Art and finance have long been considered to be two separate entities that have rarely found a middle ground. The two trades have recently seen convergence, with the formation of highly organised art investment funds, dedicated to the strategic investment of art pieces. As an alternative to traditional investments, art has become a bona fide investment vehicle which provides the much sought after ‘diversity’ in an investor’s portfolio.
History of Art and Investing
Art investors have been around for centuries, even before the very first art collection auction by Edward Harley, the Earl of Oxford, in 1742. The activity of investing in art would continue to be dominated by a small circle of wealthy families and art aficionados for another couple of centuries.
The formalisation of art as a financial investment could be said to have started with the British Rail Pension Fund (BRPF) in 1974, where they set aside a significant portion of their funds to invest in over 2,500 works of art over the span of 6 years. By 1999, the BRPF reported an aggregate compounded annual return of 11.3%. During this period, many financial institutions attempted to re-enact BRPF’s success in art investment with little to no success.
At the start of the 21st century, Phillip Hoffman (ex-employee of KPMG, ex-financial director of Christie’s Auction House, human embodiment of ‘art-meets-finance’) founded The Fine Art Fund, the first fund to invest in art as a worldwide asset class. This was followed by the formation of many other similar funds dedicated to the procurement of valued works of art as investments.
Recent Developments in Art Investment Funds
In the past few years, investments in art have been ramping up. The 2 most expensive paintings were sold off at auctions in 2015 – Pablo Picasso’s Les Femmes D’Alger Version O for $179.4 million, and Amedeo Modigliani’s Nu Couché for $170.4 million. Together with these record-breaking sales, a significant amount of investment funds are being channelled into this new asset class.
Why Invest in Art?
The growing interest in art investments can be attributed to multiple factors:
Unaffected by market fluctuations
Art, and other collectibles, are generally independent of market changes. Most traditional forms of investments fall mercy to interest rate variations, while the art market is mostly determined by general tastes, preferences and trends.
Indirect tax benefits
Investing in artwork is seen as a personal purchase by most tax agencies, and is therefore, not considered a taxable event. However, selling the art for a profit is a taxable event.
A sign of a good investment portfolio is diversity. Investing in art would allow you to reap benefits when the rest of your investments are making losses. While there is a huge range of collectibles for you to invest in, none have proven to be as profitable as art. Every piece of art is one of a kind and can never be recreated, even by the same artist who created it, making it a truly valuable investment.
How to Approach Art Investing
Unlike securities, shares and bonds, art is subject to individual taste and preference. While historical accounts, P/E ratios and financial forecasts will have no use in the field of art investing, there are other ways to approach art investments.
Learn about art
Akin to due diligence, you should learn about the various artists, their motivations, as well as the painting styles and history behind the various artistic movements. Identifying the nuances that differentiate Post-impressionist from Neo-impressionist art, knowing the time periods of the Baroque and Renaissance eras and understanding the motivations behind Surrealist paintings will help you in determining the value of a piece of art.
Identify the current trends
All markets are cyclical, and the art market is no exception. If Rembrandt is out and Picasso is in today, you can expect the inverse to hold true in the future. Know which artists are popular, and make sure that the price attached to the artwork is driven by value rather than trend.
If you find yourself holding on to a piece of work that was once highly-prized, but has since fell in popularity, fret not. Like all cyclical markets, you can expect the demand for your particular investment to rise again. The key to profiting from investing in art is to be patient and to time your sale.
Know how to store your art
There is a lot of work that goes into owning and maintaining a piece of art. In 2014, Le Freeport was established in Luxembourg, Geneva and Singapore for the purpose of preserving these valuable investments. This state-of-the-art storage facility utilises climate-control technology to keep temperature and humidity at optimum levels for the storage of fine art.
Besides preservation, the storage of your art pieces should also have good security. In terms of value per gram, art pieces carry a lot more value than cash or gold. Coupled with a highly active black market for art, your piece of art is a prime target for thieves and burglars. Make sure that your investment is well-protected by insuring your art and storing it in a high-security vault.