Art as an investment
There are many collectors of fine art but few have made it into a profitable venture, writes Tiffany Ap
A Van Gogh or a Picasso is valuable, but is it a good investment? Certainly the art world is filled with stories of sharp-eyed collectors who snapped up pieces from young, unknown artists only to see their value soar, or from established artists they may already own who suddenly find their "moment" in the commercial spotlight, like Germany's Gerhard Richter.
The Mei Moses Art Index, which tracks the prices of major works at auction, has outperformed Standard & Poor's 500 index in recent years and, in 2011, did so by 9 per cent. Such is the interest in this asset class, Deloitte now organises an annual conference dedicated to art investing.
Funds offer one entry point into the market but are something of an acquired taste - and far from guaranteed. Funds allow investors to pool money to buy a broad range of works, with the occasional hit potentially lifting the losses of the many dud performers.
For those looking for proof of concept, The Fine Art Fund Group, founded by ex-Christie's director Philip Hoffman in 2001, reported lucrative returns of 25.5 per cent in May 2011. The London-based art investment house - with US$150 million in assets under management - was the first fund of its type to invest in art as a worldwide asset class. It also represents some banks in their art advisory relationship. And while not all art will appreciate at Damien Hirst and Banksy-like rates, it's a safer hedge than a good deal of stock and makes for better long-term viewing. "The value of a Canaletto will never go down to zero, it will never do an Enron or a Marconi," says Hoffman.
Enrico Mattoli, head of investment products and services, UHNW at UBS Wealth Management, says that in theory, investing in real assets such as art and collectibles can diversify one's portfolio and act as a hedge against inflation.
Hong Kong-based Art Futures is fully committed to the market. The 2½-year-old brokerage is led by Jon Reade, previously of Galleries Direct, an Australian art investment firm, and Jonathan Macey, formerly an auctioneer with Bonhams.
Specialising in Asian contemporary artwork, Art Futures helps investors who may be "tired of traditional non-performing assets" to buy investment art, typically to hold for two to seven years.
The firm tries to strip art down to essential investing components. Reade says he looks at mid-career artists who have a "track", focusing on three main indicators: auction records, pace of artist output and death (which boosts exclusivity and rarity value).
While Art Futures handles storage and maintenance of pieces, more importantly it tries to squeeze income out of its assets by renting art to corporate clients looking for upscale aesthetic distraction in a hotel lobby or boardroom. This helps address a big complaint about art investing - no yield.
Nonetheless, the concept of collecting art purely for profit - and not for its cultural value - draws scepticism, not least from those who work in galleries
Artworks, say the naysayers, are expensive to store, insure and maintain, and the value of even the most famous pieces is completely subjective. It's an erratic, illiquid market - in other words highly risky.
Past attempts to make art prices more transparent and measurable have fallen short. The Mei Moses Art Index, for example, is imprecise and subject to variables. It uses data only from artworks that have sold at auction twice. This introduces a "survivor bias" in its results, in that pieces that are auctioned more than once tend to be in greater demand, but don't represent the wider market.
If an artwork is unpopular and unable to find a buyer, it's excluded. It also doesn't report transaction costs which can escalate to 30 per cent at auction. In short, the market is comprised of many non-financial intangibles.
Angela Li, owner of Contemporary by Angela Li and a former HSBC banker, says faddish tastes in the art world can result in prices that defy logic. "If an item is hot, there'll be a line of collectors waiting to buy. If it's not in fashion, it's difficult to sell even at reduced price."
Two artists may emerge at the same time, have a similar background, education and style, but command disparate prices. "Look at one of China's most successful artists, Zhang Xiaogang," she says. "He has a similar upbringing, went to the same school and, in terms of ideas and style, is similar to Ye Yongqing. But price-wise, the difference is more than 10 times."
There is, in other words, a highly variable subjective aspect to art appreciation, and this affects the market. Although prices range widely for artists of the same ilk and (arguably) calibre, there can also be variance for works by the same artist.
