to All Art (0.16), and not surprisingly, lowest to the Post War and Contemporary Index (0.10). What’s interesting, though, are the results if you lag the returns of BID by one year to sync up with the returns of the following year in art. Art is believed to often demonstrate lagging performance to traditional financial markets, with market and economic circumstance weighing on art in a delayed fashion. That belief holds true here, as the lagged correlations to Impressionist and Modern Art, All Art, and Post War and Contemporary Art rise to 0.63, 0.57, and 0.38 respectively.
To better illustrate that trend, we’ve removed Post War and Contemporary from the chart, and we’ve pushed the Sotheby’s price series one year later. Here, you see a significantly higher degree of unison in both movement and trend.
The verdict: at the outset of the period, if you had wanted to act on a bullish thesis for art prices, and you invested in Sotheby’s as a proxy, you couldn't be overly disappointed in its ability to act as one (even if relative performance to broader equity markets left much to be desired). However, if you had a specific thesis on Post War and Contemporary, BID would not have served you particularly well. But again, hindsight is 20/20, and choosing the best performing portion of the art market and the best performing artists and works within it would not only have been practically difficult (expensive and cumbersome), but it would have been intellectually challenging as well. This is particularly true for a non expert, which is the scenario we’re keen on exploring.
Moving on to one of the companies that provoked this thought experiment: eBay. For all its pain points, eBay has still played host to card collectors for decades. It’s been a fixture of the collecting community, with familiarity breeding both frustration and fondness. But could eBay stock have served as a proxy for card values over the years?
We’ve charted against the CardLadder50, and we note there is big selection bias within that index over the long term, as the constituents were chosen based on a status they effectively rose to attain over the time period. The constituents are cards that, by 2020, we all knew had attained an elevated status, but back in 2004, you likely wouldn’t have gone 50 for 50 predicting the composition.
Still, eBay held its ground relatively well up until early 2018, though some lagging did begin in the mid-2010s. Of course, it’s important to note that it’s not like cards were the focal point of eBay’s business, representing an even smaller portion at the time. Furthermore, there have been business challenges to contend with from the mid-2010s onward, with share ceded to various competitors in various categories on an ongoing basis. So, while eBay might’ve seemed a sound choice as a proxy at the outset, an investor may have been attuned to threats to that status over time.
Of course, when the 2020/2021 card boom came, the company stood little chance of keeping up with the blue-chip card explosion, despite delivering a 68% return in 2020. Through Feb 1 of 2023, the CL50 had appreciated at an annual clip of 15.6% since 2004, far outpacing the 6.3% of eBay over the same period. Through Feb 1 of 2018 though, the gap was much narrower at 10.0% to 8.1% in CL50’s favor.
Interestingly, if you were to look at CardLadder’s Low-End Index, which catalogs cards under $500, over the same period (Feb 2004 - Feb 2023), you’d find it generated annual appreciation of just 4.3%, underperforming eBay. So eBay would have more than approximated appreciation there, but that’s not really a crowning achievement. Given the ever-growing population of low-end cards, it’s not likely that any investor would seek to mimic the exposure of that broad market.
It feels like we’re not far away from a moment in which an index of blue-chip cards will indeed be investable, but that could structurally change their performance, and regardless, it wasn’t an option available to the layman in the 2000s and 2010s.
Correlation between the monthly returns of the CL50 and eBay was nonexistent over the period at 0.01. Annual returns were more modestly correlated at 0.36.
The verdict: not a good proxy, with too much non-card noise and otherwise challenged business prospects for eBay. Public exposure to Collectors, PWCC, or Fanatics Collectibles would make for an interesting future study. Speaking of Collectors, the parent company to PSA actually kept pace with card values much more respectably until it was taken private in 2021. Correlations to the CL50 were also higher, with monthly return correlation of a still very modest 0.16 but annual return correlation significantly elevated relative to eBay at 0.75.
In luxury - specifically the watch space - we’re working with data of a shorter time period. The WatchCharts Market Index dates back only to the beginning of 2020, essentially capturing only one boom and bust period. The index tracks the price performance on secondary markets of 60 watches from the top 10 brands.
If you weren’t set to pony up for a Rolex or Patek Philippe - or to choose one that might best benefit from a growing market - there are a few equities you might evaluate as proxies. One such option would be Watches of Switzerland, a British retailer of Swiss watches. The company maintains status as an authorized retailer of both Rolex and Patek products.
As waitlists for these products mount worldwide and retail prices climb, investors have taken notice, with WOSG experiencing an incredible surge throughout 2021 before cooling with the market in 2022. Even with the pullback, it’s up 105% since the start of 2020. By comparison, the S&P 500 is up just 21.16%. So if you wanted to play the watch boom, WOSG certainly provided that avenue…but the sustainability of its ability to provide that exposure longer term is a question mark, particularly when - as a primary market retailer - it’s not necessarily leveraged to the value changes of secondary market darlings and blue chips. Still, it handily outpaced the WatchCharts Index over the period, and appeared to respond to changes in market sentiment on more of a leading basis.
