Art has risen dramatically in value over time in the past. An Andy Warhol Orange Marilyn selling for US$2,400 in the 1960s could fetch US$17 million now. Should investors be looking at art as a way of diversifying their portfolio? According to the Mei Moses All Art Index, based on research by New York University professors Michael Moses and Mei Jianping, art has outperformed the United States stock market by roughly one percentage point a year since 1950. 'Art performs in line with stocks, which both significantly outperform debt instruments,' Moses and Mei wrote in their Winter 2004 Update. 'Over the last 50 years art has outperformed stocks, with annualised compound returns of 12.6 per cent compared to 11.7 per cent. Both outperformed 10-year bonds and 90-day bills, whose returns were 6.5 per cent and 5.4 per cent, respectively.' Stocks and art do not necessarily grow - or decline - in tandem. While art has outperformed the Standard and Poor's 500 by about 1 per cent a year over the past half a century, it has topped the S&P by 8 per cent over the past five years and by 18.2 per cent over the past three. During the 1990s bull market, however, art was a comparative laggard. 'There is no correlation between art and other markets,' Juerg Kaufmann, executive director, ABN Amro, said. '[Art] can provide a counterbalance if one market goes up and another goes down.' But there are downsides to investing in art. It has been known to drop in value, but these cases seldom make the headlines. One of the problems with art is that it has little intrinsic value. It really gets down to perception and taste, both of which can change over time. Another issue is transparency. The art market is difficult to fathom for all but a small number of professionals, and there are few experts who can offer sound advice. Suitable investments are scarce and tend to be expensive, so outlays need to be large. Liquidity in the art market is a two-edged sword. On the one hand, owing to its nature, art tends to change hands infrequently, which leads to a healthy buy-and-hold mentality among collectors. But the lack of liquidity can also make art a poor investment. You might have a magnificent Rembrandt hanging on your dining room wall that has increased significantly in value since you bought it. But if no one is willing to pay you what the appraisers think it is worth, you could have it for years. Then there are outgoings such as insurance, caring for your art and transaction costs, which can run as high as 20 per cent per sale. 'Looking at art as an investment is very risky,' Clare Hsu, executive director of the Asia Art Archive, said. 'Very few collectors acquire pieces of art hoping to sell them later at a profit. The art world here, especially in terms of contemporary Asian art, is very unstable. I would encourage people to really love the work and want to live with the art they buy.' British Rail's pension fund was among the major first investors to treat art as an investible asset, buying nearly US$100 million in fine art in the 1970s. These holdings earned an average of more than 13 per cent a year until they were mostly sold off by the 1990s. While interest in the concept seems to be picking up, people dealing in art tend to take a dim view of treating ceramics and calligraphy as an investment vehicle. 'You do have collectors who are passionate about a certain field of art and ... then one day donate their collection to a museum,' Ms Hsu said. 'I know of very few collectors hoping to sell art at a profit.' Nicole Schoeni, owner of the Schoeni Art Gallery, believes art - especially the contemporary Chinese art that her gallery deals in - holds lots of potential for investors who do their homework. 'Contemporary Chinese art is undervalued because it's still a very young market,' she says. The art world and the financial world seem to have a totally different mindset when it comes to art. 'They speak a different language,' Spencer Ewen, founder and managing director of London-based Seymour Management, said. 'But I think what's happened is the art world has become more sophisticated and worldwide there is more wealth being created and that wealth is looking towards art as one of the ways of establishing itself.' There are at least 20 art investment funds on offer and they range from fine art and paintings to porcelain, antique furniture, jewellery, and memorabilia. Exposure runs from China and India to Latin America and Russia. Seymour Management has teamed with ABN Amro to launch the Art Fund of Funds, an umbrella fund which channels money into independent and unrelated art funds, a structure commonly used with hedge funds. Seymour has evaluated six funds so far and will review another six to eight soon. Investments in art funds will initially account for about 20 per cent of the fund's holdings, fluctuating between 20 and 100 per cent as time goes by. The remainder will be invested in unrelated instruments. 'Art has not traditionally been regarded as an investment,' Mr Ewen said. 'What we are trying to do ... is make it available as an investment.'