November 28, 2023
Since 2000, art as an investment has outperformed the S&P 500 with a return of more than 360%, according to the Artprice100 Index.
Yet for the average retail shareholder, investing in art isn’t easy, even if you can find a fund that allows you to do so. There are a few limited options.
Similar to conventional investment funds, art funds enable investors to possess fractional ownership of artworks. MasterWorks, for instance, functions as a fund manager specializing in acquiring high-value art through auctions for its investors. The company establishes a dedicated holding entity for each artwork, overseeing its acquisition, storage, promotion, and eventual resale for financial gains. This process involves registering the entity with the Securities and Exchange Commission and issuing shares to individuals interested in investing in a particular artwork.
Unfortunately, an art exchange-traded fund (ETF) or mutual fund doesn’t exist. Developing such funds centered on art is unfeasible because of the art market's lack of liquidity. The uniqueness and inherent scarcity of art make it challenging for fund managers to address rising investor demand by simply acquiring additional paintings by artists like Renoir or Basquiat. Likewise, in the scenario where numerous shareholders wish to redeem their shares from an art fund, the art market's illiquidity poses obstacles for the manager in swiftly selling the fund's assets.
Still, many wealthy investors are adding investment-grade fine art to their portfolios as a way to diversify their portfolios. According to a survey by Art Basel and UBS, despite ongoing turmoil in the financial sector, high inflation, the continuing impact of three years of COVID-19, and the ongoing effects of the war in Ukraine and Israel, 77% of high-net-worth collectors remained optimistic about the art market’s performance over the next six months, a slightly larger share than were optimistic about the stock market (74%).
The median expenditure on art and antiques by high-net-worth collectors surveyed across 11 markets worldwide reached $65,000 in the first half of 2023, up 19% compared to 2021. The majority of spending so far in 2023 has been on paintings (58%), with works on paper the second-largest component (13%). Mainland Chinese collectors’ spending on paintings was nearly four times the average, and up by 20% in 2022. They were the highest average spenders in several other mediums, with the notable exception of digital art.
The share of spending on digital art was just 3% of high-net-worth collectors’ total expenditure in 2023 so far, and digital artworks made up 8% of their collections, down from 15% in 2022. This decline parallels trends on external NFT platforms, where, by mid-2023, sales of art-related NFTs had fallen to their lowest level since January 2021, with monthly turnover at about 2% of the value at their peak later that year.
Investing in art is not for the faint of heart. We hear tales of people scoring big at a garage sale or discovering a valuable item in the attic, turning it into a fortune. While that sometimes happens, it probably won’t. If your goal is to profit from art, be prepared to invest in valuable items.
While holding onto these items for an extended period may lead to appreciation, it's not a guaranteed outcome. There's still a chance that despite a significant investment, you may not see a substantial return. Tastes in art change. Artists fall in and out of favor.
Also, if you factor in expenses such as handling, storage, marketing, and insurance, the costs of owning fine art can be high. In many instances, maintenance and restoration expenses may also add to the financial commitment.
If you do invest in art, it is important to track its value, the same way and individual investor would a stock or mutual fund price. Art Market Research’s All Art Index is used by auction firms like Sotheby's and Christie's to justify their starting bids. The index, which tracks sales of 100 artists across various regions, styles, and periods from 22 auction houses around the world, can convey a broad sense of how the global market for artwork is performing.
There are a few of problems with art-focused indices. First, they only account for the auction prices of the artworks sold. All of the costs associated with investing in artwork are disregarded. The sale price of a piece may not generate any profit if the art is sold at a price lower than the amount of the up-front costs (including sales tax, transportation, and appraisal).
The second problem is a phenomenon called "selection bias." Art market prices don't update every moment or day like the prices of securities traded in the financial markets. Art indices are based on the available auction data. If a piece of art never sells, then there's no data. And the works that aren't going up for auction are often worth less than the most recent selling price, making the indices’ record returns greater than the overall art market. The indices are biased to only account for the winners.
Investing in art can be a way to diversify a portfolio, but its risks and liquidity problems make the market less practical for the average retail shareholder.
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