Art Investments: The Portfolio on the Wall
Investing in art offers investors diversification and the potential for high returns
Prefer Monet to Microsoft? Looking to diversify? Or maybe it’s just time to liven up that empty space over the mantle. Fine art offers excellent diversification and adds a splash of color to an otherwise black-and-white portfolio.
Fine art can provide impressive returns. “Take for example the Warhol silk-screen print ‘Simply Liz’ which was bought by Hugh Grant in 2001 for $3.6 million and sold last month for $21 million, which is a pretty impressive return on the original investment in anyone’s books,” Nicholas Forrest, art market analyst and founder of ArtMarketBlog.com, said in an e-mail interview.
Of course, investors shouldn’t expect returns as immense as Grant’s. In fact, “this can also be seen as a deal that went badly, as Christie’s reportedly guaranteed the work for at least $25 million, and therefore lost money on the sale,” Philip Hoffman, chief executive of The Fine Art Fund Group—comprised of The Fine Art Fund I, The Fine Art Fund II, The Chinese Fine Art Fund, The Indian Fine Art Fund, the soon to be launched Middle Eastern Fine Art fund and FAIR (Fine Art Investment & Research)—said in an e-mail interview.
But it is worth noting that from 1955 to 2004, art had a compounded annualized return of 10 percent, comparable to the S&P 500’s compounded annualized return of 10.4 percent during the same period, according to “Beautiful Asset: Art as Investment,” a 2006 report by Jianping Mei and Michael Moses. Art also outperformed bonds and gold, which had compounded annualized returns of 6.5 percent and 5 percent, respectively. Art proved to be less volatile than gold, but slightly riskier than the S&P 500, according to the same report.
Fine art is not as liquid as stocks and bonds, making it slightly riskier
Increased risk may partially be because fine art is not as liquid as stocks or bonds. An investor cannot simply decide to sell a Van Gogh and be done with it; there is more time and effort involved in setting up a sale, and the right buyers must be looking.
“So the question is: Why does it have investment potential if it has similar returns [to the S&P 500] but higher risk?” Michael Moses, co-founder of ArtAsAnAsset.com, said. “And the question is answered in that it is not correlated with the other assets. It has very low correlation with stocks and negative correlation with bonds.” Because of this, fine art offers an excellent opportunity for diversification.
But even those with a creative flair might find themselves at a loss when faced with a gallery or auction house. As a jumping off point, investors should cultivate their personal tastes. This is particularly important with art because, unlike stocks or bonds, it is often displayed. The typical holding time for a piece of art is at least five to 10 years in order to get good returns, Forrest said, so investors should like the pieces they purchase.
“I would recommend [investors] start going to museums and buy posters of works that they like, and put up the posters. And then live with them for a while. And then over time, when you find something that you like better than your current poster, replace it. And after a few years of doing that, you start to hone what you think your tastes are,” Moses said.
However, investors considering investing in fine art within a self-directed IRA should know that investment in collectibles within self-directed IRAs is not allowed. The IRS has restrictions regarding taking personal possession of investments.
Though personal preference should be a consideration in investors’ art purchasing decisions, taste alone will not single out the best investments. Certain types of artwork sell better than others, and it is in investors’ interests to know what is in demand.
“Over the last 25 years, the strongest performer has clearly been post-war and contemporary art,” Moses said. “But we have to remember it was also hot between ‘85 and ‘90, when it went up 30 percent a year, and then it went down for the next five years, losing about 60 percent of its value.” Hoffman pointed out that the preference for contemporary art extends to pieces from several regions—including a demand for contemporary art from China, India and, possibly in the future, the Middle East.
Forrest specifically cited an increasing interest in street art, such as the work by Banksy, Faile and Paul Insect.
Contemporary and post-war art have performed well over the last 25 years
It is interesting to note that more expensive or better known artwork doesn’t necessarily mean greater returns. In fact, when compiling the Mei Moses Fine Art Index—which tracks repeat auction sale prices of art from 1955 to the present—Moses and Mei found the opposite to be true. In a correlation dubbed the “Masterpiece Effect,” very expensive artworks tend to realize lower returns than their low- to mid-priced peers.
“Our estimate for American artworks indicates that a 10 percent increase in purchase price is expected to lower future annual returns by 0.1 percent,” according to Mei and Moses’ report, indicating that investors may be better off targeting less expensive pieces. The report also stated that these findings remained true in all collecting categories.
“In the current climate I am leaning more towards emerging artists because the value of the more established ‘blue chip’ artists is being artificially increased by factors that create a false impression of value, such as auction price guarantees, media hype and an association with social hierarchy and cultural elitism ,” Forrest said.
If these details and decisions set investors’ heads spinning, personalized help is available in the form of art consultants.
Investors using art consultants will find themselves in good company. Insiders estimate that 50 to 60 percent of the dealmakers at Art Basel Miami Beach—the U.S. sister of Switzerland’s prestigious international art show—are not the buyers themselves, but rather their “educated, plugged-in personal shoppers,” according to The Miami Herald .
Finding a good consultant may be best accomplished through word of mouth. Art & Antiques recommends asking museums, galleries, auction houses and collectors for reputable names.
An art investment fund can also provide an excellent opportunity for investors without the inclination or resources to hire a consultant. “I would advise someone [new to art investment] to invest in a fund, rather than trying to invest on their own,” Hoffman said. “Of course, they could take on a personal art advisor, but the benefits of investing in a fund are that one has access to top advisors from all areas of the market.”
The Fine Art Fund, based in London, has an extensive team of buyers and advisors who seek out and recommend high quality pieces. The Fund conducts due diligence on the artist and artwork, ensuring that the artist is either of “lasting historical importance” or has an extremely promising career, according to Hoffman. The Fund is open to U.S. investors.
A fund takes a load off investors’ shoulders by conducting all necessary background work, including deciding when to buy or sell. It also simplifies diversification, as investors can spread their money across multiple artworks instead of sinking everything into a single piece.
Art funds conduct due diligence for investors, but remove some of the thrill
The Fine Art Fund aims to provide annualized returns between 10 and 15 percent on investors’ initial investments and shows 47 percent returns on sales, according to Hoffman. He said the Fund’s value as a whole shows an annualized internal rate of return of 23.4 percent during the past three years.
But one of the draws of art investment is displaying one’s purchase. With art investment funds, this basic thrill is essentially eliminated from the experience.
“If you convince me that I should have some oil in my portfolio, it’s unlikely that I’m going to bring it home and put it in my living room,” Moses said. “But if you convince me that I should have some art, then maybe I’d like to have the fun of actually learning, and meeting an artist and bringing [the art] home. And get the visceral joy of having it up on the wall.”
Funds may have policies to try to allow their investors this joy.
“We would recommend that art always be hung to be enjoyed, whether in a private home or a public institution,” Hoffman said. “We try to loan as many of our works as possible, whether in the homes or offices of our investors or in museum exhibitions, so that they do not remain in storage, but we do emphasize that they are not for sale.”
Whether investors choose to invest on their own, with the help of a professional consultant or through a fund, investing in fine art is a creative way to diversify a portfolio. Museums, galleries and art shows provide opportunities to get to know the market and refine one’s personal sense of taste while connecting with professionals who might provide guidance along the way.
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