What one needs to know prior to embarking on the journey
Investing in art has become a very trendy subject recently, given the global recession, economic volatility and proliferation of art investment funds and fractional art ownership. However, it is not as straightforward as with stocks, for example, and one requires a certain degree of prior knowledge and understanding of the art world dynamics.
Before we begin, it is worth noting that this article presents solely our opinion without any third-party affiliations and should be used for information purposes only.
Let us first establish where does art fall in the investment portfolio. Art is a "passion investment", meaning it is a non-traditional asset class, which allows its owner to derive pleasure from ownership, while also generating financial return in the process. Examples of passion investments could be rare watches, wines, vintage cars, jewels, artworks, even some handbags.
Non-traditional assets, like art, are suitable for portfolio diversification, because they provide a hedge against inflation, are resistant to financial crises and aid capital preservation. Art is an uncorrelated asset - its performance has low correlation with stocks and bonds' performance - which aids risk reduction, if integrated into a diversified portfolio. Not to mention the so-called "psychic benefits": cultural appreciation, social status and the "elite club of ownership" one automatically joins by the virtue of collecting valuable items.
However, it is important to bear in mind, that, unlike stocks and bonds, art is an illiquid asset, meaning it cannot be quickly and easily traded for cash without making a loss. The typical minimum holding period that any art investor would advise is 3-5 years, better 10 years, basically the longer the better, but one should continuously monitor the market to identify better or worse opportunities to sell for maximum ROI.
For instance, if an artwork achieves record price at an auction and you happen to own an artwork by the same artist, you may benefit from the "halo effect" due to heightened interest in that artist's work and newly established price bracket, hence prompting you to sell sooner, and vice versa.
Alternatively, most collectors would avoid selling their artworks during a recession, because the buyers tend to be more cautious and reluctant to part with their cash, faced with economic uncertainty, driving the prices down. This temporary decrease in supply is what helps keep art prices leveled, making art a safe investment in the long term.
Categories of artists one can invest in
Emerging Artists
Emerging artists are contemporary artists that are at an early stage in their career. Their works are the most accessible, however, they also possess the highest level of risk, associated with investment. Investors buy those works in hopes that emerging artists' careers will continue to rise and eventually command higher prices, bringing them a hefty ROI. This process is very much akin to a lottery. Nobody can guarantee a profit, because there are too many variables out of anyone's control, including the artists themselves. Also, emerging artists are typically found on the primary market, implying there is no data on the past sales.
When investing in emerging artists, it is advisable to buy as many works by different authors, as one can afford. The holding time is longer, than with other groups, because it might take a while to see their careers in full blossom. Additionally, many galleries nowadays include a clause for the right of first refusal, compelling the buyer to sell the work back to the dealer, before offering it to anyone else, thus excluding the possibility of making a quick profit. Some galleries prohibit the resale of their artist's work for a number of years after purchase. Dealers justify such approach by claiming it protects artists and their markets, but it has attracted a fair share of criticism for hampering many artists' growth.
Established Artists
Also called 'mid-career artists', this cohort has already affirmed itself in the art market. Established artists have wide-spread coverage in publications, museum and gallery exhibitions. They are known nationally and/or internationally, have become permanent fixtures of cultural discourse and have regularly sold at auctions, where their artworks have attracted high bids. Transparency of prices for previous sales, accessible via databases like ArtPrice or Mei Moses All Art Index, aids in gauging value trajectory. Mid-career artists' works sell for higher prices, than emerging artists', but they see a more consistent yearly ROI and, therefore, are a less risky investment. Cecily Brown, George Condo, Damien Hirst or Banksy can be regarded as established artists.
Blue-Chip Art
Borrowing its name from blue-chip stocks - shares of reputable, established and profitable companies - in art it similarly means that these artworks have been produced by highly regarded artists with museum recognition, increasing value and proven track record at auctions. Blue-chip artworks are generally considered to be a safe bet by investors. For example, artists like Claude Monet, Vincent van Gogh, Leonardo da Vinci, Mark Rothko, etc. are blue-chip. Unsurprisingly, these investment-grade works command premium prices, starting from seven figures, therefore, making them affordable only to the wealthiest collectors.
In the past decades, there have been numerous attempts to make blue-chip art more accessible for investors. This is evident in proliferation of art investment funds - privately held art portfolios, that are structured like a mutual fund or a hedge fund. Art fund manager would buy, hold and sell paintings on investor's behalf for management and success fees. Investor would then receive his share of the profit upon the sale of the artwork, considering it has gained in value over time. There is a formal application and vetting process, and the old-fashioned art funds typically require a minimum investment of about $250,000.
Striving to democratize art investment even further, many art funds have begun offering securitized art. The art fund manager would buy a blue-chip artwork, create a holding company for it and the investor consequently owns shares of that company. One does not have to be an accredited investor to invest in securitized art. It lets one buy shares of artworks for as little as $20 and trade them, much like on the stock market, taking advantage of higher liquidity. Investors could make a quick return simply by selling shares of artwork that goes up in value, instead of waiting for the art fund to sell the artwork itself in a number of years. However, those interested in a major art investment are better off sticking to classic art funds, because the small profit that one could generate trading $20 stocks can easily be diminished further by hidden costs and fees, when attempting to cash out. This model of art investment is still in its embryonic stage and more time is needed to carefully assess the lucrativeness of fractional art ownership.
In conclusion, the best advice is to do your research, refine your taste, consult an independent art advisor and purchase art that you genuinely enjoy looking at, because you might be stuck with it for a good number of years. It has to guarantee at least a psychic return, while financial ROI is always just a bonus.
MERVEILLE Art Advisory is pleased to offer a personalized consultation to discuss collecting with investment purpose. Drop us an email, if you have any further questions.
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