Art as an Asset

Livemint and the Wall Street Journal, a publication from India has a good article on investing in art and art as an asset class.  The article has a mixed approach, noting the typical inherent problems of investing in art, such as being illiquid, non-replaceable, high transaction costs and expensive to hold.

The article does note art has the potential to appreciate, but it also notes it is difficult to realize a consistent profit in the above $1 million category based upon information gained from the Mei Moses art indexes.

As I have mentioned in the past, art as an asset class and an investment has both supporters and detractors, but it is a part of collecting that is now getting a lot of trade and main stream press, which can only be a good thing for the appraisal profession.

Overall, the article states that for wealthy connoisseur, art investment is at the least a niche investment with the added bonus of collecting and enjoying the art work.

Livemint/WSA reports

In reality, art, like other collectibles, is a very difficult asset class, being illiquid, non-fungible, expensive to hold, and involving high transaction costs. The first two characteristics are readily apparent and common to all collectibles. However, unlike other collectibles such as stamps and coins, storing and insuring art is expensive, with insurance alone costing up to 0.3% of the total value. Moreover, sale commissions are substantial and can account for anywhere between 22% and 35% of the selling price (auction houses like Christie’s and Sotheby’s usually charge a 10% seller’s commission and 12-25% buyer’s premium depending on the eventual sale price). Add sales and value-added taxes (20% in the UK), and the artwork needs to appreciate by a phenomenal amount at every buying-selling cycle for it to provide any return at all. Those poor souls who have been beguiled by the alchemists of finance to invest in art funds and other exotic products have to pay yet another layer of charges that further raises the appreciation requirement.

However, despair not, as art can actually appreciate a lot. Unfortunately, finding artists and artworks with such an appreciation potential is like looking for a needle in a haystack. Making it more difficult is the fact that the holding period, in which the appreciation happens, is exceedingly uncertain. The graph provides a stylized return profile for an artist. An artist’s transition from obscurity to fame is the time during which his/her artwork appreciates rapidly and massively. These are the returns that make the front pages of newspapers and magazines, and over which investors salivate. However, for every successful artist, there are thousands who struggle futilely. How does one sift the winner from the losers? In addition, even winners may take a long time to achieve fame. Vincent Van Gogh is probably the most famous example of a painter who struggled to sell his paintings during his life and only found fame after death. Even for readers of this column, who have a long-term focus, investing is not about waiting for Godot.

Basic mathematics shows that the strategy of picking a famous artist doesn’t work. A painting worth $100,000 can appreciate 50 times to $5 million but a $5 million painting is unlikely to reach $250 million. Prices at the very top tend to stagnate due to the relative paucity of people with such deep pockets. For example, Diana and Callisto by the 16th-century master Titian sold for £45 million in 2012. This was actually lower than the £50 million paid for a similar painting by him—Diana and Actaeon—in 2009. Paintings purchased for more than $1 million tend to produce the lowest returns according to data on 33,000 separate sale-purchase pairs kept by the firm that publishes the widely tracked Mei-Moses index of art returns (Beautiful Asset Advisors December 2012 Tracking Report). Therefore, it is no surprise to find that most wealthy art buyers tend to buy for emotional reasons rather than for investment purposes (according to a survey of 2,000 wealthy individuals globally carried out by Barclays, only 10% buy art purely for investment).

Source: Mint/Wall Street Journal