Fine Art as an Asset Class? Part 1: Points in Favour
The first piece in a 2-part series on art as an investment option looks at the factors that make art investments a favourable proposition…
The art trading world is not something a lot of us would be aware of. No, the banana duct-taped to the wall doesn’t count as a standard. We do know fancy showrooms exist, we’ve seen the process of purchasing expensive paintings in television shows and movies, but the intricacies and details are aspects that we don’t explore much. Art is a member of SWAG — Silver, Wine, Art and Gold. Coined by money manager and economist Joe Roseman, these assets share in common a scarcity, a tendency to serve as a hedge against major downturns, absence of a recurring income stream and they all possess inherent value. These attribute unique value-storing properties to SWAG assets.
The fine arts market includes sub-categories like paintings, drawings, tapestry, sculptures, installations amongst others. This market is in itself a subset of the arts and antique market. Between 1993 to 2009, the art markets saw an 8% annual market growth. Values advanced 9% between 2008 and 2018, with the art market reaching a whopping $67.4 billion. The US, UK and China are the top three art markets in the world.
The direct stakeholders in this market are the artists, galleries, auction houses, museums, art dealers, advisors, curators, collectors (read ‘Angel Investors’ of the art world, as per RoseLee Goldberg’s description), critics and auctioneers.
Not too different from the traditional finance market, we can view art trading as one comprising the primary and secondary markets. Broadly, the primary art market involves purchasing new artworks from galleries while secondary trading happens primarily via auction houses, where one can purchase art for resale.
Through my two-part series on art, I’ll delve a bit into the art of buying art from the vantage point of finance. Is (fine) art an asset class? Some factors play in art’s favour and some others that make it less enticing an asset class. This first article takes a looks at some of the favourable aspects of art.
1. Scarcity and Uniqueness
Limited supply + unlimited demand = high value. This is essentially one of the key ideas that powers bitcoins. Though it’s a highly simplified version of a more complex principle, the core point remains valid. Art is similar. Artworks are unique and one-of-a-kind. No matter how many recreations are available, the work of an original artist is unparagoned. This is usually because the value accorded to a piece is intimately tied to the value accorded to the artist (though it might not be entirely valid for less familiar names). There was only one da Vinci and his works are fixed in number. Classical art is inherently scarce.
Further, while one can say that people can just make more paintings today to overpower the scarcity factor, not all pieces end up selling for millions of dollars. Unlike commodities like gold where people are quite agnostic about the source and where value is essentially derived from molecular composition, art incorporates a lot of emotional and unquantifiable judgement. The supply of best works is always limited.
2. Antiquity and Heritage Accumulation
Luckily for art, its value tends to rise with the passage of time(ideally). The worth of a painting purchased today could indeed rise significantly, assuming proper maintenance and a fair current purchase price of course. However, this is highly dependent on a lot of factors including who the artist is, his/her reputation and future trends. An old enough painting may just use its antiquity as a selling point, but that, from a practical investment point of view, is a very long term investment. A rich history of past owners can also push up a painting’s worth.
3. Multi-purpose Asset
A major use-case for art is, well, as art. The pieces look great and are used to adorn walls in homes, offices, museums etc. Unlike many other commodities, art can serve as a decorative utility tool, evoking emotions. The overall market indeed services three types of buyers — pure collectors, collector/investors and pure investors (as per Baird Asset Management’s 2009 classification). It serves as a financial and passion investment that can, by just sitting on the wall of your living room, accumulate value.
4. Easy to Buy
Two avenues for purchasing art are through auctions and galleries. While big names might be hard to nab without paying significant premiums over competing bidders, pieces by less familiar and up-and-coming artists can be easily purchased at galleries. One just needs to pass basic credit card checks for auctions and there’s not much due diligence involved in assessing the buyer, neither are any questions asked. For a buyer, it’s indeed comfortable. Nowadays, online auctions and gallery viewing make this process even simpler.
5. Wide Range of Options
Art purchases don’t always have to run in greenback millions. There are works up for sale for a few hundred and thousands of dollars or a few thousand rupees. While these might not include the most popular names and faces, there’s always a chance that you may have just run into the next Picasso. In addition to purchasing paintings, fractional ownership models are also mushrooming. This may further democratise art investments.
6. Weak Correlation and Good Returns
Blue-chip artworks created by some of the most famous names have witnessed a very weak correlation with the equity markets over the years. This makes them a good risk diversifier. Further, they’ve shown pretty good returns over the S&P500. Artnet’s Index for Top 100 Artists saw an 8% CAGR between 2000 and 2018, overshadowing S&P500’s 3% CAGR for the same period. Additional revenue and returns from art can be obtained by lending out pieces for display and research and by facilitating expert discussions.
7. Growing Interest and Awareness
An increase in world wealth, heightened awareness regarding fine art investments thanks to various media sources and globalisation has resulted in a proliferation of the community of buyers and larger sales volumes. Social media has a prominent role here too. Development of financial products around art including ALF and lending (using art as collateral), investment services and the rise of boutique firms offering advisory services are contributing to making art investments mainstream. Further, online auctions, brochures and guides are encouraging greater participation from a larger proportion of the population, especially amongst millennials.
Deloitte’s 2019 Art & Finance Report found high consensus among wealth managers, art professionals and collectors on the importance of art as an integral aspect of the wealth management service offering, with over 72% of firms offering art-related services. Further, the art-secured lending market size in 2019 was around $21 billion to $24 billion in outstanding loans against art, depicting a steady incline over the last decade.
Looking at financial products around art, a highly intriguing area is that of art funds. La Peau de l’Ours was the first art fund that was started in 1904 by Andre Level, a French financier. Within a decade, by the eve of WW1, investors’ initial investments had quadrupled. The British Rail Pension Fund also decided to invest in art in 1974, devoting 3% of its holdings to the same. Not constrained by regulations dictating investment strategies, art funds are free to opt from a plethora of options. Buy and hold strategies, geographic arbitrage, artwork driven strategies, regional art strategies, emerging artists, intrinsic value strategies, leveraging strategies, co-ownership and distressed art strategies are a few examples of the same.
8. The Growing ArtTech Ecosystem
ArtTech startups have been sprouting up quite a bit and have raised around $600 million over the past 8 years. Focus areas of these startups include logistics, insurance, contracts, storage, data standardisation and new artist discovery.
Often described as the Shazam of the art world, Magnus, an app, provides information and pricing facts about artworks whose picture you take and feed into the interface. Artomatix, GowithYamo, Artmyn, Monart, Obvious Art are some other players leveraging AI, blockchain, AR, VR and data analytics to improve the art experience. Maecenas allows investors to purchase shares of artwork using cryptocurrencies. According to CEO Marcelo Garcia-Casil, ‘What we’re doing with the fractionalization or tokenization of art is creating a stock market experience when it comes to investing in art…We’re not going with this platform to art experts — we’re bringing it to people who may be investing in art for the first time.’
Thus, the world of art is much more than colours and paints on canvas. The ecosystem is very rich from a financial asset class point of view and innovations are springing up rapidly. But, it’s not just a bed of roses here. Some factors might dull the lucrativeness offered by the aspects discussed here. And that’s for the next piece!