Investing in art: do the New York sales prove anything?

May 17, 2013
Jane Lewis

Prices have hit the stratosphere again. But is fine art really a viable investment class?

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ART PRICES are smashing records again. At a Christie's contemporary sale in New York this week, $495 million was taken in just one session, marking "the highest total in auction history", with works by Jackson Pollock (above), Roy Lichtenstein and Jean-Michel Basquiat achieving record prices.

At a rival Sotheby's sale, the red-hot German painter, Gerhard Richter, broke his own record for the most paid for a work by a living artist at auction ($37m). Both houses are now proclaiming "a new era in the art market".
In other markets, such hubristic talk might well be taken as an invitation to head for the hills. But in the art world – now back to its full pre-crisis exuberance – it's being embraced with relish by mushrooming numbers of art investment funds out to woo punters with promises of stellar returns.
They argue that art makes the ideal "alternative" investment, because its cycles run counter to those of more mainstream equity and bond markets. This "low correlation" means you spread your portfolio risk more broadly.

Art is also often trumpeted – most recently in Joe Roseman's book SWAG: Alternative Investments For the Coming Decade – as an effective hedge against inflation. While fiat currencies, as he observes, can be increased at the push of a button, "you can't magic up 10 more Picassos".
There are, however, big caveats. The recent auction splurge is evidence that the super-rich are bent on buying. But that doesn't mean the hype has filtered down to the wider market. The Mei Moses World All Art Index, which tracks prices across genres, actually fell by 3.28 per cent last year. Equally surprising, given the hoopla surrounding contemporary and modern artists, the best performing category was Old Masters and 19th Century paintings.
Claims that the art is "uncorrelated" with other markets are also questionable. Indeed, their paths have seemed remarkably entwined of late. The $200m auction staged by Damien Hirst, with remarkable symbolism, on the day that Lehman Brothers collapsed in 2008, also marked the top for the art market. In the subsequent crash, art fund failures were just as prolific and painful as those of more mainstream funds.
Some funds, to be sure, have built up solid reputations: notably, the London-based Fine Art Fund Group, which invests across a range of different genres and claims to have delivered its investors double-digit returns. But viewed dispassionately as an investment class, the drawbacks outweigh the advantages.
For a start, art funds typically charge the same eye-wateringly expensive "two and twenty" fees as hedge funds (a two per cent fee on assets, plus 20 per cent of any profits). Secondly, your investment won't yield anything until it is sold. Most significantly of all, this illiquid and often opaque market is more prey to fads and fashions than any other: as illustrated by the lack-lustre performance in New York this week of two former market darlings, Jeff Koons and Francis Bacon.
Big-hitting buyers seem to have clocked as much. Of the 2,000 affluent individuals canvassed by Barclays in a 2012 report, Wealth Insights: Profits or Pleasure?, only ten per cent said they bought fine art purely as an investment. Most bought "for their own enjoyment" or for "cultural and social reasons". Above all, they bought what they liked. The best insurance against disappointment – financial or otherwise – is to follow suit.

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