THE ART OF INVESTING IN ART
The Art of
Investing in Art
Art as an investment avenue has been considered an interesting and profitable alternative.
With uncertain stock market returns and interest rates at their lowest in decades, nervous investors are now considering alternative investment avenues. Some of them are hoping to find solace in alternative investments such as fine art, wine and even stamps.
These alternative investments' performance is alluring. Indices tracking the performance of high-class art have held up well in the recent economic slowdown, while art-auction houses report record prices.
Art as an object of investment has been debated for long. However, in the age of 20% returns on stock markets and a long bull market, the concept of art as an investment option was passed over.
But the corporate scandals, stock market losses and low interest rates have helped it to re-emerge. In one of the niost prominent examples of art investing, British Rail pension fund invested 2.9% of its portfolio in the 1970s earning a return of 14% above inflation till 1999.
Virginia Wilson, an art consultant from Australia, says, "Art has been an attractive investment for centuries and is becoming increasingly recognized as it has outperformed more conservative investments over the last few decades. It is an alternative investment earning capital gains rather than a dividend."
Art can never be considered as financial asset. Critics contend that investing in art disregards the traditional yardsticks of financial analysis, since they do not generate income streams that can be discounted. It is a bet on the price appreciation of something whose value defies financial logic.
But advocates of art investing argue with growing volume of supporting analysis. Prominent among them are from professors Jianping Mei and Michael Moses, at New York University's Stern School of Business, who found that art has outperformed S&P 500 (excluding transaction costs, since they are not included in stock market indices such as the S&P 500 eitber) in the past 50 years.
From 1875 to 2000 art has outperformed fixed income, but underperformed equities. And in the past two and half years of stock market losses, art has outperformed equities.
For frightened investors this may sound soothing.
But over the long-term -- experience suggests 10 years and more -- investment in art provides annual average returns, which top all-coniers. The prerequisite is investment in top-quality art.
With knowledge, practice and discernment, the risk is alleviated. "The high end of the market is not at the mercy of public taste. The art market has its blue-chip investments and these quality investments will bring reliable return. Of course, the entry point is higher," she adds.
Considering this performance of top-quality art, in April, UK-based Fine Art Management Services launched Fine Art Fund, a private equity-backed venture aimed at pension funds and university endowments. It hopes to raise $350 million, locked in for 10 years, to invest in a portfolio of top-quality art.
The fund managers feel, it will appeal to those investors who have seen some of their biggest holdings plummet as the value of a quality painting will never go down to zero-it will never do an Enron, WorldComm or a Bernie Madoff.
Fine Art Fund also plans to solve the problem of lack of dividend income in this type of investment by renting out its art. This can be a boon to wealthy private investors, wanting to take advantage of slow but steadily growing art market.
The advantage of investing in good art is - it survives economic downturn. In art markets cumulative selling pressure arises only during economic depression and that is primarily confined to the lower segment of the art market.
Wolfgang Wilke in his report Investing in Art' says, "The long-term trend in inflation adjusted art prices follows the general economic trend, i.e., art prices rise above average compared to the prices of other goods.
Consequently, top-quality art tends to be more stable than most financial investments in difficult times.
Further, the long-term trend for art prices is definitely upwards. Wolfgang Wilke says, "Art is a scarce product and not reproducible at will. Rising incomes over the long-term ensure a steady rise in demand for works of art against falling supply."
For investment-quality art the limited supply adds to the increasing demand, this would mean a definite price appreciation over the long run.
But the main attraction of the art market and the prime reason for its resurgence as an investment is its low correlation with other financial assets.
Despite the recent collapse of many financial markets, the fine art market has stayed buoyant over the past three years, though market volumes have fallen.
This year some top art even fetched record prices. But the perceptions about the performance are not unanimous as regards the correlation of art values with the stock markets.
