For art’s sake - How good is art as an investment?

22 Jan 2018

Patrick Lawlor


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.

2017 was once again a busy year for the art market. According to (with figures for the first half of the year, the latest available), art auction turnover increased by 5.3% compared with the similar period in 2016. China was knocked off its perch as the world’s largest art market (29% of the global market, from 35% in the first half of 2016) by the US – thanks to a 28% jump in auction turnover in the US. The UK (up 13%) and France (up 7%) both recorded good gains, the former perhaps benefiting from a weaker pound following the Brexit vote in June 2016.
The US became the world's largest art market in 2017 with a 28% jump in auction turnover, toppling China from its post.
The increase in art auction turnover in 2017 compared with a similar period in 2016
China continued to show its growing importance in the market, while the decision by UK voters to leave the European Union sent shock waves through its art market.
In terms of investment, Deloitte’s Art & Finance Report 2017 notes that six of the seven major art indices reported positive returns for the 12 months to April 2017, led by impressionists (up 10.5%) and contemporary (up 7.45% - both figures in US dollars).
Over five years, contemporary art has delivered a compound annual growth rate of 4.09% and old masters 1.72% (see table 2).
Compound annual growth rate delivered by contemporary art over 5 years.
Compound annual growth rate delivered by old masters over 5 years.

Table 1: Global fine art market turnover, January to June 2017

Country Turnover (USD) Market Share
United States 2,239,080,536 32.4%
China 1,999,094,934 29.0%
United Kingdom 1,581,615,191
France 326,398,192
Germany 100,451,363
Italy 95,051,377
Switzerland 73,623,263
Austria 53,720,750
Australia 47,329,131
South Korea 39,787,141
Other 344,862,990

Table 2: Art market returns by time period

Art market price index returns – 1, 5, 10, and 15 years based on artnet indices
  Last 12-month return

5-year CAGR 10-year CAGR 15-year CAGR
European Old Masters 2.21% 1.72% 1.72% 3.69%
Global Impressionist Art 10.50% -0.78% -2.07% 1.54%
Global Modern Art 3.62% -2.50% -2.43% 4.05%
Global Post-War Art -0.98% 1.29% -1.26% 7.12%
Global Contemporary Art 7.45% 4.09% 2.04% 8.54%
Fine Chinese Paintings & Calligraphy 0.67% -0.59% 9.17% 11.50%
20th-Century & Contemporary Chinese Art 3.74% 1.10% 3.19% 14.10%
Source: artnet
Among other major sales in the year was Jean-Michel Basquiat’s “Untitled” from 1982, which was bought by a Japanese collector for US$110.5m, a record for a US artist.
The 21st century has certainly been a good one for the art auction market – by some estimates, the market doubled in sales volume between 2002 and 2013 – due to rises in global wealth and very low interest rates. This was despite the knock to the market following the global financial crisis in 2008. 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.

A second problem arising out of the fungibility issue relates to what is referred to as “selection bias”.  In the art market context, selection bias refers to the fact that what we call the market in art really refers to the sales of a small sample of expensive, high profile works rather than the overall market. 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.

A third issue – which may not necessarily be a problem for investors – is that for many art buyers, there is an intangible value attached to owning a work of art or a specific themed collection. 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.

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.
Further joy could come from lending collections to galleries and museums and thus sharing the joy with the general public, or from bequeathing works or collections to public galleries and museums. These intangible benefits are not necessarily unique to private collectors. Corporate collectors can use their collections as a way of building staff morale or of building a corporate image. Art collecting can be allied with corporate social investment goals, for example by supporting up-and-coming artists from disadvantaged communities.

Measuring the market

Despite these challenges, researchers have managed to analyse returns in the collectibles market over a long period of time. Elroy Dimson of London Business School and Christophe Spanjaers of HEC Paris calculated returns on the UK art, stamp, and violin markets from 1900 to 2012.
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.
The calculated, real, annualised returns on the UK art market from 1900 to 2012. (6.4% in nominal terms) based on research.
25% +
The cost increase that galleries and auction houses can add to the buying or selling of art works
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!”).
Other costs include storage, transport (if the owner lends the works to external galleries) and insurance. Hidden costs include liquidity costs related to the difficulty in selling a work quickly once the intention to sell has been announced. Equally, straitened economic circumstances (perhaps sparked by economic conditions like the 2008 financial crisis) may lead to forced sales, leading to works being sold well below their “normal” value.
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. 

The answer to this is perhaps the same as for any investment: diversify across a range of art movements and even across different collectables. The Art & Finance Report 2017 notes that there are some correlations between art categories and traditional asset classes. For example, impressionist art and old masters are highly correlated with safe-haven assets like bonds or real estate, while movements like contemporary or Chinese art (pictured here), tend to be correlated with riskier assets like equities and commodities.
Diversifying across art types may or may not deliver the required outcome; investors may find it easier to invest across more established assets like equities or bonds. In any event, many collectors derive more joy out of specialising in one particular field. 
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.