We believe the collection of art is as much a means of personal expression as it is an effective financial venture. With a market that exceeds $50,000,000,000 in annual sales, art can provide pleasure, add beauty and improve emotional life, at the same time that it can diversify your investment portfolio.
To that end, the collection of art proves to bring high returns over the long term, not to mention that it can function as a stable investment in turgid economic conditions. Unlike stocks and bonds, art prices tend to have a positive correlation with inflation, which means that the addition of art to a conventional portfolio can increase overall equity without any corresponding risks. Considering this, many portfolio professionals recommend allocating approximately 10% of one’s portfolio to art as part of a diversified portfolio strategy.
Additionally, art funds have emerged as vehicles to take advantage of the market, with the aim of providing long-term capital growth for high net worth individuals who want to diversify their risk. Such individuals have the capital and the interest in art investment, but generally do not have the knowledge or experience to buy and sell art themselves. In such cases, art may serve purely as a financial tool.
The emergence of art funds treads on the re-definition of art as an asset class. In contemporary speak, art can be considered as such because works are owned, hold monetary value and can be exchanged for such value. However, said value is subjective based on the larger market, but because art objects are (nearly) all unique, art is not a homogenous commodity like stocks or bonds, which cannot be differentiated. As with other luxury goods, art prices are based on supply and demand. Since artworks are either unique or in short supply (editioned prints or photographs), this will generally lead to higher demand, pending other factors such as:
- artist’s fame and importance
- artist’s auction records, associated galleries, books, museum shows (association with an important international gallery which will ensure that the artist is promoted and represented in the global market, gets into museum collections, and participates in the world’s major fairs and art events)
- quality and rarity of particular work of art
- price curve and history (how the artist has performed over the years)
- condition and provenance of the work
- macroeconomic environment
Art investment performance may be tracked by indices such as the Mei Moses Annual Art Index. Started by a team of NYU economists, the Mei Moses Index uses recent auction results to gauge the appreciation of works of fine art. These indices are then compared to the S&P 500, government bonds and gold in order to decipher relative performance.
There are also tax benefits to art investment. The 1995 Tax Act allows individuals to donate works of art at the fair market value (not their cost basis) to any IRS approved charity, and the market value of the gift may be deducted on one’s tax return. The only caveat is that the buyer must hold the work for one year after purchase before donating.
- High amount of risk involved
- Buyer must know what he/she is purchasing
- Buyers must either be very educated or work with an art advisor; truly successful investment in art requires extensive knowledge about the quality of and demand for an artist’s work.
- Peculiarities of the art market
- Investors must know international factors that affect art such as exchange rate movements, cultural factors, and market preferences/tastes. It is also important to research museum shows, publications, and interest of important collectors (i.e. Saatchi)
- Illiquidity and vulnerability to changes in trends and tastes
- Few powerful players control market
- Inefficiency and opacity of the market
- Because of the lack of market prices it can very hard to determine values since most sales are privately executed. Public auction results are the only gauge for base market and artist performance.
- Alternative form of investment
- Art investments earn capital gains rather than dividends
- Art can incur negative income
