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May 1, 2008updated 04 Apr 2017 3:58pm

Art for wealth’s sake

While the slowing US economy has shown signs of undermining the market for multimillion dollar paintings and sculptures of late, the art market will continue to provide one of the alternative investments with the greatest upside for the foreseeable future, art advisors assert.Recent news from the art world has been somewhat troubling, giving rise to predictions that the boom may be drawing to a close

By PBI Editorial

As the world’s equity markets continue to absorb the fallout from the US subprime mortgage crisis, wealthy clients can be forgiven for turning to the artsy set for financial inspiration, even though fine art itself is looking a little shaky. Charles Davis reports.

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GlobalData’s ‘Asia-Pacific Wealth Management: Market Sizing and Opportunities to 2026’ report provides a comprehensive overview of the Asia-Pacific (APAC) wealth management market.
  • The report analyzes the APAC wealth and retail savings and investments markets. This includes affluent market size, both by number of individuals and the value of their liquid assets.
  • The affluent population grew by 5.3% in 2021 and is expected to grow at an AAGR of 4.8% between 2022 and 2026.
  • The value of liquid assets held by the affluent segment surged by 8.4% in 2021, backed by economic recovery. HNW individuals’ financial wealth grew by 12%, while mass affluent individuals’ wealth grew by 6.0%.
  • The report provides an analysis of factors driving liquid asset growth. It is also split into asset classes - equities, mutual funds, deposits, and bonds.
  • The affluent population are more risk-tolerant and invest a significant proportion of their investments in risky assets such as equities, compared to emerging affluent and mass market individuals.
The report also provides data and insights on the size of offshore holding of HNW investors in the APAC region.
by GlobalData
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While the slowing US economy has shown signs of undermining the market for multimillion dollar paintings and sculptures of late, the art market will continue to provide one of the alternative investments with the greatest upside for the foreseeable future, art advisors assert.

Recent news from the art world has been somewhat troubling, giving rise to predictions that the boom may be drawing to a close. The doomsday scenarios follows concerns that prices have been overblown for several pieces, including Vincent van Gogh’s ‘Wheat Fields’ which failed to reach the undisclosed reserve price at a recent Sotheby’s auction, according to specialist investment group Fine Art Management Services, one of several players that have emerged to connect artists, collectors and investors. While Sotheby’s managed to auction works totalling £128 million ($160 million) at the recent auction, it did not reach its target of £191 million. However, Christie’s, Sotheby’s main rival, fared better at its sale of Impressionist art, which managed to beat its estimate, before commission.

Possible peak in prices

The poor auction results suggest that the 11-year surge in art prices may have peaked, perhaps because of losses sustained in other asset classes as a consequence of the troubles afflicting US credit markets, which are being blamed for a global economic downturn.

It’s important to maintain a bit of perspective, according to Fine Art Management, which notes that with more than 20,000 contemporary artists in the world and hundreds, if not thousands, of classic works still coming onto the market from time to time, the art investment world closely resembles a stock market where some works are overvalued while some are undervalued.

Art can represent a major investment on the balance sheet for private clients and provides a new and unique opportunity for private banks. For years, banks didn’t recognise art as an asset class at all. But the recent emergence of art investment funds has altered their way of thinking about art and other exotic investment opportunities.

That market had been hot until the latest round of auctions, which attracted a great deal of attention, given the economic uncertainty roiling the markets and the high-profile paintings which served as a highly visible, if imperfect, barometer. In the first six months of the year, Sotheby’s sold $2.9 billion of art at auctions, plus private transactions of $334 million. Christie’s sold $3.2 billion of art and collectables at auctions in the first half, and handled $161 million of private transactions.

Much of the excitement surrounding the art market comes from its relative lack of history. Although still in its infancy, art is more and more an accepted asset class. Exploding global wealth, particularly from developing countries, and the quest for investments that don’t mimic equity and bond markets are the main drivers for the growing investment in fine art.

