Some years ago, in 2012, the news about the sale of Edward Munch’s “The Scream” at Sotheby’s for nearly $120 Million opened very heated discussions among investors about buying art as an alternative investment asset. So, the question emerged - is art as a tangible asset an alternative investment? And if so, how should the collectors get the best access to such asset class?
The question is most controversial among experts. Just some less years ago, in 2015, an oil painting by French Post-Impressionist artist Paul Gauguin titled “When Will You Marry?”, 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?
As some of the art reporters of Telegraph say, some 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.” Quite a bold statement.
So again, the question is: Is art a viable alternative investment?
“Buying art can reap financial rewards – if you know what you're looking for”, some other experts say. Investing in the markets when they are as volatile as they are at present may not seem that appealing, but if you prefer to take a view on some of the finer things in life, then you might want to consider some alternative investments. Putting your hard-earned cash into artworks may seem like a frivolous activity at first suggestion, but there is serious money to be made if you invest in the right items. Again, the example of Edward Munch’s paintings “The Scream” comes to our heads making it the most expensive artwork ever to sell at auction at the time. This was not a one-off offering either, a number of pieces sold for record values for the particular artists, suggesting there is an increasing appeal for great artwork among the collectors. Both Christie’s and Sotheby’s have seen significant boosts to profits in the same year. In Sotheby’s Summer Season of Sales in London, it achieved a combined total of £268.8 million, with the Impressionist and Modern Art Sale series realizing a 12 per cent increase in the same period the following year. The impact of the internet is key to the widening appeal and accessibility of online sales and even the biggest art dealers declare they plan to capitalize on this with a series of “online-only” sale auctions and private sales campaigns.
Matthew Paton of Christie’s, said: “The value of art is subject to people’s taste, and you can’t judge future taste. The market goes in cycles, and strong prices encourage owners of other works of art that they can benefit by earning from their art.” Therefore, one can say that yes, art is an investment but it is a unique investment, especially in the modern art market. Collectors shall be careful in investing, as some of the popular materials on art investing are in some cases potentially misleading in their optimism. It can be hard to keep one's head in the face of popular literature extolling the giant winners in the game – the big world galleries - creators of new collections, even new categories of art, which dominate the market and return hundreds of times the initial investment. However, according to some experts, some art investments have managed to outperform the stock market in the post- World War II years and, in many cases, quite handsomely. There have been periods when 25 percent compounded rates of return have been available to the investors and in some cases substantially higher rates have been achieved by many contemporary art collectors over long periods of time. However, as it is an economic impossibility to compound any substantial sum of money at a 25-percent rate of return indefinitely, in order to consider buying an artwork as an investment, the prospective collector needs access to expertise in the areas of taxes, legal title, recognition, liquidity and premiums.
Moreover, building a good collection requires some other features such as recognition and legal title. The value of a good collection could be much more susceptible to market forces than others. This may be because of the general standards of taste, critical acclaim, the vagaries of provenance and authenticity, the role the item plays in the culture, and changes in laws banning the sale or purchase of certain items. The good collection needs to be aggregated in terms of what artwork has the more stable pricing than other and what artwork has more volatile pricing, questionable legality, or uncertain provenance.
In terms of legal title, insuring that there is good legal title is critical for any investment, and doubly so for investments in Artwork. Today, claims for recovery of looted or stolen artworks can be made from miles away and from deep in the past. Once there is a “cloud on the title” of artwork, there is essentially no time limit by which an alleged prior owner may submit a claim. Legal title to artwork is too often presumed to be clear in the mind of the current owner and advisor, and then when the piece is listed for sale or gifted to charity, the prospective buyer, the recipient institution, a trustee or fiduciary have no guaranty of good title. As part of the inventory process, the prospective collector shall review all items for which the legal title cannot be adequately certified, and they should obtain title insurance, very similar to the one obtained in cases of buying or selling real estate.
In terms of liquidity, the ease with which a prospective collector can sell an item is also a serious aspect. This is even more true for collectors that would like to sell an entire collection as one single item. In this case, there can be a few highly liquid items and many illiquid items in the collection. By aggregating the highly liquid items that may be sold with the more illiquid items, the collector would have leverage on negotiating the fees, commissions and other costs of the sale. In some cases, a collector may inherit or possess otherwise a very rare, the so called “premium” item. Such items can be key to the preservation of the rest of the collection, especially if planning has been done be- forehand to allow for some of the estate tax avoid- dance in the settlement of the estate. These premium items are truly in a realm of their own and require the most expert help in managing the preservation, transfer or sale.
How one can have access to art as an alternative investment?
Direct Ownership of artworks collection - there are many types of advisors that can facilitate a collector to obtain a direct ownership of a collection of artworks. Often these include access to in- dependent curatorial staff, and work to actively manage and structure the collection.
Indirect Ownership of Art by investing, what access can the collectors have?
If one wishes to obtain indirect ownership of artwork as an alternative investment, there are two choices. The first one is to invest in companies that profit from transactions involving artwork or to choose a hedge fund model, such as The Fine Art Fund Group. In either case, the necessary scale and expertise needed to play in the premium artwork market, which is where much of the profit is realized, is quite impressive. For a hedge fund, literally billions of dollars are needed to buy a diversified portfolio of art works of the highest quality. Even then, artwork hedge funds have the same issues any hedge fund has for individual investors. They are difficult to fit into an asset allocation model, the style of the managers is often opaque (since they are hoping to exploit the market inefficiency), the returns are under threat if the market inefficiency they exploit becomes too popular, and there is little you can do to negotiate fees or costs. In addition, art funds lack one of the core attractions of investing in artwork and collectibles: the value of direct ownership and control of the artwork involved. This alone makes many art hedge funds unattractive to individual investors.
Still, we can say - art is an investment, but it requires very different expertise and experience to manage art as an alternative investment class. In addition, high profile sales in the global art markets, as well as political and financial uncertainty, made many art lovers asking about art as an alternative investment class. Many know the glamour stories of the returns over time, but art is even more of a challenge for an alternative investment manager over other alternative investment classes, due to the very different key investment factors playing a role in the return on investment on artworks over time.