Art is the new asset class.
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For a long time art markets were steeped in mystery, seemingly reserved for the upper echelon, the .1% of the top 1%. These markets were often described as being illiquid and non-transparent; it was hard to buy and sell art in a timely fashion and no one knew where to do it.
More recently, high net-worth investors are embracing art as an asset class unto itself but is it a worthwhile investment, and how do you get a piece of the action?
The latest developments
The global market for works of art is larger than you think. In 2016 the total market was $45 billion, up from $44 billion the previous year. That’s the size of the entire U.S. Leisure Products industry, a segment that includes manufacturers of sports equipment, bicycles and toys.
Of that global market, the biggest players are the States, the U.K., and China with a combined market share of nearly 70%.
People are now collecting for reasons beyond an appreciation of the finer things in life. According to report put out by Deloitte, 3 out of 4 wealth managers indicated that art and collectibles should be a wealth management offering. They’re collecting art as an investment – holding for the long-term to try and cash in. With the S&P 500 hitting new highs, investors are looking for alternative areas to store their cash as fears of a market crash ramp up.
It’s not like investing in art is a lark either. The Art 100 Index, a measure of the global art market, has outperformed the MSCI World Index between 1985 and 2012. In other worlds, the art market nearly tripled the return from global equities in that time period. Research from JP Morgan also indicates that art has a low correlation with other financial asset classes, so if the S&P 500 crashes art doesn’t necessarily go down with it.
Source: J.P. Morgan, the art of investing
How can I invest in art?
Investing in priceless works of art could be lucrative; the AMR Art 100 Index reports that prices for collectibles have increased at a rate of 8% for the last 25 years.
Not everyone has the ability to bid for a Monet or a Manet at one of the top auction houses such as Christie’s or Sotheby’s. Thankfully, there are other alternatives.
1. Invest with an artfund
Art funds have been around for a while and are basically private investment companies that specialize in one niche or area. These companies raise money from private investors and then go out and acquire art with the goal of selling it for a profit in a few years. The Fine Art Group, based in London, is one such company.
2. Start a private investment partnership, or find one in your area
This is like an art fund, except on a more local level. Start a group with your friends and family or look through Meetup.com for a group you can join. Pool your funds together and start searching for pieces of art you’d like to purchase. If you already own pieces of art your new partnership can use that as collateral against new purchases that you can then attempt to flip for a quick buck.
3. Irrevocable bids
Irrevocable bids are interesting in that they allow a bidder to pay well below the auction price for a piece of art. Here’s how it works: a bidder places a low bid and in the event that no one bids higher, the artwork goes to that bidder.
If someone does bid higher, the irrevocable bidder gets a cut of the sale. So if you win the bid, you get the art and if you lose you get some cash.
4. Invest in emerging artists
One way to avoid inflated prices is to look for artists in your own neighborhood. This is for people who truly appreciate art for what it is, rather than investors looking for a sure thing. You need to have the ability to pick out talent in a sea of good work, with an eye for artists with the potential to become greats. The prices are lower here but the returns can be stratospheric. You never know what can happen.
What to invest in?
Knowing how to invest is somewhat easier than knowing what art to invest in. Let’s start by getting a sense of what’s selling.
A Stanford research paper looked at the sales of paintings at Christie’s and Sotheby’s and found that about 30% of total sales were of Impressionist and Modern art. 19th century paintings represented another 25%, 16% were Post-War and Contemporary, while another 5% were Old Masters (paintings of certain artists active before 1800).
That gives us a high-level look at what is being sold in auction houses. We can pair that knowledge with the Mei Moses Art indexes to see what gives us the best return. The Mei Moses Post-War Contemporary Index greatly outperforms the Mei Moses World Impressionist Modern Index – especially over the last 10 years.
The Art 100 indices also back up the result. The Contemporary Art 100 Index out-performed all other categories, smashing the Modern Art (2nd place), the Old Masters and 19th Century indices over a 27 year period spanning 1985 -2012.
Past performance is no indicator of future performance however and art markets can be fickle and cyclical. What’s in style now can go out of style just as quickly as it came in. It might make sense to diversify rather than place a bet on one specific era.
Don’t forget about the Fed
One final thing to consider is the current political climate. With interest rates hovering near zero and interest rate hikes on the horizon we need to know how art fares in such an environment.
Research suggests that art performs best as an investment when inflation is high and rising. Right now interest rates are low and on the verge of rising. When interest rates rise inflation tends to go with it which means we need to know what art does when inflation is low and rising.
In 7 such occasions investing in art has seen positive returns (9%) whilelagging US equities (20%) and commodities (17%).
While it may seem silly at first, investing in art could be a realistic alternative for investors who want to allocate funds to an asset that uncorrelated to US equities and tends to have strong returns over long periods of time – comparable with that of more traditional asset classes.