In May, Edvard Munch's iconic painting The Scream became the most expensive artwork sold at auction, for US$119.9 million. Despite the financial acclaim, it did little to elevate prices for Munch's other works.
Li's advice is to treat art as a side investment. "A lot of people have made money in the art market in a short period of time, let's say two years. But with art, it's a jumpy appreciation rather than a smooth curve. The trend may not always go upwards either. It can die."
The late Australian art critic Robert Hughes also cautioned investors in 2008. "One of the things that sustains the art market is an irrational faith in a continuous rise in prices," he said. "There was a 17th-century Italian painter called Guido Reni. Not a lot of people have heard of him, but in the late 18th century many connoisseurs thought that Italy's two supreme artists were Michelangelo and Reni. But by 1950 you could buy a three-metre painting by Reni for £300. People fall out of fashion quite rapidly. So this idea of the inviolability of the modern art market is a fantasy."
While the internet is helping to increase the market's transparency, the industry remains unregulated and requires specialised, insider knowledge. Auction prices are not representative and its numbers are limited to the secondary market; an estimated half of all art transactions happen behind closed doors.
Moreover, an aspiring Joseph Lau Luen-hung [Chinese Estate's chairman with a predilection for Warhol's portraits of Mao] may be willing to shell out an outrageous sum of money for a piece but there's little assurance it will fetch a similar price again. Skate's Art Market Research reports that no painting bought for more than US$30 million has ever been resold at a profit.
"The price level is never what the auction sets," says Jehan Chu, director of Vermillion Art Collections. "That's an upper benchmark. Two people do not define the market; they just define a price level."
"There are people who play in the market," says Steve McGuinness of Plum Blossom Gallery. "You get people who own several pieces from one artist. They'll take one artwork out of their collection, put it in an auction and have their friend bid it up to manipulate prices."
Chu resists the notion of art as pure financial investment. His art advisory helps clients build collections, which involves valuation, but he believes profit should not be the sole motive.
"There often is some kind of financial side to it, especially in Asia. But with all of my clients, it is not the driving force. Few people come to me and say, 'I want to invest in art.' Most don't want to lose money on art. They want to protect their investment rather than see five-times' growth."
No talk of art investing would be complete without mention of the British Rail Pension Fund. In 1974, the fund placed US$100 £40 million, or 2.5 per cent of its portfolio, into art, buying more than 2,400 works including old masters, Impressionist works, books, medieval art, Chinese ceramics and African tribal art. The fund enjoyed aggregate returns of 11.3 per cent before it eventually sold off its collection in the 1990s.
The double-digit growth is oft-cited. What's less mentioned is that the gains came largely from just 25 Impressionist paintings. It also failed to beat the stock market during that period.
Many of the art funds set up in the past two decades have fizzled, including those launched by major banks. Funds launched by ABN Amro, Chase, the Athena Fund by Merrill Lynch and other high-profile veterans of the art and finance world have gone belly up due to undercapitalisation.
"Forget about quarterly performance, even annual performance is very difficult to get a snapshot of," says Chu.
"The larger the collection gets, the more diverse, the more difficult it is to benchmark the value of the pieces. It is too opaque to mark the market for one artist, let alone 50. If pure financial investment is your only concern, go buy some stocks instead."
Graham Steele, the director of art gallery White Cube Asia agrees that art funds are challenging. "It is difficult to make something that is not too commercial, not too overly conceptual. You need to buy low and sell high. That's not something that is really attainable in the short term. You can't have a two-year art fund. It's buying someone at 25 who at 45 becomes huge."
"We work with what people consider 'blue chip' artists. The art that we exhibit is supported by national museums, governments and institutions but it's still difficult to gain the perspective in order to decide long-term viability. I do not have a crystal ball. Committees have failed. One person's taste has failed."
Steele also questions whether financiers are missing the bigger picture.
"It's not the way that I would buy art. So much of the work that I do is to get away from this idea that art is purely an investment. The point of art is supposed to express something about the human condition, be it profound or superficial," he says.
Whatever the financial measure - or pleasure - of art as an asset class, at least Picasso will never be Enron.