Another reason for art’s popularity is the growing interest in investing in tangible assets as a result of the credit crunch and the general consensus that art makes a good portfolio diversifier. Although returns on art can be high, the unregulated and opaque art market needs to be navigated with care, whether buying direct or through an art fund. In this market, insider trading is essential to success.
The Art Market
In 2007 the global art market’s estimated trading volume was USD$66bn. However, estimates on sales volume can never be more than approximate because of the fact the only price data available to the general public are auction results. Sales through galleries, dealers and by private treaty are not divulged and can only be estimated. Although a number of price databases and market indices have been launched over the years, transparency is still a problem. It does not help that as result of the current economic climate sellers have been reluctant to consign to auction as they are worried a stellar work might go unsold, resulting in more private treaty sales.
The major art centres continue to be London and New York where Christie’s and Sotheby’s conduct their auctions of Impressionist, Post-War and Contemporary Art. In addition emerging economies are becoming more active participants (Dubai, Moscow and Shanghai have had art fairs established in the last few years).
Art as an asset
Buying and selling art is not as straightforward as it might seem. It is not as simple as buy the work, hold it for eight years and then sell it, there are a number of issues to consider. Art is an illiquid asset. This can prove a problem when a work needs to be sold as timing is imperative in the art market with a cycle that needs to be taken into consideration. Major auctions take place only a couple of times a year and if a private treaty sale is sought, it can take up to months to find a buyer at the seller’s desired price.
Another consideration is that art transaction and holding costs are high. When buying at one of the two major auction houses, buyer’s premium is due on the hammer price which is calculated incrementally and runs from 25% down to 12%. When trading privately the agents involved will usually receive a commission of at least 10%. In some jurisdictions contemporary works might be subject to Droit de Suite, a resale royalty that is passed on to the artist or their estate. VAT and other sales taxes might also apply while holding costs include insurance, appraisal, transport, storage and collection management.
Each category of art comes with its own challenges. Art produced before and during WWII (for instance Impressionist works) has more chance of title disputes and third party claims as Nazi-looted art was dispersed throughout the world in the 20th Century and is still occasionally claimed by heirs of the victims. For these works, an impeccable provenance or ownership history, is of paramount importance. Although a blue-chip Impressionist work with a perfect provenance and the added rarity factor (the artist cannot produce anymore) will likely hold its value, such a work will probably generate a less spectacular profit as their value has already been universally recognised and paid for.
Contemporary art on the other hand has less chance of title disputes or third party claims as long as the artist or his estate documented the work adequately. There is an unlimited supply of contemporary art but it has not stood the test of time, i.e. an investor has to try and predict what will happen to the work’s value in 10 to20 years time which makes it a more risky but potentially very lucrative investment. Besides provenance and authenticity issues there are other considerations to be made regarding tax (inheritance and capital gains tax, import taxes) and legal implications(export restrictions in certain jurisdictions).
With all these elements to consider it is no surprise art investment continues to be practised mainly by the more sophisticated investor.
Investing through art funds Three art funds are usually mentioned as having been successful: the Peau de l’Ours in late 19th Century France, the British Rail Pension fund in the 1970’s and the London-based Fine Art Fund established in 2004 by Phillip Hoffman. The latter seems to be the only existing fund with a proven track record. A number of new funds have been launched in the past few years but it is difficult to assess their performance without a track record. Therefore, when deliberating to buy into a fund the question is not just whether the fund manager has financial acumen. Leaving aside for the moment the feasibility of the fund’s buying strategy – some buy specific categories (such as photography) whereas others buy opportunistically across the board and invest in other art funds - the fund needs to have specific knowledge of their preferred area or areas of investment which means access to information and to the best works. In addition the fund needs to have an awareness of the complications that can arise from transacting art and the impact these might have on investor returns. Transaction and holding costs are high as well as an art fund’s overhead (depending on the buying strategy a number of experts will need to be employed or retained) so returns need to be enough to cover these expenses.
There is no doubt that art has the potential to be an attractive asset but doing the research before getting in the market – by oneself or through a fund - is a good idea.