Billionaires Cry Too

<a href=www.latintrade.com>LatinTrade June, 2003 Investors can take solace in this news: Microsoft founder Bill Gates, the world’s richest person, has lost more than half his fortune in the last five years, according to an exclusive Latin Trade analysis of the annual Forbes magazine ranking of the world’s billionaires. Bill is scraping by on US$41 billion. In Latin America, billionaires are suffering far less than Bill, yet los ricos are crying, too. Mexican telecom mogul Carlos Slim has $7.4 billion in 2003, down from $8 billion in 1999.

Argentina’s Gregorio Pérez Companc’s holdings were cut in half to $1.6 billion during the last five years. Overall, José Billionaire—the average Latin American billionaire—is almost 14% richer than he was in 1999, but his wealth has declined $300,000 to $2.2 billion in the last two years. The primary challenge for Latin American investors in recent years has not been to increase wealth, but simply not to lose it.

“Latin American investors face double jeopardy: significant risk in their own markets and risk associated with investing in developed markets,” says Ted Berenblum, chief investment executive for Citigroup Private Bank, which manages money for 24,000 of the world’s wealthiest and most influential families. “The vast majority seeks to preserve capital.”

The fortunes of Latin America’s elite have been dwindling due to political and economic instability at home during the past year. Currencies have collapsed with respect to the dollar in Argentina, Venezuela, Brazil and even Chile, with little or no rebound in the countries’ economies. Brokerage Morgan Stanley’s index for emerging stock markets has fallen 40% during the last five years, while J.P. Morgan’s index for emerging market bonds has been cut practically in half.

Taking no chances. Global markets have been abysmal during the past five years, too. The Dow Jones industrial average was at the same level at the end of March 2003 as it was at the start of 1998. A five-year U.S. Treasury bond now pays an annual yield of less than 3%—close to the historic U.S. inflation rate, or effectively a zero real return.

Accordingly, investors are combining traditional assets like cash, stocks and bonds with alternative investments such as positions in hedge funds, private equity, real estate, commodities and art. People who don’t like to take chances favor traditional investments, while those who like to live on the edge see a buying opportunity.

“A large pool of clients is risk averse,” says Citibank’s Berenblum. “One could argue historically that when it has looked the worst, it was often a good time to enter into private equity or other alternative investments. However, to say that this is happening in a large way today would be misleading.”

Latin American investors are exploring new ideas to preserve capital while trying to put a little zip into returns of a small portion their portfolios. Mainstream ideas include stable value funds that have short- and medium-term bonds, guaranteed investment contracts and insurance to keep the fund’s net-asset value stable. According to specialized research firm Heuler Analytics, annual returns on these funds has been more than 5% for the last five years.

Gold, real estate and art, the traditional havens for emerging market investors in tough times, especially during periods of high inflation, have not proven risk free. Investors who plowed into gold, seeking refuge from uncertainty surrounding the Iraq war, watched in horror as prices zoomed to more than $380 per ounce during January 2003, from $325, only to collapse back to $325 by the start of April. Nonetheless, the average price is up 10% since 1998.

Real estate, another favorite of emerging market investors, is harder to quantify. Prudential Real Estate Investments, which managed $21.6 billion in assets for 363 institutional clients at the end of 2002, puts the minimum acceptable rate of return for Latin American real estate investments at anywhere from 13.8% for Chile to 34% in Argentina. It then requires a further average return of 11.5% for Latin America for taking the risk of investing outside the United States.

Oil futures. Some Latin American developers are building projects in Miami to reduce the risk of investing in Latin American real estate. Mexico’s Grupo Inmobiliario Cababie is building a $40 million twin-condo tower, shopping mall and office complex in the northern suburb of Aventura, where the developer expects to sell units for as much as $1.4 million each.

Art has traditionally been hard to buy and sell as an investment because each piece’s unique value makes it harder to trade than, say, a commodity like pork bellies. Returns are even harder to predict. Nevertheless, slowly but surely, it is becoming a market like all the rest. U.K.-based fund managers Fine Art Management Services has been trying to raise $350 million to create a fund dedicated to investing in museum-quality pieces.

In a recent article titled, “Can Rembrandt Get You Through Wars and Recessions,” Jianping Mei and Michael Moses, associate professors at New York University’s Stern School of Business, calculated that the average annual appreciation of art prices from 1875 to 2000 outpaced inflation but was considerably less than the 6.6% real return of the S&P 500 index.

“People don’t buy art for a return in three to six months,” says Ana Sokoloff, head of the Latin America art department at auction house Christie’s. “They don’t talk about returns on investment.”

While the amount of work offered at auctions of Latin American art continues to decline, the total value of art sold grew slightly last year to $30 million, according to the London-based research firm Art Sales Index. Auction house Sotheby’s reports a $2 million rise in Latin American art sales, including an estimated 20% buyers’ premium, to almost $17 million last year, albeit far below Sotheby’s peak sales of almost $24 million in 2000.

Kirsten Hammer, director of Latin American art at Sotheby’s, says that works in the $800,000 to $1 million price range continue to sell well even though these paintings, by artists Frida Kahlo, Diego Rivera, Rufino Tamayo and Wifredo Lam, among others, do not necessarily offer the highest return.

Buying lesser-known or under-appreciated artists at $10,000 to $30,000 is where art offers a large payback. Kahlo’s work sold in that price range in the 1970s and went on to sell for $5.1 million in 2000—still the highest price paid for a female artist’s work, says Hammer.

The artists don’t have to be dead to sell well. Pablo Vallecilla of the Marlborough Gallery in New York says that investors are paying $100,000 to $300,000 for paintings by Colombian Fernando Botero, Chilean Claudio Bravo and Cubans Tomás Sánchez and Julio Larraz. The Marlborough Gallery’s presence in New York, London and Madrid create el marketing muscle, he says, to give artists worldwide exposure. “Whenever an artist crosses borders with an international exhibition, it’s always an important sign,” says Vallecilla.

As the pool of buyers of Latin American art grows, Vallecilla says, Latin Americans don’t see its importance as only art. “They see it as an investment,” he says.

Given the time frame to generate returns on art, however, investors may be well-advised to take to heart what a professor once said to Sotheby’s Hammer about investing in art: “You have to think of the dividend as sitting and looking at wonderful art.”