Art index

Michael Moses, a professor at New York University and the co-founder of the Mei Moses art index, has constructed a way of examining the composite of annual auction prices for four collecting categories – Old Master and 19th century, Impressionist and modern, American before 1950, and postwar and contemporary. The index, which includes the four categories, posted a gain of 21 percent in the first half of the year, compared to 14 percent for the S&P 500. From July 2006 to July 2007, it returned 13 percent, compared to 20 percent for the S&P 500.

The Mei Moses indexes, like the Case-Shiller Home Price Indexes that are used for the housing derivatives market, are based on repeat transactions – that is, on paintings, or houses, that have sold more than once. But the Mei Moses indexes are based only on auction results, not on the equal or larger number of private sales.

Funds like the Mei Moses bring order to what was once a purely ad hoc market, allowing would-be investors to better gauge risk and compare art investments with other alternative investment classes. In an era of wild rides in the traditional equities markets, art looks better and better.

One key selling point is that returns from art generally boast a zero to slightly negative correlation with returns from other asset classes, making art a great portfolio diversifier. Most art funds are built for capital appreciation or short-term arbitrage, with a mix of private equity and hedge funds. The idea is that a portfolio of art can be managed in a way similar to other financial investments.

Bringing the expertise of the art world to an investment fund means that wealthy clients can pick the brains of the experts and exploit inefficiencies in the art auction crowd to find can’t-miss opportunities – or so the argument goes.

The funds collaborate with galleries around the world, which take a cut of the profit when a piece of art is sold and organise exhibits to promote the art pieces. Many of the biggest art funds are concentrating business in Asia, where most of the high net worth individuals interested in art reside.

Investment hot spot

The current hot spot is investing in mid-career contemporary artists, particularly from emerging markets including China and India. India has one of the highest growth rates in high net worth investors: that segment of the population increased by 21 percent in 2006. At the recent auction sales at Sotheby’s, Indian artist Raqib Shaw’s ‘The Garden of Earthly Delights III’ was sold for nearly $4 million, far above its estimate, setting a new record for an Indian work of art at auction.

It’s not just paintings, either. WMG, a London-based hedge fund group, recently launched the WMG Photography Fund, a closed-end fund with a three- to five-year capital appreciation period, during which the photographs will be showcased in galleries and museums, including the Tate Modern and National Galleries of Scotland, which are both planning loans and exhibitions from the collection.

The WMG collection already comprises works of 20 to 25 artists, including Russian constructivist Aleksandr Rodchenko, Magnum photographer Eve Arnold and Robert Frank. The minimum investment is $1 million and the fund charges a 1.5 percent and 20 percent management and performance fee, while targeting eye-catching 50 percent returns.

For many private banking clients, investing in art means the marriage of passions in art and money making. The combination of art and investment also opens a natural extension for philanthropy, another convenient function provided by an increasing number of wealth management firms.

Wary US investors

Art funds are largely Europe-centric, as US investors are still mindful of the high-profile collapse of New York-based Fernwood Art Investments in 2006. Fernwood, founded by Bruce Taub, a one-time Merrill Lynch executive, launched with great fanfare and featured the brainpower of the former founder of Citibank’s art advisory service, the former head of Christie’s Old Masters department and a former marketing director at Sotheby’s. But almost as quickly as it launched, the fund closed and lawsuits followed. The litigation continues and has scared off many of the US arts crowd from funds, unless they head to Europe.

The big banks are getting into the arts game as well. Société Générale Asset Management (SGAM) is launching a Luxembourg-based SGAM Alternative Investment Art Fund, a private equity-like fund with $25 million in commitments. It aims to raise up to about $70 million for the first closing and nearly $150 million for the second, closing next year.

The lending business

There’s also money to be made on the lending side, especially in the US, where capital gains taxes make it difficult for art collectors to part with their holdings, even if they seek liquidity. Enter Fine Art Capital, which can lend wealthy clients between $500,000 and $100 million, from six months to 20 years, secured against paintings, drawings, sculpture, furniture or decorative arts. Citigroup Art Advisory, which has been in the market for 25 years, will offer an advance rate of 50 percent on a diversified portfolio of four or more objects worth at least $10 million.

