Does investing in art make financial sense?
04 Mar 2020
More and more investors are looking at the art market (and other collectables) as an alternative to traditional investment assets. At the same time, numerous academic studies have tried to ascertain the returns for art over the years. Perhaps though, a key part of the investment return is that part that cannot be measured – in this case, the enjoyment one gets from collecting and owning art.
The US maintained its postion as the largest art market globally, with 44% of the global market share in 2019. The UK followed with 20% and China with 18%.
Fast forward a year and the world was hit by the Coid-19 pandemic that forced galleries to close, art fairs to be postponed and auctions to be delayed. Like most industries however, the pandemic proved as a catalyst for digital transformation in the art world with art sales going online, virtual fairs and live online auctions.
According to a report by Citi Private Bank, The Global Art Market and COVID-19, galleries saw their online sales grow from 10% of total sales in 2019 to 37% in the first half of 2020.
The success of virtual auctions was evidenced by the fact that Sotheby's online-only sales grew year-on-year by 413% in the first eight months of 2020, according to Citi. In addition, Sotheby’s debut livestreamed auction generated $363.2 million, followed by Christie’s event that achieved $420 million.
And it was good news for investors too with Citi reporting that the Masterworks.io price-weighted All Art Index — which tracks the art market as a whole — up 5.5% in the first seven months of 2020, outperforming ten major asset classes, including developed-market stocks, developed-market investment-grade bonds private equity and real estate. Contemporary art performed especially well, gaining 6.7% over the period.
In 2020, the Artprice Global Indices performed stronger than they did before the Covid crisis, with the Contemporary Art price index showing a massive 48% increase.
The Deloitte Art & Finance Report 2019 notes that: “Art is thought of as an asset class that holds its value. Across all collecting categories, art has a stronger positive correlation with the price of gold than with other asset classes reviewed in this study, indicating investors’ perception of art as a value-preserving asset class asset class rather than an investment vehicle.”
Measuring the performance of art investments - an issue of fungibility
Aside from new collectors, a number of specialist art investment funds have entered the market. In 2013, the global art market was estimated to be as large as the venture capital market in terms of assets under management.
Jaw-dropping numbers aside, it’s hard to say whether these numbers translated into big returns for the fine art market as a whole, for a number of reasons.
The art auction market virtually doubled in sales volume between 2002 and 2013 due to rises in global wealth and very low interest rates.Firstly, measuring performance is hindered by the fact that pieces of art are not “fungible”. Unlike shares, bonds and commodities for instance, each work of art is a unique entity that cannot be replaced by another.
By way of explanation, when buying shares in a company or even apples (of specific type and quality of course), one does not specify a particular share or apple. This is not the case with art, where the price pertains to a specific Matisse, Rothko, Stern or Picasso.
Numbers quoted by big auction houses like Christie’s and Sotheby’s relate to super-valuable works, rather than to the different tiers below them. Mid-market collectors will face different pressures and be more susceptible perhaps to tougher economic conditions than, say, collectors at the high end.
Unlike shares, bonds and commodities, for instance, each work of art is a unique entity that cannot be replaced by another.Moreover, works that are in demand tend to go on auction more frequently as owners look to realise big profits on them. By contrast, less valuable works tend to stay out of the market. Moreover, auction houses will generally only place items on sale that they believe will generate profits. The overall effect of this selection bias is the potential overstating of returns as well as the understating of risk, according to Stanford University’s Arthur Korteweg et al.
The intangible value of art
This concept applies to all sorts of collectable assets such as classic cars, coins, wine or stamps, as well as fine art. A collector may derive great joy from owning a particular work or group of works according to a theme or artist that cannot be captured in a simple return on investment.
Intangibles could include the joy of acquiring knowledge and insight into a movement or artists that accompany the acquisition of works over time, or it could be the joy of showing and discussing works with friends and colleagues.
READ MORE: Investing in art: It's more than just a numbers game
Measuring the market
These showed that UK art generated a real, annualised return of 2.4% (6.4% in nominal terms); stamps a real, annualised return of 2.8% (6.9% nominal); and violins 2.5% (6.5% nominal).
These returns lag the real, annualised return of 5.2% for equities, but beat returns on bonds (1.5%) and gold (1.1%) over the period, implying that art (and collectibles) is an asset class not to be sniffed at. However, there are a number of issues that need to be considered.
One is the issue of costs. As noted above, art is not a fungible asset, and as such this creates layers of costs, both disclosed and hidden. Galleries and auction houses can add substantial costs to buying and selling of works that are well in excess of those charged by brokers of shares or commodities, often more than 25% of the price.
Having said this, the effect of such costs diminishes with time, so investors in art pieces can be rewarded for a buy and hold strategy (as Warren Buffett once replied when asked his optimal holding period for an asset: “Forever!”).
Galleries and auction houses can add substantial costs to buying and selling of works that are well in excess of those charged by brokers of shares or commodities.These issues, alongside other issues like changes in tastes or bubbles, need to be considered by potential art investors. For example, a particular art movement may be in vogue among collectors – even for an extended period – but this is no guarantee of future demand.
Diversify your art investments
This brings us back to the intangible aspect of investing in art and collectables, that “emotional dividend” that is earned in lieu of an actual dividend.
Those of us who remember the roaring lion of the old MGM movies may also remember the Latin saying underneath: Ars gratia artis – Art for art’s sake.
For many collectors, even the most astute financially, this sums up their passion.
About the author
Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.