Monday, 29 September 2014

Is art a good investment?

“Nothing great in the world has ever been accomplished without passion.“- Georg Wilhelm Friedrich Hegel

Miss Mai Pham Ngoc, founder of Art&Heritage LTD in collaboration with Macronomics

Is art a good investment?

The question in itself seems legitimate at first, but, in order to answer more precisely the question asked one has to reduce art to a simple investment instrument. Art could be therefore easily comparable to other financial investment instruments such as bonds or equities based on financial analysis, its performance, rate of return, and other measures, when it really isn’t a simple investment. 

Art is first and foremost an “emotional” investment we think.

Based on this clearer definition one can relate more easily to our above quote from German philosopher Hegel whose lectures on Aesthetics are regarded by many as one of the greatest aesthetic theories to have been produced since Aristotle.

Indeed, how can one achieve “financial” success in building up an art collection without passion? All great collectors share a common trait, a strong passion for the art works they are attracted to.

Why do these collectors see value in art works we do not see? 

Maybe Hegel was right when he came to defining why art was such an “emotional investment”: “The beauty of art is beauty born of the spirit and born again, and the higher the spirit and its productions stand above nature and its phenomena, the higher too is the beauty of art above that of nature. Indeed, considered formally [i.e. no matter what it says], even a useless notion that enters a man’s head is higher than any product of nature, because in such a notion spirituality and freedom are always presented.” - Georg Wilhelm Friedrich Hegel

No great collection, in private hands or displayed in museums was ever achieved without passion, making art itself a separate asset class of its own.

But how do you value art?

How can one understand that since 1985 until 2012, the AMR Art 100 index has provided an average annual return of 10 percent when in the same period the MSCI world has only returned an average annual return of 5.9 percent as reported in a study made by ArtAssure - Art Market Analysis 2013?
- source ArtAssure - Art Market Analysis 2013

Why in recent auctions new records have been broken? What makes the art market so different than a bond, or a company stock?

First, the use of fine art is an effective diversification tool as art is removed from the capital structure of the economy. Put it simply, Art is an insiders’ market driven by limited supply and the demand is strongly correlated to economic expansion of a country.

Growing global wealth and the emergence of new private and institutional buyers is leading a strong
demand for the “emotional” asset class. 

One of the chief reason behind record auction prices for the high end market of art is due to new buyers from Emerging Markets boosting prices for postwar and contemporary artists as the works are perceived as strong investments.

Second, think of art somewhat as “venture” capital investment in the sense that insiders, the ones investing in the primary market of the new “venture” have the highest probability of making much more significant “exponential” returns than the ones investing in the secondary market during an IPO

Why is so and why this comparison relates to the art market? 

Art follows a power law. In statistics, a power law is a functional relationship between two quantities, where one quantity varies as a power of another. For instance the primary market price for a work of art will be less for a large series or works of art than for a unique work of similar size, medium, and appearance by a specific artist. 

Once art passes out of the hands of the “insiders”, its commercial value is determined by the principle of supply and demand, but it can be “influenced” by the artist’s primary dealer in the sense that many art galleries will participate to some auctions to sustain the price level of the artist they represent, in similar fashion banks can sustain a share price for a certain period of time following an IPO. 

When we hear of “great price variations” in the art market, it seems to us that the behavior of the prices in the art market is similar to what can be seen in the complex options financial markets and difficult to value “American” options (An option that can be exercised anytime during its life). Since investors have the freedom to exercise their “American options” at any point during the life of the contract, they are more valuable than European options, which can only be exercised at maturity. In similar fashion a video on can suddenly attract millions of views, in the art markets, the price of the work of art can vary very significantly upwards at any time due to an artist becoming mainstream or suddenly “fashionable”. But, the prices of contemporary artists can fall significantly as well as seen in 2008. It  can make it difficult for some art funds with tie-up clauses to realize timely their gains. Art remains an unpredictable “emotional investment”, subject to changes in trends and fashion.

How does one invest?

So, how does one invest? Demanding outside counsel and expertise is a necessity because of the very particular nature of the market and its different segments as well as the common risk of forgery. 
Either you are passionate enough to become your own expert (many top collectors end up being experts), or you rely on external art experts to help you build up a long-term collection. Such curating services are generally provided to ultra-high net worth individuals (UHNWI) who often rely on their own curators to manage and build-up their collections. The continuation of the on-going economic crisis has led to an accentuation towards tangible assets such as gold, real estate and works of art. Wealthy individuals hold an estimated US $4 trillion in “treasure/emotional assets”, an average 9.6% of their total net worth according to the World Wealth Report 2012 from Cap Gemini and RBC Wealth Management and Barclays Wealth. 

What we are seeing is the development a new trend « art and investment » which is pushing for complimentary services to be added to existing services provided by wealth management companies, private banks, as well as law firms, specialized or not. Furthermore, the development of internet based auction solutions backed by the growing number of “big data”providers from specialized art internet companies is adding more traceability and efficiencies to the growing art market. 

It is also worth pointing out that the higher returns of the art market also come with lower volatility. While the AMR Art 100 has an annual volatility rate of 12 percent from 1985 until 2012, the MSCI World Index had a volatility rate of 16 percent as indicated by the study made by ArtAssure - Art Market Analysis 2013

Counter-intuitively, this illiquid market is prone to less volatility. The upcoming opening of a port franc in Luxemburg as well as the commercial agreements between Asia and Luxembourg will no doubt sustain even more the buoyant activity in the art market with new money in Asia chasing old money in Europe. The art market throughout the history of mankind has always tend to follow money. When it comes to long-term trends, Asia-Pacific (ex Japan) is expected to be the second-wealthiest region in 2014, and the wealthiest by 2018 but that is another story (we highly recommend reading Angus Maddison's book Contours of the World Economy, 1-2030 AD, Essays in Macro-Economic History).

The art market, a fast growing segment

No doubt that the art market is a very fast growing segment of Global Private Financial Wealth Management. According to a recent survey conducted by the BCG (BCG Riding a Wave of Growth, June 2014 report), Global Private Financial Wealth grew by 14.6% in 2013 to reach a total of US $152 trillion with the fastest growth coming from Asia. The number of HNWI is on the rise and as an illustration, of the rise in Chinese art, in 2002 not a single Chinese artist was in the list of the top 100 contemporary artists. 10 years on, you find 45 and the overall turnover in China for the contemporary Art Market represented 25.6% of the global turnover.

To conclude, art is no doubt an “emotional investment” but, with proper counsel and advice, it remains a resilient allocation tool in wealth management. It can allow you to build long-term wealth with lesser commotions than in the stock market in addition to providing you with the pleasure of owning an aesthetics’ mean, more precisely, an object produced by the science of sensation, of feeling as postulated by Hegel.

For more on this subject and in relation to outside counsel and expertise services available you can contact Miss Mai Pham Ngoc at the following e-mail address:

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