Should you make art part of your investment portfolio?
As investors move towards a more holistic wealth management model, diversifying client portfolios with art-related assets is on the rise and adding up, with total U.S. investment in art expected to reach $2.7 trillion by 2026, according to Deloitte's 2017 Art & Finance Report.
Although the art market is starkly different from more traditional asset classes, there's money to be made for those willing to invest.
Although the art market is starkly different from more traditional asset classes, there's money to be made for those willing to invest. According to the 2018 Art 100 Index by Art Market Research, art achieved a 10.6% return in 2018, outpacing all other categories.
Is art a good investment?
Art makes good sense as an investment, and most wealth managers agree. In fact, 88% of wealth managers think that art should be a wealth offering. However, only 11% of wealth managers surveyed offer an art investment fund product in-house. This is in part due to the lack of transparency of the art market.
But, times are changing, and so is the opportunity to invest in art. Here’s what anyone considering adding art as an investment should know.
Art can protect assets amidst economic woes. Between 1974 and 1981, the British Rail Pension Fund invested roughly 3 percent of its holding, or about $70 million, into fine art and collectibles in an effort to diversify its portfolio and hedge against inflation. It did so successfully, strategically buying and selling artwork, generating as much as $65.6 million in just one night in 1989 (in addition to $48 million in previous sales). More than three decades later, the risk associated with traditional assets, per the S&P 500 bond index, is enhancing art’s appeal as an investment, which can offer stability in the case of an economic downturn.
Art can protect assets amidst economic woes.
But not all art is the same. Generally speaking, old-world art is the safest bet while trendier modern-day works experience the greatest fluctuation. According to the Deloitte, safe haven art categories (impressionism and old masters) are highly correlated with safe haven asset types (bonds, real estate), whereas riskier movements (contemporary, Chinese art, etc.) correlate more with riskier asset types (stocks, commodities). Similarly, post-war era works have low volatility and are in line with the MSCI World Real Estate Investment Trust (REIT) index. Not all art is created equal, and not all art is a safe investment.
Not all art is created equal, and not all art is a safe investment.
Art that never sees the market still impacts the market. Valuation in the art market remains opaque. For example, many off-market works held by museums—works that have not, cannot, or will not come to market or ever see a price tag—still drive prices higher by igniting a sense of scarcity. In the same way, philanthropic purchases of artwork as well as unsold, off-market inventory that doesn't have market prospects continue to drive market prices.
Art is a niche investment market
Art investment fund products remain niche. The market for art-secured lending reached an estimated $17-20 billion in 2017 in the US, achieving a 13.3 percent growth rate from 2016. This market offers a niche-credit service targeted to ultra-high net-worth individuals who wish to unlock liquidity out of their collection or art assets for investment or personal finance purposes. For those who don't have ultra-high net-worth, companies like Masterworks are leveling the playing field, allowing investors to purchase shares of a piece of art (and making art enthusiasts’ dreams come true).
Technology lowers the barrier to entry in art investment
Lack of liquidity and price transparency have long plagued the art market. But technology is advancing to counter these challenges. Blockchain technology, for example, is being used to more securely track provenance. The digitization of sales prices is also helping to make the industry more transparent, with prices widely available on sites like ArtNet.com. Technology and the application of artificial intelligence is helping investors to analyze risks and spot trends like never before.
Technology and the application of artificial intelligence is helping investors to analyze risks and spot trends like never before.
Investments should balance client interests and goals. Art, by nature, is not strictly transactional. Clients who have an interest in art investments shouldn’t be guided to invest in a piece or a genre they have zero personal interest in or taste for. When it comes to art, investors will likely hold onto the pieces (rather than sell them on a whim) until a strategic point for sale arises, and so the work they invest in should be something they are proud to own and share.
In the world of art, the barriers to entry are many. However, as technology changes the old ways of the art market, investment is poised to grow. Wealth managers who begin to incorporate art offerings now will see dividends later.