Buy Art for Enjoyment Not Investment?

United Press International posted a short article on a report from the University of Luxembourg's School of Finance where the potential financial returns for investing in art are actually much lower.  Part of the overvaluation is due to selection bias, but as you read the article the study was based upon returns from art funds and not individual purchases. There have been other studies using selection bias as a method to dilute art index returns.  If I recall correctly, some art market analytic resources have built in corrections for selection bias and it is taken into account.  Given this study looks at selection bias for art funds only, perhaps art funds have an issue with their stated returns.

The paper was originally published in the journal Review of Financial Studies in 2015, so it is a little dated, and I am not sure why there are new press released. Click HERE to order the paper.

The first block quote is from the UPI article, the second block quote is from a press release from the author and is a Google translated document.

UPI reports

LUXEMBOURG, June 15 (UPI) -- New research suggests returns on investment in fine art have been significantly exaggerated. Economists' advice to collectors: buy art if you enjoy it, but not with the expectation of profit.

No longer simply framed and hung in homes or museums, art is now bundled into financial instruments and used to diversify investment portfolios. Financial analysts have measured the annual rate of return for art funds at 10 percent over the last 40 years.

But new analysis by researchers at the University of Luxembourg's School of Finance suggest the rate of return is significantly lower. Their findings were detailed in a paper published in the journal Review of Financial Studies.

Economists looked at auction sale data collected by the Blouin Art Sales Index to more accurately measure both the potential returns and risks involved in art fund investments. Their work suggests art as an asset provided a return rate of 6.3 percent between 1960 and 2013. Researchers also found the risks assumed in hopes of profit were underestimated.

Researchers blame the overvaluation on selection bias in the art market. The most valuable and quickly appreciating pieces of art go to sale most frequently and are sold for the highest prices. These inflated prices are then used to overvalue the remaining art that doesn't sell.

By incorporating data on how likely a painting is to sell and how quickly prices rise over time, researchers were able to more accurately value the art market. Their analysis suggests a portfolio with an art fund is no more likely to outperform the market than a portfolio without one.

The new analysis applies specifically to art funds, but risks are high for individual investors, too.

"If you own a painting, you bear the physical risks and costs, including insurance, damage, and theft or forgery, among others," researcher Roman Kräussl, a professor of finance at Luxembourg, said in a news release.

"In short, buy paintings if you like looking at them," Kräussl concluded. "You can hope that your children will sell one or more of them later for a gain -- but paintings are primarily aesthetic investments, not financial ones."

 Source: UPI

The yield on art is overrated
Thomas Klein Communications department
University of Luxembourg - Université du Luxembourg

Investors should buy paintings, if they like them, but not as an investment. This is the conclusion of a new study of the Luxembourg School of Finance at the University of Luxembourg, which has found that the return on art is vastly overrated.

Art has established itself as a new asset class for diversified portfolios. Art consultants rely on the sale of Art Fund of the Index, art sales, which can show an average annual return of 10 percent for the past four decades. Now Prof. Dr. Roman Kräussl (University of Luxembourg), Arthur Korteweg have (Assistant Professor at the Marshall School of Business, University of Southern California) and Prof. Dr. Patrick Verwijmeren (Erasmus School of Economics at the Erasmus University Rotterdam), however, demonstrated that the income of Art are actually much lower. in your analysis of Blouin Art sales Index (BASI), the most comprehensive available auction database, they came to the conclusion that the actual annual return for art as an investment 1960-2013 at about 6 , was 3 percent. Likewise, does not increase the absorption of art works in a portfolio, the chances for an above-average performance of the Portfolio. Scientists also point out that the risk of investing in art is much higher than expected through a fund. The study authors calculated the Sharpe ratio method, the risk-adjusted return on the basis of BASI. Instead of the previously specified ratio of 0.27, this yielded a value of 0.11. The higher the Sharpe ratio, the more attractive the risk-adjusted return. According to the scientists, the overestimation of yield and the underestimation of the risk arising from an occurrence known as a selection bias (selection bias) is referred to. On the art market selection bias occurs, for example, because highly popular paintings are auctioned frequently and sold at higher prices, so the price is biased upwards. In addition, owners sell more paintings, whose value has increased since their purchase. For the indices, the data from the sale of this exceptionally expensive paintings are also used for the evaluation of paintings that are never or more rarely sold. In order to determine a more accurate value for works of art of the latter category, the researchers analyzed data about how many times paintings are sold and how quickly increases their price. They were able to get a clear picture about art as an investment. When comparing risk and return for the investment in works of art of any kind with a pure investment portfolio, investments in art can not significantly improve the risk / reward profile of a portfolio with a broad diversification of traditional asset classes, such. As stocks and bonds, . This analysis applies to works of art that can be purchased through a fund. But how it is with art objects that are purchased once overlooking its resale to achieve a good return? Such a purchase can be by investing in a single stock or a small number of shares compare. Some people might have the relevant expertise or just lucky, select profitable plants, while others are not , "If you own a painting, apply the physical risks and costs, including but not limited insurance, damage and theft or forgery, "said Prof. Dr. Kräussl and added:" In brief, do paintings buy only if you like them. You can perhaps hope that your children sell one or two later at a profit - but paintings are primarily aesthetic systems and no financial ". 

Source: IDW