Investing in Art

A few weeks ago the UK newspaper the Telegraph ran an interesting article on investing in art.  The general outlook from the article is to not move so fast when it comes to investing in art. The article does note the large amounts of money flowing into the art market as well as the growth in investing in art.  The point being, from a purely investment and returns point of view, is art currently a good investment, and the answers seems to be no.

The Telegraph reports

Investors are being warned not to rush in to investing in art, amid reports of surging returns.

Other assets viewed as alternative investments, such as luxury cars and wine, have also been grabbing headlines.

The interest is understandable given the income being paid by more traditional assets, such as bonds, or by savings accounts.

The global art market is booming, with last year’s sales reaching a record £37bn, a 7pc year-on-year increase

Just two months ago, an oil painting by French Post-Impressionist artist Paul Gauguin titled When Will You Marry? (pictured below) sold for almost $300m (£197m), the highest price ever paid for a work of art.

At the more realistic end of the art market, what can investors expect?

Melanie Gerlis, author of Art as an Investment?, says combining all research on the broad market points to an average compound return on investment-grade art, held for between five and 10 years, of around 4pc. “Considerably less than gold, wine and both public and private equity,” Ms Gerlis said.

Paul Gauguin's When Will You Marry?

High-profile experts in the field advise against it. Art critic Brian Sewell recently told Telegraph Money that that “no one should buy works of art for investment” as art is for “pleasure and enlightenment”.

But he did offer some advice for investors: “If you do buy art, buy what everyone else is buying. It is an entirely false market and one day it will implode, but at the moment it is fiercely profitable.”

Financial planners are keen to steer investors away from alternative investments.

Patrick Connolly, a financial adviser at Chase de Vere, highlighted that art investments are unregulated, so investors cannot fall back on the Financial Services Compensation Scheme (FSCS) or any other body if their investment goes wrong. They are often illiquid, meaning that you may not be able to sell when you want, and art, unlike equities, bonds or property, does not produce an income.

Investing in art can also incur high costs, whether that is fund charges or associated transaction, insurance and storage costs if you’re buying individual works. Many people will also need to pay for specialist advice on what and when to buy. Purchase and resale fees when buying and selling art can be as much as 25pc.

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Furthermore, Mr Connolly said to expect volatility tied to changes in the economic environment or if particular works or artists come in or out of favour. “What you get is an investment which is unregulated, illiquid, with high charges, produces no income and with potentially volatile performance. This isn’t exactly appealing to most investors,” he said.

Nevertheless, investors will be impressed that artists, such as Banksy, can emerge rapidly and find their work achieving astronomical values. It can also be argued that art has a very low correlation to equity markets and so could provide good diversification as part of an overall investment portfolio. “For most people who like art, the most sensible approach is probably to buy something they like and can afford and, first and foremost, be prepared to keep it just for their own pleasure,” Mr Connolly added.

Kyle Sommer at JP Morgan said art has shown to be an effective hedge against increasing prices when inflation rises. “On average, art has performed significantly better over the last 40 years during periods when inflation is rising, particularly high and rising. Returns on art appear weakest when inflation is falling,” he said. UK inflation is currently at zero.

HOW DO I INVEST IN ART?

Art funds are near-impossible to find as a UK investor, said Ben Yearsley, head of investment research at broker Charles Stanley Direct. “If there are any art funds, they will be offshore, very hard to invest in and will be restricted to quarterly dealing,” he said.

Investors, however, do not just have to buy art directly, but can be in a consortium with other investors.

Art fairs are growing in popularity. Affordableartfair.com details forthcoming exhibitions. For instance, Cameron Contemporary Art's (CCA) exhibition between April 25 to May 25 in Brighton and Hove will showcase works by modern British masters as well as collectable contemporary gallery artists.

Investors can also find peices of art at Saatchiart.com, with costs ranging from $100 (£67) to $30,000 (£20,145).

According to private bank Coutts, traditional Chinese works of art have been some of the most profitable pieces of fine art over the past few years, almost doubling in value since 2008.

These works are in increasing demand (see graph right) as the ultra-high-net-worth section of the Chinese population expands, the Coutts Index found. A decade ago, Asia accounted for just 5pc of Sotheby’s global art sales, but in 2013, it accounted for a third.

Bonhams frequently sells Chinese fine art, but the pieces don't come cheap. On May 14, the auction house will be selling a selection of fine Chinese art pieces including an archaic bronze square vase from the Han Dynasty (1st-2nd century AD), expected to go for between £2,500 and £4,000 and a 15th century gilt-bronze figure of Buddha Shakyamuni from Nepal, expected to go for between £15,000 and £25,000.

Fine Art Wealth Management, an advisory firm, provides independent consulting, networking, and research on managing art wealth. The Fine Art Fund Group offers a similar advisory service. The group, started by Philip Hoffman, a former finance director at Christie’s, also runs art funds for investors with a minimum of £150,000 to deposit. However, there are currently no funds open to new investors, with plans to offer some in the future.

Source: The Telegraph