China fund gets to the art of the matter

PUBLISHED : Saturday, 06 May, 2006, 12:00am
UPDATED : Saturday, 06 May, 2006, 12:00am

Investors make 70pc gain as banks stay leery of new market

Acting on a hunch that Chinese contemporary art would be the next big thing, collector Paul Serfaty set up a private art fund last year even when some investment banks were steering clear of this non-traditional asset class.

'I believed prices would increase sharply, so I talked to some private banks such as BNP Paribas and UBS two years ago,' said the art lover. 'But banks are very careful. I'd say conservative.'

So Mr Serfaty, 51, who has been a collector for 25 years, and about 10 of his friends - including art collectors and some investors - last year established a private fund and started acquiring contemporary Chinese artworks. The group currently has 50 works in its expanding portfolio.

'The fund is a life-long [investment] and we've set our first target at five to seven years [after the fund's establishment],' said Mr Serfaty, who declined to disclose the initial and current value of the fund.

The group hopes the fund will grow to US$20 million at an appreciation rate of 15 per cent a year. Mr Serfaty, who also manages the fund, said he contributed about 15 per cent of the initial capital. On average, the value of the artworks surged 70 per cent in a year, he said.

Mr Serfaty said that while Chinese contemporary art was already well-known among art specialists and museums as early as 2003, it was largely terra incognita among the general public and wealthy investors.

As a collector of Chinese contemporary art since 1988, Mr Serfaty's own portfolio of this genre includes paintings, sculptures and calligraphy.

He said the works had proved a good investment. And what made it an even better proposition was the fact that there was only a limited supply of such works.

For example, a painting by Beijing-born artist Zhao Wuji cost US$60,000 five years ago. Within three years, its price had jumped fivefold to US$300,000. Today, the work is valued at between US$1 million and US$1.5 million.

Mr Serfaty acknowledged that market volatility could have an impact on the fund's apparently high projected rate of return.

Although prices of art can prove slippery, Mr Serfaty said certain indices are available on the market to monitor price movements.

One of these is the Mei Moses Annual All-Art Index, created by New York University business professors Mei Jiangping and Michael Moses. The index traces 9,000 pieces of art such as paintings, sculptures and drawings that have been auctioned by Sotheby's and Christie's since 1925.

According to the latest Mei-Moses index, which is based on repeat-auction sales, art prices were up a compound 14.52 per cent annually last year. Annual returns over the past five and 50 years were 7.7 per cent and more than 9.9 per cent, respectively.

Unlike other art funds, Mr Serfaty's private pool relies solely on price appreciation as it does not lease out artworks. He said offering their portfolio for rental was complicated and risky.

Mr Serfaty acknowledges that art funds can entail high operating cost, such as maintenance fees and insurance - typically 1 per cent to 2 per cent of the insured value.

As with hedge funds, art fund investors must also pay a 2 per cent management fee. The fee is payable every six months.

'Transaction cost is high as well. Including the auction fee and dealers' payment, it's around 20 per cent of the selling price, compared with the low transaction cost for shares,' Mr Serfaty said.

Another reason why it is difficult to get people to buy into art funds is the risk associated with authentication and market illiquidity.

Mr Serfaty's strategy is to search for works by recognised but undervalued artists.

'Art is a specialist investment that involves a lot of knowledge. It's a diversification of investment and it is best for people to understand how it works,' he said.

'It cannot be [a person's] primary investment. One should not invest more than 10 per cent to 15 per cent of their wealth in art,' he said.