Investing in art: it’s a scream!

Influential trade publication Skate’s enthuses: “The concept of art as an investment has emerged from something viewed as vulgar and inappropriate less than 10 years ago to the mantra of the art trade today.”

Fine art

Skate’s is an exhaustive study of the 5,000 most valuable works of art based on the latest auction prices. It therefore provides an interesting glimpse into the health and the direction of the art world and Skate’s is convinced the future of investment is bright. The report gushes: “Fuelled by the global economic uncertainty, investors, lured by its asset protection quality, have poured capital into fine art.”

It estimates that global art trading volumes grew close to $80bn (£51.3bn) in 2011, having reached peak levels previously seen in 2006-07. Closer to home, the household names of Sotheby’s and Christie’s both reported record lots going under the hammer. Sotheby’s had total auction room sales of £931m, up more than £50m on 2010. Christie’s, meanwhile, sold art worth £3.6bn in 2011 and posted record revenues 14 per cent higher than 2010; the strongest markets were post war and contemporary art up 22 per cent to £736m and Asian art up 13 per cent to £553m. Given the global economic backdrop, a booming market in a product that pays no income, employs relatively few people and has little functional purpose doesn’t seem to make much sense.

Buoyant sales in auction rooms in the west belie the shifting tectonic plates in the art world, as China reclaims its place in the world economy it also wants to reverse centuries of cultural expropriation. In auctions last year, the two most expensive pieces to go under the hammer were by Chinese artists. Qi Baishi’s ‘Eagle standing on Pine Tree’ went for a record $65.5m, closely followed by Wang Meng’s ‘Zhi Chaun Moving to Mountain’, sold for $62.1m. The top three highest returns on works of art sold in 2011 were provided by Chinese artists – Fu Baoshi, Zao Wou-Ki and Chu Teh-Chun – who averaged a 72 per cent annualised estimated rate of return on a staggeringly short holding period of just three years. But perhaps the most eye-watering sale was completed well away from the publicity and hype of the auction room.

Top ten most valuable artists in skate’s top 5000*

The Middle East, awash with petrodollars, is seeking to create cultural hubs that will remain tourist destinations long after the last drop of oil has been wrung from the desert. Qatar recently paid more than $250m, the highest price ever for a work of art, to acquire Cezanne’s ‘The Card Players’ from the estate of Greek shipping magnate George Embiricos. In one fell swoop, the tiny, oil-rich nation gained admittance to an exclusive art-world club: only five ‘Card Players’ exist, and the other four are in world-class collections such as the Musee d’Orsay and the Metropolitan Museum of Art. The Qataris haven’t stopped there, though, they have been on a buying spree including Rothkos, Warhols and Hirsts to accompany their Cézanne centrepiece. So the value of art as a marker of vaunting national ambition or cultural calling card is alive and kicking, but what of art as investment?

A matter of taste

That is where it becomes far trickier as reports like Skate’s are really only indicators for the super wealthy; to gain entry to the list of 5,000 works they monitor it must sell for over $2.1m and this is up from $1.87m in 2010. The weighted average return of these works may be up from 4.24 to 4.82 per cent, but this is before costs for insurance and storage, which will easily shave a good 1-2 per cent off. It also doesn’t reflect the wild swings and vagaries of taste, which impact each individual painting regardless of the artist. Take the famous pop artist Roy Lichtenstein for example: his work ‘I can see the whole room!… and there’s nobody in it!’ was the fourth most valuable painting sold last year for $43.2m, but this will have provided little solace to the owner of his work ‘Still Life with Mirror’ as it delivered the worst investment return for the whole year, bought for $9.6m in 2008 it made a hefty $3.8m loss when it was sold for $5.8m three years later.

The differing fates of two works by the same artist just go to show that in this market you are always highly reliant on the experts and changing tastes. Also with such high costs to buy quality pieces it becomes difficult to create a portfolio to spread the risk. The only other option is buying a share in a portfolio of works through an art investment fund, but again these have struggled to get off the ground.

