Financial Planning Focus – Investing in Art

December 22, 2014

Georgia O’Keefe’s “Flower” painting set a new record for a work by a female artist, grabbing $44 million at auction late last month. Also in November, Andy Warhol’s signature silk-screen of Elvis Presley yielded $82 million, and Alberto Giacometti’s “Chariot” was sold for $101 million. The recent surge in artwork prices represents the growing interest in art as an investable asset. According to an article in the Wall Street Journal, since November 4th the two biggest auction houses, Sotheby and Christie’s sold $2 billion in artworks within a two week period. There are a number of reasons why art collectors are aggressively pursuing rare pieces and art collecting in general is on the rise:

  • Individuals view investing in art as a strategy for accumulating wealth.
  • Newly wealthy buyers in countries such as China and Russia have driven up the prices of art.
  • Collectors view art as a means to store extra cash given low interest rates and volatile stock markets.
  • Investors may benefit from inefficiencies due to private valuations and illiquidity.
  • Art values are typically independent of financial markets.

One drawback to art investing is the difficulty in measuring performance, primarily because art markets are characterized by infrequent transactions. Also, the artworks themselves are quite unique and prices tend to be smoothed due to illiquidity. Studies of art returns are normally based on the hammer price, which is the final auction price, excluding commission (as high as 20%) charged by an auction house. Assuming 20% total buy and sell commissions, it can take an investor 10 years of price appreciation to recover the commission charges, based on the 2.2% long-term median real rate of return on art. The financial returns may be low, but some argue that the non-financial benefits of ownership (e.g., the joy of owning and viewing the art, the social status gained with a quality piece of art), combined with the modest financial gains, are what motivate some investors to collect art.

Interest in art investing has grown to a point where there are new investment options, such as art investment funds. Art funds are private investment funds that generate profit through the acquisition and disposition of artworks. They are managed by a professional art investment management firm who receives a management fee and a performance related fee. Art funds are relatively new, with approximately $2 billion of assets under management, according to the Art Fund Association. A 2013 Barron’s article states that global inflows to such funds ran at $482 million, up from $32 million in 2008. The minimum investment for these art funds ranges from $50,000 to $500,000, with a lock-up period similar to that of hedge funds.

As with traditional investments, some art fund managers buy pieces they believe are currently undervalued, while others focus on investing in art from a geographic region, a particular style period, or a specific medium. After every piece in the collection is sold, investors receive their share of the profits. Managers try to predict the most opportune time to sell by tracking a variety of indicators from auction houses, private dealers and galleries. While art funds may represent a good way to diversify into the art market, investors do not have the non-financial benefits of art ownership, which may be the more compelling reason to invest.

The art market is complex and unregulated, making it difficult for most people to navigate. It is important to obtain objective and knowledgeable advice from experienced art market professionals in order to protect one’s best interests. Because of the infrequent trading of artworks, investors should be aware that these investments are illiquid and therefore they should expect to hold pieces for years and be able to absorb the initial acquisition costs.

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This report has been prepared by West Financial Services, Inc. from original sources and data we believe to be reliable. This report is for informational purposes only and should not be construed as investment, legal or tax advice. Analysis of past market conditions may not predict future market activity.