The next frontier of financialized watches

Whether collectors and enthusiasts want to recognize it or not, the financialization of watches is very much in its infancy. How can we tell that’s the case? Well, we still have a difficult time separating the physical watch from its value. For collectors, dealers, and lay speculative “investors”, it’s only through owning the material object – the timepiece – that they can capture its financial value. That continued requirement of having to physically handle watches is one of the first indicators that the market has not yet fully financialized. But I don’t think it will stay this way for much longer.

Watches as financial abstractions

We’re steadily approaching the full abstraction of value from physical timepieces. An increasing number of people are focusing on the financial value of watches more than the watch itself. But what’s the next step in the evolution of watches as investments? William Gibson’s quote, “the future is here— it’s just not very evenly distributed,” rings true in the watch world. All we have to do is look at what’s been brewing at the margins.

While still relatively obscure, there are financial instruments (mostly private equity funds) that buy, store, and sell portfolios of watches over 5-10 year time horizons. Alfredo Paramico, the well-known collector and one-time owner of a steel Patek Philippe 1518, launched the Precious Time Fund nearly a decade ago to capitalize on the financial appreciation of rare timepieces.

I was lucky to find some publicly available information on their investment strategy (take with a grain of salt, I presume this probably doesn’t reflect where the fund stands today). The strategy is quite conservative— 80% of the ~400 watch portfolio will be in Patek, AP, VC, Rolex, Breguet, Cartier, almost entirely focused on vintage. Only 10% of the €25m fund is allocated to contemporary timepieces, which I suspect investors view (rightfully) as higher risk investments.

A new model for financialized watches

A quick look around and one realizes that the Precious Time Fund is by no means uncommon in luxury good markets. As a matter of fact, watches still lag significantly behind the financialization of the art and wine markets. Companies like Masterworks and Vinovest are a testament to this fact. Where Paramico and Precious Time Fund likely cater to a relatively small audience of investors (family offices, ultra-high-net-worth individuals), Masterworks and Vinovest have a much broader, bigger investor base.

This is the new model for alternative assets. Capitalizing on a huge surge in interest, both Masterworks and Vinovest effectively operate as crowdfunding platforms for accredited investors. Ultimately, this provides access to high-value goods without the prerequisite of spending big bucks. Masterworks’ pitch to potential investors, “invest like a billionaire,” certainly has its appeal, especially when minimum investment sizes for both art and wine can be as low as $500.

To return to the initial question, what’s the next frontier in the financialization of watches? It is an increasing number of higher risk, private equity funds, like Masterworks and Vinovest. These investors will likely not come from within the community, but rather from general audiences interested and willing to allocate money to high risk investments.

Though it pains me to say this as a watch collector and enthusiast, it makes sense that watches are a fairly attractive high risk asset class, situated somewhere between venture capital and index funds. I say “between venture capital and index funds,” precisely because with watches, it is possible to yield 3x returns in 10 years (greater reward than an index) while also retaining value better than equity in tech startups (less risky than venture capital).

So, what happens if there were an influx of $100m, buying up timepieces left, right, and center over a 10-year time horizon? I’ll dig into the implications of this trend toward full financialization in the next article.

Post script – Dec 21 2020

For reference, the performance of Precious Time’s fund over the last decade appears to be very “meh”. This 2015 article from the NY Times references investor redemption issues for the fund as well. I don’t find this particularly surprising as early-mover in this space. Nor do I believe the poor performance of Precious Time from 2010-2017 will represent a deterrent from the rush of capital willing to play the same game again. Thanks to @8ball_watch for pointing me to the above link for share prices.