Ioannis Evangelos C. Haramis, an investment advisor from www.GreekShares.com, which advices on art investment, says, "Cycles in the art market are not necessarily linked to those of other asset classes and there is low correlation between art prices and the equity markets, just as there is little correlation between different categories within the art market. This might make art a good choice for investors that want to diversify their portfolios."
The MeiMoses All Art index, which is based on the resale values of paintings sold at public auction in New York, shows a correlation of 0.04% (over the past 50 years) with the US stock market.
Wolfgang Wilke says, "Investment in works of art helps reduce portfolio risk as trends on the art market generally have a slightly negative correlation with the financial markets."
William Goetzmann at Yale School of Management has subjected the art market to econometric analysis, and found that the art market's beta - its synchronized movement with the stock market - is higher than one.
This means that in boom times art moves up more, and in crashes art drops lower.
If the past is any guide, the art market will react with a delay to declining stock markets and economies. In the immediate aftermath of the stock market crash in October 1987, Sotheby's and Christie's achieved record prices.
Nevertheless, art as an investment cannot be overlooked for one unique reason: An ever-increasing demand coupled with an absolutely limited supply. Add to that ability to survive economic downturn, one would start contemplating about investing in it.
I. E. C. Haramis says, "Although putting money into art may not be as straightforward as investing in bonds or equities, the art market is attracting increasing interest. As a result, we are now seeing a lot more new and old investors that are looking to put their money at art."
The number of art advisory firms promising to help new art market entrants is growing. Many financial institutions are building up large databases covering various segments of the art market.
A few firms are even turning to art experts to build art portfolios for their wealthy clients.
G.C. Haramis feels, "Collecting art can be one of the most enjoyable ways to spend money. An engaging work can provide its owner with a lifetime of visual pleasure-and then fetch cash!
Virginia Wilson says, "The art market has been in existence for a long time because of its returns - capital gain, pleasure and social status." Considering that art touches a personal chord, it can never be a staple part of institutional investment portfolio.
And in final analysis, art markets have existed for thousands of years, and will most likely continue to exist in the future, regardless of the merits of art as an investment.
Art as an investment avenue has been considered an interesting and profitable alternative.
With uncertain stock market returns and interest rates at their lowest in decades, nervous investors are now considering alternative investment avenues. Some of them are hoping to find solace in alternative investments such as fine art, wine and even stamps.
These alternative investments' performance is alluring. Indices tracking the performance of high-class art have held up well in the recent economic slowdown, while art-auction houses report record prices.
Art as an object of investment has been debated for long. However, in the age of 20% returns on stock markets and a long bull market, the concept of art as an investment option was passed over.
But the corporate scandals, stock market losses and low interest rates have helped it to re-emerge. In one of the niost prominent examples of art investing, British Rail pension fund invested 2.9% of its portfolio in the 1970s earning a return of 14% above inflation till 1999.
Virginia Wilson, an art consultant from Australia, says, "Art has been an attractive investment for centuries and is becoming increasingly recognized as it has outperformed more conservative investments over the last few decades. It is an alternative investment earning capital gains rather than a dividend."
Art can never be considered as financial asset. Critics contend that investing in art disregards the traditional yardsticks of financial analysis, since they do not generate income streams that can be discounted. It is a bet on the price appreciation of something whose value defies financial logic.
But advocates of art investing argue with growing volume of supporting analysis. Prominent among them are from professors Jianping Mei and Michael Moses, at New York University's Stern School of Business, who found that art has outperformed S&P 500 (excluding transaction costs, since they are not included in stock market indices such as the S&P 500 eitber) in the past 50 years.
From 1875 to 2000 art has outperformed fixed income, but underperformed equities. And in the past two and half years of stock market losses, art has outperformed equities.
For frightened investors this may sound soothing.
But over the long-term -- experience suggests 10 years and more -- investment in art provides annual average returns, which top all-coniers. The prerequisite is investment in top-quality art.