Investors could have also played a thesis based on increased demand and improved sentiment for luxury goods more broadly. This would’ve led them to luxury titans like LVMH and Hermes. While those - as larger, more stable businesses - didn’t boom quite as hard, they also haven’t similarly suffered during the downturn, showing greater resilience and bottoming more quickly. Those well-known names outperformed the broader S&P Global Luxury Goods Index.
Of the three companies (WOSG, LVMH, and HRMS), approximate monthly returns demonstrate the highest correlation between the WatchCharts Index and WOSG, which is perhaps not a surprise. Still, it’s essentially no correlation at all at 0.13. The other two companies’ returns, though, exhibit -0.12 and -0.08 correlations respectively. Similarly, the price correlation between WatchCharts and WOSG is considerably higher and positive at 0.82, while it's 0.71 for LVMH and 0.68 for HRMS.
The verdict? It’s a short time period, but Watches of Switzerland would’ve best provided exposure to the boom in luxury watch markets, though imperfectly. Whether that would hold up over a longer period is a large unknown, particularly as demand grows for low supply, secondary market watches and the supply of new, primary market watches perhaps fails to keep pace.
As in watches, publicly traded companies in the wine & spirits space offer exposure predominantly to producers and distributors, rather than those really operating in secondary markets for rare vintages. LVMH plays host to 25 wine & spirits “houses”, but that portion of the business accounts only for about 10% of revenue, whereas fashion & leather goods make up close to 50%. As a result, while it tracked fairly close to the Fine Wine Market Index from Sotheby’s until 2014, the following years resulted in a significant divergence in LVMH’s favor. Monthly returns of the index and LVMH show very little correlation at 0.13, though the similar price trends yield a price correlation of 0.90. You would’ve done very well investing in LVMH, but not as a representative proxy for the wine market. You could also use broad Liv-Ex indices to represent the wine market, but ultimately to similar effect.
Diageo and Ricard Pernod are solely beverage focused, and the results are reflective of that, at least in comparison to LVMH. Both offer higher correlations to the Sotheby’s Fine Wine Index, though correlations of monthly return remain modest at 0.21 for DGEO and 0.20 for PERP. The price correlations are ever so slightly higher than for LVMH at 0.91 and 0.92 respectively. DGEO annual returns offer 0.69 correlation to the Sotheby’s index, higher than LVMH at 0.48. Ricard Pernod has the lowest annual return correlation of the bunch at 0.42. You’ll notice quite comparable drawdowns in both 2008 and 2022, and the Fine Wine index managed to escape the brief 2020 swoon.
Diageo perhaps tracks the wine index best, though it did underperform over the period, particularly in more robust recent years for wine’s secondary market. Wine market performance is quite nuanced, though, and rational theses can be built at the region and vintage level to achieve better returns. So, while broad market exposure may have been somewhat replicable in the past, the landscape may become more complicated in the future, especially with the increase in sophistication in wine’s secondary markets,
Rare Whiskey’s Icon 100 index more handily outstrips both DGEO and PERP thanks to the surge in demand for rare spirits over the last decade. There’s little in the way of monthly return correlations, with both stocks exhibiting correlation below 0.1. Same goes for annual returns. Price correlations are high over the period, but given the trend, that means little. Ultimately, there’s little reason to believe that exposure to the most collectable and sought after scotch (acknowledging index selection bias) can be at all replicated via the publicly traded equity markets, though perhaps that will change as the market matures and undergoes further cyclicality.
Generally speaking, in recent history, public market investment could have in many cases provided a decent substitute for exposure to a collectible asset class. However, it’s often quite imperfect, whether in its ability to capture the same level of absolute return or to offer low correlation to traditional equities and therefore diversification benefits. Rarely is there a way - for better or worse - to experience the performance of the true blue-chip collectibles in a category without being directly exposed to the assets themselves.
Of course, that still leaves the pesky issues of investability and expertise. A solution for the former is in progress via fractional at present, whatever shape that may take in the future. The need for expertise is hard to bypass, but may become less relevant to the extent true investable indexing materializes. With a decreased emphasis on moves in value based on underlying, pure collecting-motivated transactions, one is left to wonder if these assets would increasingly trade more like stocks, with diversification and correlation benefits eroding.
Those are, in some respects, questions for tomorrow. For the moment, collectors and collectible “investors” will feel confident that they are gaining exposure to a performance profile not at all easily replicated, again...for better or worse.
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