Is Fine Art a Good Investment?
In 2005, a consortium of art dealers paid $10,000 for a damaged painting at a New Orleans auction. What the dealers initially described as one of many copies of a long lost masterpiece by Leonardo da Vinci turned out to be the original Salvator Mundi or Savior of the World.
In November 2017, Prince Badr bin Abdullah bin Mohammed Al Farhan bought the restored piece on behalf of the Abu Dhabi Department of Culture and Tourism for $450 million, making it the most expensive painting ever sold. Although the piece had changed hands several times along the way, an investor who bought in at the original price would have experienced a compounded annual return of 144% over the 12-year period.
Not every painting goes from obscurity to multi-million dollar sales like this, but lucrative deals in the art world have started to attract the attention of investors from across the globe. According to data from Artprice.com, global sales of art doubled between 2002 and 2013. In 2013, there were more assets under management for art investments than venture capital.
Research conducted by Elroy Dimson, emeritus professor of finance at London Business School, and Christophe Spaenjers of HEC Paris, an international business school, sheds some light on the returns investors have experienced from investing in what they call “emotional assets.” According to data they collected on art deals completed in the U.K. between 1900 and 2012, art as an asset class delivered a better return than gold and government treasuries.
Art generated a compounded annual return of 6.4% in nominal terms and 2.4% in real terms. Twentieth century contemporary Chinese art outperformed the rest of the asset class, delivering a 14% compounded annual return over the past 15 years.
Business Development Manager
Fine Art Department of Borro Private Finance
Fine Art’s Role in a Portfolio
Gabrielle Segal, business development manager at the fine art department of Borro Private Finance, says the returns of art investments are shaped by esoteric factors and trends. “[Art] follows a value trajectory independent from, and potentially surpassing, the larger economy. This cements art’s value as a potential hedge against inflation and market volatility.” Segal believes art provides investors a reasonable opportunity for portfolio diversification.
Investors are increasingly looking to art funds and collectibles to diversify their portfolio and safeguard wealth. “Even those without an explicitly investment-minded approach to collecting want to ensure their acquisitions can sustain, if not grow, in their value,” says Segal.
“This is of particular concern to investors who have approached Borro Private Finance for lending purposes, as they recognize certain artworks’ viability as collateral for financing. Art offers access to capital independent of cash flow and credit.”
However, investors realize that art has more to offer than a safe haven and return on investment. In a 2018 luxury investment report by Knight Frank, art investors said the “joy of ownership” was often more important than capital appreciation or portfolio diversification.
Investing in art is quickly catching on across the globe. With more than $2.2 billion in turnover in just the first half of 2017, the United States is clearly the largest market for art. China is a close second, with just over 29% market share.
A clear sign that the market has matured in recent years is the rise of art funds, exchange-traded funds and art indexes listed on certain exchanges. One of the largest art funds in the world, The Fine Art Fund Group, has more than $200 million in assets under management. It is a private investment fund serving family offices, high-net-worth individuals and private banks from more than 20 countries.
“There have been several well-managed art funds in the last 10 years who have successfully hedged against market volatility and even yielded handsome returns,” says Segal.
Costs and Idiosyncrasies
Despite the rise of funds, professional services and indexes, the art market remains obscure and treacherous for new investors. Segal believes funds and indexes are not as straightforward as those in the equity or bond markets.
Art funds are usually constructed within a tight knit group of collectors and dealers. Usually, they’re only available to qualified investors as closed-ended, long-term investments. Investors face steep management fees for operations, storage, insurance, marketing and deaccession. For direct ownership, galleries, brokers, and auction houses can add substantial costs to the price of an artwork. Investec estimates that these costs could account for nearly 25% of the final selling price.
“New investors often neglect the esoteric, idiosyncratic, and fundamentally illiquid nature of art as an asset class, and are often guilty of underestimating the expense and upkeep required for not only building, but also maintaining a collection – proper transport, insurance, valuation, framing, storage, conservation etc. Record results fetched for long-lost Old Masters and Modernist gems are statistical anomalies,” concludes Segal.
She recommends that investors spend time studying the industry and learning as much as they can, but also hire an expert qualified art advisor to guide them through big-ticket purchases.
With the rise of professional services and an increasingly robust framework, art has cemented its position as a viable asset class. Investors can expect diversification and potential returns comparable to other asset classes, although they must consider the hidden costs and unique requirements. The returns may or may not justify the effort over the long term, but there is little doubt that any other asset class will fail to live up to the emotional value of owning a masterpiece.