Did you know in 2016, 60 billion dollars were invested in art? This is comparable to the proceeds of venture capital investments.
This article illuminates the opaque world art investments and whether they are a good choice to include in your portfolio. This article discusses the types of art, how investments are valued, and their performance compared to other assets.
The Market for Art
The art market, with its annual value of approximately 60 billion, has been a significant and stable volume for the last decade.
These figures coincide with the value of venture capital-backed exits in 2016, which was $63 Billion. Art investments and the wider ” Treasures” are becoming viable alternative asset allocations for HNWIs in their portfolios. This trend has been picked up by wealth managers who have seen an opportunity to expand their services. 88% of managers now report that they plan to cover this asset class.
Art is a highly concentrated market with large “liquidity pools” in the key markets. Although art collectors and artists are diverse, 81% percent of all art transactions take place in only three countries: the US, the UK, and China.
From these criteria, art does show some “asset-like” characteristics. However, unlike stocks and bonds, motivations for purchasing art reach all the way through to “em>passion, regardless of cost/em>.” These criteria show that art has some “asset”-like characteristics. However, unlike stocks and bonds, the motivations for buying art go beyond simple profit motives. They can include ” passion regardless of cost.”
They are not mutually exclusive, but they are also far more varied than the reasons to buy a bond or stock. These buyer groups share a common characteristic: many of them consider themselves collectors, but they also have a financial investment perspective.
The financialization of art is a fascinating asset category to study because of this mixture of emotions and investing. When art is pledged or included in someone’s net worth, it can influence investor behavior differently than “traditional” financial assets.
Art Subsectors: Contemporary and Old Masters
The period of an artwork reflects its creation date. Old Masters is contemporary/modern, and both have different investor characteristics. The styles of growth and value investing in equity markets are clearly paralleled. According to David Nahmad, who, along with his brother, owns one of the world’s most valuable art collections, Old Master artists such as Monet and Picasso are “like Microsoft and Coca-Cola.” The return on Old Master paintings is lower than contemporary art, but it’s still more stable. This is evident when we compare the indexed returns.
Looking back at the last 20 years, contemporary art has shown greater gains than the art market as a whole. However, the volatility is higher. The 10-year returns on modern art were 200% up until the Financial Crisis of 2008, but then they were halved at the end of the year. The study found that Old Masters had actually lost value but with a much smaller variance in returns. In fact, there is a weak correlation between Old Masters and contemporary art. According to my calculations based on artprice.com, the correlation was only 0.34.
The art market is notoriously intransparent, and it is hard to get good data about prices. Many argue that the price indexes for contemporary art suffer from a survivorship bias. This is a problem that does not exist with Old Masters. As an example, if the value of a work is declining, it will often remain on the wall rather than being sold at auction. This does not provide a good data point for the price decline.
Contemporary art, in the absence of historical contexts, relies on buzz and momentum as well as institutional support to keep prices high. The price range of Old Masters is more stable due to their history. It is the same with wine. The great Bordeaux wines fetch high prices because of their long history and the ability to validate quality. Art investors can use a catalog raisonne instead of tasting wine to authenticate an upcoming piece. The catalog will provide more information as the older the art piece. In this way, investing in contemporary artists can be a big financial risk. However, 52% of all art investments are made by contemporary artists.
Could contemporary art be the latest version of famous historical bubbles, with the vast majority of pieces destined for an obscurity future and an unprecedented proliferation in the sheer number of works created?
According to sources, New York art critic Jerry Saltz’s rule is that “85% of contemporary artwork is bad.” This figure is not disputed, but we should remember that the “bad” work created in the past is never seen because it survived. A century can be a good measure of art value.
A collector may be tempted to buy contemporary art for a fraction of what it would cost to purchase a Velazquez masterpiece and then watch as the piece increases in value over time. This is value investing at its best.
Provenance and Validation
Provenance plays a crucial role in the world of art. The origin of a work that was originally commissioned and hung in the Uffizi for many years would be considered impeccable. There would be no doubt about its authenticity. Contemporary art is a little different. There is no doubt about the authenticity or origin of the piece, but the value can be a bit uncertain.
Validation can be achieved by organic or paid channels, just like modern marketing techniques.
Upstarts, historically a cottage industry, are trying to streamline the process of bringing new art to targeted gallery venues. It helps publicize the work and validates it through its association with a reputable gallery, biennale, or museum. Premala Mathen is an art market adviser. She told me that this type of validation can increase art pieces’ value by at least 20% but more often by up to 30%.
The process of “validation” (and, therefore, “valuation”) of art is subjective. It clouds the determination of the fundamental value. Certain gatekeepers have the power to increase art values by 30%. This creates a market that is more uncertain than other financial assets. Sanford Bernstein’s report or Sequoia Capital’s participation in venture capital and equities can certainly have a significant effect on asset prices, but not to the extent of 30%.