Picasso’s ‘Nude, Green Leaves and Bust’

Art funds

Randall Willette, managing director of Fine Art Wealth Management, said there are around 40-50 art investment funds globally, but they have struggled to raise capital since 2008. He added that investors’ key concerns are around the lack of liquidity in the funds and a lack of education about art. Mr Willette described how those high-net-worth individuals who do have a passion for art are increasingly using managed accounts to access the market. These are dedicated investment vehicles, often set up as limited liability corporations, but crucially with the pool of funds segregated from any other investors, which protects them from co-investors who may be forced to redeem. Mr Willette is confident about the future of art investment: “Over the last seven to eight years that we’ve observed this space we believe there is a role for art to play in portfolio strategy.” But it seems there are always going to be stumbling blocks due to the illiquid nature and subjective valuation of the underlying assets themselves, and a fund just adds another layer of fees and obfuscation on what is already an opaque world.

Skate’s report was undeterred and thinks innovation will unlock art as an investment: “It is only a matter of time before art securitisation will fly in earnest. One only has to imagine a $1bn-$2bn art fund based on a small part of a major museum art collection, widely supported by authorities as a government deficit-reducing initiative.” Those concerned for the safety of the UK’s art treasures can breathe a sigh of relief, though, as a spokesperson from the National Gallery bluntly said: “We do not comment on market forces and under the 1992 Museums Act we are not allowed to dispose of works in the collection,” which seems to put a dampener on any dreams of national art-backed bonds or the like.

Given that gaining access to the super-rich art market is hard for retail investors, one possible entry point is buying an unknown in the modern or contemporary art market before they make it big. This is not to everyone’s taste as some would agree with the American satirist Al Capp when he said: “Abstract art is a product of the untalented, sold by the unprincipled to the utterly bewildered”. Even if you do end up with an affordable piece, divining its value can be even more complex. Like any investment, what matters is what someone else will pay for it. Unfortunately, at times even the experts can’t agree.

Cézanne’s ‘The Card Players’

Art isn’t immune

Take our very own enfant terrible of contemporary art Damien Hirst. Hirst’s high point came in 2008 when his Sotheby’s sale entitled ‘Beautiful Inside My Head Forever’ made more than £100m – the City remembers that day for different reasons: Lehman Brothers filed for bankruptcy. More recently, his works have underperformed the wider contemporary art market, and those tracked by Skate’s lost $15.4m in value in 2011. As his new retrospective opened at the Tate Modern it came in for withering criticism from some quarters, critic Julian Spalding called it “subprime” and urged people to sell their Hirsts while they still can. Mr Hirst responded by saying people should hold onto them adding: “They are not that expensive, a couple of hundred grand for a medium-sized spot painting, when it’s £150m for a Picasso”.

The other argument for art as an alternative investment is that it is uncorrelated with financial markets and will hold its value regardless. But even a cursory glance at the below chart for the contemporary art market, provided by Art Market Research, will dispel that myth. From the Lehman crash in 2008 to the trough in early 2010, the index shed half its value. Even the supposedly rock-solid world of the Old Masters shed 26 per cent peak to trough in the two years from 2008.

While the volatility of the contemporary art market is extreme, there is also a clear discrepancy between the top quartile of the contemporary art market and the middle and lower quartiles, which have had a far more anaemic recovery and are far more likely to include a part-time art investor with lower funds. Pierre-Auguste Renoir was right when he said: “There’s only one indicator for telling the value of paintings, and that is the saleroom”.

Super bubble

It is said that art reflects life; as such arts true value for investors may lie in the fact it could be pointing out another monstrous financial bubble. The fact that prices have returned to 2007 levels and the super-rich are detached from reality could offer far more insight than a slightly above inflation investment return. Art’s final metamorphosis into an investment asset class seems to be its most difficult transformation. We at Investors Chronicle remain unconvinced and we’ll leave you with a message from Forty Two Wealth Management’s chartered financial planner Alan Dick, who said: “Art is speculation not investment. It’s value is totally subjective and therefore there is no way to value it other than the madness of crowds or the greater fool theory – ie, you need to find a greater fool willing to buy it off you in the future.”

The expert view

Martin Bamford, managing director, Informed Choice Financial Planners

Art is often overhyped as a type of alternative investment. Unless you are absolutely passionate about art, with lots of experience and knowledge of the market, it represents a high risk for the majority of retail investors. Art should be purchased for enjoyment value first, with any investment returns a nice bonus. It is an illiquid asset class with high trading, storage and insurance costs. As such, it is typically unsuitable for retail investors and should only be considered once other financial objectives have been secured with mainstream asset classes in a portfolio.