Art and Business

I am an artist in my spare time and, over time, have developed a passion for collecting art. The following is a piece I wrote in September 2012 for LUXURY magazine about financial investments in the art world. It’s a piece close to my heart because it couples art and economics – Comments welcome….

A PICTURE WORTH A THOUSAND WORDS

Would you rather have a stock certificate or a piece of art decorate your wall? Given the exponential evolution of the art market in today’s economic environment, they may very well yield similar returns.  Among seasoned investors, fine art is known to possess features that make it a particularly attractive alternative asset class. As such, collecting art is no longer about individual tastes or an isolated hobby. It is now a serious investment in its own right, making a picture worth far more than just a thousand words.

The options for purchasing art work are endless. According to statistics from the Fine Art Fund UK, the art industry is now worth around $3 trillion, with an annual turnover of $30 billion. The art world has its own indices for tracking performance, some of which include the Mei Moses Art Index (MEI), artprice.com, and artnet.com. Analytical tools are utilized in measuring the performance of art investment portfolios, similar to those used for conventional investments such as real estate and gold. Moreover, online portals allow potential buyers to commission reports on any piece of art, making relevant statistics for informed decisions available at the click of a button.

It is a common misconception that the art market is a lottery in which prices behave in an arbitrary and unpredictable manner. For the last several years, two professors at New York University’s Stern School of Business, Michael Moses and Jiangping Mei, have been compiling data to allow them to track the long-term performance of fine art. The resulting MEI index focuses on mature artists whose work would collect significant prices at an auction. Here, original sales prices are taken and subtracted from the most recent sales prices at Christie’s and Sotheby’s in New York. Doing so can calculate an annual return for a single painting. To take a particular example, a J.M.W. Turner view of Venice was sold at auction at Christie’s in London in May 1897 for $35,000, and then sold at Christie’s in New York in April 2012 for $35.8 million, yielding a 6% annual return for 109 years.

Given these potential high returns, art funds have emerged as vehicles for reduced risk investments, as buying can be spread across multiple disciplines and historical periods. History shows that art consistently offers high returns and reduced portfolio volatility. For example, from 1965 to 2002, the MEI Moses All Art Index (at 10.94%) outperformed both the S&P 500 (at 10.49%) and government bonds (7.53%). Art trends bear little correlation to equities or bonds, making them less susceptible to global economic fluctuations, and creating great potential for portfolio benefits. According to the Sotheby’s art institute, this strategy created a realised cash-on-cash return on investment of 47.6% at the end of 2011. Earlier this year, Edvard Munch’s ‘The Scream’ – one of the world’s most famous paintings – was sold for a record $119.9 million, making it the most expensive artwork to ever sell at auction.

With art being such a lucrative asset class, how does one assess which purchase is the right purchase? As with any investment, expert advice can provide insider information, leading to bigger returns. Furthermore, canvassing a number of opinions can give a better idea of emerging areas of opportunity. However, the message from all the experts when it comes to investing in art is clear – you need to buy something you like and not concentrate on its future value. This way, one is more likely to hold on to the investment, even through unfavourable market changes, gaining long term appreciation benefits in the process. Surprisingly, many art buyers do not consider themselves art investors – of the 2,000 high net worth individuals around the world surveyed by Barclays for their June report ‘Wealth insights, Profit or Pleasure?’ – only 10% said they bought fine art paintings or pictures purely for investment purposes. Instead, 69% believed that the financial value of art is driven by public taste, rather than its intrinsic worth.

This is not without reason. It is important to keep in mind, for instance, that not all art performs equally. In recent years, masterpieces tend to underperform lower-priced paintings by a substantial margin. This trend can be correlated with variations found in stocks – like blue-chip stocks, well-known paintings by blue-chip artists are known quantities and offer safety and stability. And as with stocks, the greatest opportunity for growth in art values comes when investors abruptly focus their attention on a hot new name. It may be worthwhile, therefore, to not focus on artwork based on an artist’s name alone, but also by the sector or region from which the piece derives.

Two important regional markets to keep an eye on, according to a collaborated ArtTactic and Deloitte 2012 report, are the Indian and Chinese art segments. After becoming the largest art market in the world in 2011, recent auction results from Hong Kong and Mainland China depict a market that is slowing down. Whether these are indications of market consolidation after years of exponential growth, or the prelude for more serious market correction, remains to be seen over the next six months. However despite a drop in overall volume, demand for art in Hong Kong and Mainland China remains strong. Chinese artists to keep an eye on are Zhang Xiaogang, Yan Pieming, Zeng Chuanxing, and Sui Jianguo.

As steam is coming off the Chinese art market, the equally established Indian market is increasingly garnering international attention. Fuelled by economic growth and wealth creation, coupled with well developed art market infrastructure and a broad collector base, it is expected that the Indian art market will be one to watch in the future. This is especially the case with events such as the annual India art fair, taking place at the end of January 2013, to promote local artists such as Tyeb Mehta and Francis Souza. Worldwide sales of Indian art were worth a little over $300 million in 2012, and individual fairs within the country, the largest being the India Art Fair, have aided in engaging high net worth clients.

The US and European market for post-war and contemporary art has exploded in the past decade, from $254 million in 2000 to $2.1 billion in 2011. According to Deloitte, some reasons to borrow against art as collateral include: the ability to increase buying power to acquire new art, the generation of liquidity from individual pieces or collections, and the creation of liquidity ahead of a sale. As such, art financing is blossoming, and even traditional banks such as Citigroup and JP Morgan aim to get more involved in the market with their private wealth management divisions.

As art gains traction as an investment class, specialist wealth managers have begun adding art to their wealth-related services. For example, 15 of the 19 private, Luxembourg-based banks surveyed by Deloitte felt that there were strong arguments for including art and collectibles in traditional wealth management. This was due, in large part, to the need to stay adrift amongst increasing competition in the private banking sector. For art buyers, however, the most important wealth management services remain to be art valuation and art education. These can be provided in the form of financial art advisors in many large art institutes, including the predominant Sotheby’s and Christie’s brands.

Recently, a company by the name of Liquid Rarity Exchange has aimed to encourage average retail investors to participate in the art world. The company based in St. Louis, Missouri, hopes to promote fund management companies in licensing its product, calling Liquid Rarity Funds (LRFs). Creating LRFs would allow securitization of individual art works, or groups of art works, to be sold publicly – through shares, mutual funds, or indices. The idea is to allow more investors to participate, without the steep management fees or large minimum investment associated with private art funds. In the process, liquidity would be improved and pricing made more accurate and transparent. As such, anyone would be able to buy or sell a share in a Picasso or a Pollock painting, much like a stock in a company.

In his 1889 essay, ‘The Decay of Lying’, Oscar Wilde declared that ‘Life imitates Art far more than Art imitates Life’. According to the author, such anti-mimeses is based not only on life’s imitative instinct, but from the fact that the self-conscious aim of life is to find expression. The time to express ourselves through art is now. With the opening of the art market to investment, be it sizable or long-term, regional or artist-centric, art can reap more than just financial rewards – it can offer us a means of expression beyond just a thousand words.

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JBS Winter Doctoral Conference

Presenting at my first conference on the 3rd of December at the Judge Business School (JBS),  University of Cambridge. Session 3.2: Marketing http://www.doctoralconference.net   for a link to my abstract and the conference.