With knowledge, practice and discernment, the risk is alleviated. "The high end of the market is not at the mercy of public taste. The art market has its blue-chip investments and these quality investments will bring reliable return. Of course, the entry point is higher," she adds.
Considering this performance of top-quality art, in April, UK-based Fine Art Management Services launched Fine Art Fund, a private equity-backed venture aimed at pension funds and university endowments. It hopes to raise $350 million, locked in for 10 years, to invest in a portfolio of top-quality art.
The fund managers feel, it will appeal to those investors who have seen some of their biggest holdings plummet as the value of a quality painting will never go down to zero-it will never do an Enron, WorldComm or a Bernie Madoff.
Fine Art Fund also plans to solve the problem of lack of dividend income in this type of investment by renting out its art. This can be a boon to wealthy private investors, wanting to take advantage of slow but steadily growing art market.
The advantage of investing in good art is - it survives economic downturn. In art markets cumulative selling pressure arises only during economic depression and that is primarily confined to the lower segment of the art market.
Wolfgang Wilke in his report Investing in Art' says, "The long-term trend in inflation adjusted art prices follows the general economic trend, i.e., art prices rise above average compared to the prices of other goods.
Consequently, top-quality art tends to be more stable than most financial investments in difficult times.
Further, the long-term trend for art prices is definitely upwards. Wolfgang Wilke says, "Art is a scarce product and not reproducible at will. Rising incomes over the long-term ensure a steady rise in demand for works of art against falling supply."
For investment-quality art the limited supply adds to the increasing demand, this would mean a definite price appreciation over the long run.
But the main attraction of the art market and the prime reason for its resurgence as an investment is its low correlation with other financial assets.
Despite the recent collapse of many financial markets, the fine art market has stayed buoyant over the past three years, though market volumes have fallen.
This year some top art even fetched record prices. But the perceptions about the performance are not unanimous as regards the correlation of art values with the stock markets.
Ioannis Evangelos C. Haramis, an investment advisor from www.GreekShares.com, which advices on art investment, says, "Cycles in the art market are not necessarily linked to those of other asset classes and there is low correlation between art prices and the equity markets, just as there is little correlation between different categories within the art market. This might make art a good choice for investors that want to diversify their portfolios."
The MeiMoses All Art index, which is based on the resale values of paintings sold at public auction in New York, shows a correlation of 0.04% (over the past 50 years) with the US stock market.
Wolfgang Wilke says, "Investment in works of art helps reduce portfolio risk as trends on the art market generally have a slightly negative correlation with the financial markets."
William Goetzmann at Yale School of Management has subjected the art market to econometric analysis, and found that the art market's beta - its synchronized movement with the stock market - is higher than one.
This means that in boom times art moves up more, and in crashes art drops lower.
If the past is any guide, the art market will react with a delay to declining stock markets and economies. In the immediate aftermath of the stock market crash in October 1987, Sotheby's and Christie's achieved record prices.
Nevertheless, art as an investment cannot be overlooked for one unique reason: An ever-increasing demand coupled with an absolutely limited supply. Add to that ability to survive economic downturn, one would start contemplating about investing in it.
I. E. C. Haramis says, "Although putting money into art may not be as straightforward as investing in bonds or equities, the art market is attracting increasing interest. As a result, we are now seeing a lot more new and old investors that are looking to put their money at art."
The number of art advisory firms promising to help new art market entrants is growing. Many financial institutions are building up large databases covering various segments of the art market.
A few firms are even turning to art experts to build art portfolios for their wealthy clients.
G.C. Haramis feels, "Collecting art can be one of the most enjoyable ways to spend money. An engaging work can provide its owner with a lifetime of visual pleasure-and then fetch cash!
Virginia Wilson says, "The art market has been in existence for a long time because of its returns - capital gain, pleasure and social status." Considering that art touches a personal chord, it can never be a staple part of institutional investment portfolio.
And in final analysis, art markets have existed for thousands of years, and will most likely continue to exist in the future, regardless of the merits of art as an investment.
