Is art the next great asset class?

Yes

Philip Hoffman

CEO, The Fine Art Fund Group

The debate as to whether art is a true investment class is one that resurfaces again and again. Art is often viewed as a hedge against inflation and currency fluctuations, a solid tangible and moveable asset which has an increasing demand, set against a diminishing supply.

When I launched The Fine Art Fund Group in 2001, the idea of investing in art to diversify one’s financial portfolio was virtually unheard of. Getting potential clients to listen to the merits of buying a first rate Monet was a difficult task. Today the tables have entirely turned with the subject taking centre stage at conferences, panel discussions and in the media. Many banks now have art advisory arms dedicated to servicing the rapid rise in clients’ requesting exposure to art funds, private accounts and brokerage services.

However, the art market is a complex world with little similarities to the financial markets, but it is in part this very difference that makes art a desirable and investible asset with the best works acting as a potential hedge against inflation as well as being enjoyable objects.

Insurance brokers are following suit with adapting products in order to cater to the specifics of insuring these tangible assets. The confidence in art investments can not be better illustrated than by Damien Hirst’s record breaking sale at auction, which occurred during the heaviest period of 2008’s financial crash. Even more convincingly, this high profile sale was not an isolated event.

With a rising demand for information and guidance, art indexes have sprung up in recent years with institutions such as ArtTactic providing key statistical information to buyers, collectors and enthusiasts. There are also a number of institutional tools, reports and commentaries such as Arts Economics, which has been providing financial analysis of the market for the past decade. Working alongside the market’s key organisations, auction houses and private dealers, Arts Economics provides concise statistical assessments of the market. 

It is also no coincidence that tickets to Sotheby’s and Christie’s Contemporary or Post-War evening sales are the most coveted and generate the most blockbuster headlines during the New York and London auction season.

In reality, this headline grabbing activity is a minuscule percentage of the market with a very elite, small pool of potential buyers. However it is with the much larger group of high net worth individuals and art enthusiasts where the power of art as an investment is at its strongest.

Here the values are comparably more realistic, stable and relatable to the macro-economic world. The market is by no means one entity with not only many genres reflecting different aesthetic tastes but also investment opportunities relating to cultural popularity and return potential.

As the world continues to understand the value of art as an asset class, associated services have grown with the market in every aspect being called to develop and respond to the concept that art can be an excellent alternative asset to diversify a financial portfolio.

Arts Economics reported that in 2013, “the international art and antiques market reached €47.4bn... close to its highest-ever recorded total in 2007”. This is “an 8 per cent increase on 2012” alone. There is no doubt that the market at large continues to grow and we see no signs that these developments are slowing.

Over the past seven or so years, the concept of diversifying your financial portfolio with blue-chip art has really taken hold. Across our products we have found that broadly, investment into the right works, following expert advice, can make 6-12 per cent returns.

In the coming weeks, we will see what I believe will be a tremendous sale at Sotheby’s Impressionist auction. Vincent Van Gogh’s “Still Life, Vase With Daisies and Poppies” will likely make the headlines. Bought by its current owner in the 1990s and held for 20 years, November’s sale might generate a return of five times the owner’s original investment. 

No

Evan Beard

Art & Finance Leader, Deloitte US

It was in Belle Époque Paris when art was first treated as a pure form of investment capital. The French financier André Level and his Le Peau de L’ours investment club amassed a great collection of works by Picasso, Matisse, and others with the sole objective of capital gains.

In 1914, he orchestrated an extravagant evening auction at the Hôtel Drouot in Paris, inviting both avant-garde (artist, critic, and dealer) and establishment (flâneur and financier) to hammer down 145 lots that would return a stunning 400 per cent on his investment. 

The Level syndicate marked the beginning of a slow evolution from art’s traditional role as an expressive good, where value was largely social or emotional, to a capital good, where value is now largely financial. Our 2014 Art & Finance survey findings support this trend that collectors increasingly acquire art with an eye on investment. This is prompting many across the wealth management community to ask whether art is indeed the next great asset class.

Well, it is not. An asset class makes certain demands of its underlying securities that art simply cannot live up to.  While academic studies on the financial performance of art are mixed, their common byproduct – the Art Performance Index – has done for art what the Dow Jones Industrial Average did for blue chip stocks a century ago: objectified the idea of art as a safe investment.  It is no secret that these indices are non-tradable and suffer survivor bias, but their veiled mathematical exactness serves to disguise just how difficult art is to commoditise (much less securitise). Art is heterogeneous and illiquid, and unlike stocks and bonds, fractional or custodial ownership eliminates its most tangible utility – aesthetic pleasure. And despite headlines of the latest Pollack drip or Bacon triptych to achieve evening auction millions, insurance, storage, and transportation costs, along with the risk of theft, degradation, or shifts in critical acceptance makes for a lacklustre risk-return profile when considered in a pure financial context.

Still, art bought for consumptive value (not purely financial) can deliver a significant stream of non-monetary benefits like emotional capital or social prestige. It is precisely why kings and monarchs used art to signal their power and humanity. It is also why economists refer to art as a positional good – where prestige of ownership meets raw human desire. The point here is that unlike most alternative investments, a significant portion of art’s total return is non-monetary.  These very tangible benefits are forfeited (and thus create a hurdle rate) to anyone examining art purely as a financial asset or aggregating it into a fund.

But perhaps art’s greatest hurdle in becoming a great asset class is the labyrinthine structure of the global art market. While commerce and art have long been allied, the art market still falls short of meeting the regulatory and legal expectations of the investing class. From the vague fiduciary responsibilities of art advisers to the absence of a central clearing house for art transactions to the lack of even a clear definition of what constitutes high art, it is still a market governed by custom and tradition.

Yet we should still buy art. As long as we recognise that André Level made his fortune precisely because he understood that art behaved nothing like an asset class. He promoted a new bohemian style, cultivated critical appeal, frequented the studios of Picasso and Matisse, and organised one of the great social events of Belle Époque Paris in liquidating his investment. Art is so much more than an asset class.