Art investments certainly are not without risk. Unlike holdings in other sectors, investors have no way to hedge against a fall in the art market. No derivatives market exists for works of art, unlike weather, commodities or, more recently, real estate prices. The emergence of art funds offers visions of just such a hedge, however, such as the Art Trading Fund, based in London, which has plans to develop an art market index in which it would be possible to bet on which direction the market will go.

Turning options into cash

While such an index is far from reality, the Art Trading Fund has identified stocks its managers believe correlate strongly with the art market, such as Sotheby’s and luxury goods companies such as Richemont, and are buying put options on them. The idea is that if the art market falls these stocks will fall too, and the fund can turn these options into cash.

The Art Trading Fund is focused on the mid-market and keeps works only for a few months. A significant part of the latter’s business is in the work of living artists, with whom the fund has a relationship like that of an exclusive dealer for an artist.

Art investments aren’t the best bet for all private banking clients. While a client doesn’t need to be a family office candidate to begin collecting, most experts say that art or other collectables should make up no more than 1 to 10 percent of a portfolio. Given the entry costs of the art world, that translates into having a net worth of at least $5 million. More important, the client should be prepared to hold the art for at least five to ten years, much like a private equity investment. That allows for appreciation to outpace transaction costs and market fluctuations.

The creation of alternative investment markets won’t end with art, either. As investors range far afield in search of places to put their money, hedge funds have expanded investments beyond stocks and bonds into art, wine, rare stamps and even football players.

Risk diversification

Money managers have begun to look at these so-called ‘exotic assets’ as a way to diversify risk while searching for assets that may provide a cushion if the five-year market boom comes to an end. Critics blast them as risky and opaque, but their growth has been impressive, as the new wealth from developing countries such as China and Russia drive up demand and the prices of luxury items such as wine, watches and violins.

The Liv-ex 100 index of investment-grade wines, which is more than 90 percent weighted toward Bordeaux, rose 49 percent in 2006 after rising 18 percent the year before. A case of Chateau Latour brought $l5,290, or $10,700, at a Sotheby’s fine-wine auction in London, 5 percent more than at a similar auction just three months earlier. Those are heady returns on a three-month investment cycle.

Areas such as wine and art investing, previously reserved for the rich, are becoming more mainstream, as pension funds and institutional investors look for ways to spread risk. And the face of the art market is changing, as a growing number of borrowers are young entrepreneurs, asset rich but cash poor, who are used to using leverage but are not looking for huge loans and have not been collecting big-name artists for five decades.

Private banks and independent businesses such as Fine Art Capital, Art Capital Group and Art Finance Partners are trying to find a niche in these smaller deals – usually at higher lending rates – rather than attempting to compete with Citigroup or Sotheby’s.

Free Report
img

Analyze opportunies within the wealth management market in APAC

GlobalData’s ‘Asia-Pacific Wealth Management: Market Sizing and Opportunities to 2026’ report provides a comprehensive overview of the Asia-Pacific (APAC) wealth management market.
  • The report analyzes the APAC wealth and retail savings and investments markets. This includes affluent market size, both by number of individuals and the value of their liquid assets.
  • The affluent population grew by 5.3% in 2021 and is expected to grow at an AAGR of 4.8% between 2022 and 2026.
  • The value of liquid assets held by the affluent segment surged by 8.4% in 2021, backed by economic recovery. HNW individuals’ financial wealth grew by 12%, while mass affluent individuals’ wealth grew by 6.0%.
  • The report provides an analysis of factors driving liquid asset growth. It is also split into asset classes - equities, mutual funds, deposits, and bonds.
  • The affluent population are more risk-tolerant and invest a significant proportion of their investments in risky assets such as equities, compared to emerging affluent and mass market individuals.
The report also provides data and insights on the size of offshore holding of HNW investors in the APAC region.
by GlobalData
Enter your details here to receive your free Report.

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