Share page with AddThis

Magazine Issues » Dec 2009-Jan 2010

ART INVESTMENT: picture perfect

As a niche asset class, art investment can provide a good inflation hedge, without having to be speculative, writes Angele Spiteri Paris...

gallery.jpgAndy Warhol, Pablo Picasso, William de Kooning, Roy Lichtenstein – great artists with one thing in common… they’re all dead. Contrary to what some may believe, investing in art successfully is not about picking the ‘next big thing’.

To generate solid returns from art investments you need to pick works by artists who have already garnered a good reputation and are not producing any more works – this is the way the economics work.

Investing in art may be considered eccentric and although it is a niche investment, acquisitions based on sound economic theory can yield surprisingly positive results.

A glance over the recent performance of art indices might not do much to convince any doubters. This is because as equity markets rallied the Mei Moses All Art Index posted a dismal 32.4% decline at the end of the third quarter of 2009. The professors at Mei Moses, one of the foremost art indices providers, indicate that there is a historic lag in this index of art market performance relative to the equity markets.

Angus Murray, CEO of Castlestone Management, says: “Equities basically pre-predict what is going to occur in the economy. Therefore, if equity prices have been rising since March this year and according to economists, sometime over the next six to 18 months the economy will improve, then velocity [will] turn positive and this will drive up the price of art.”

Castlestone runs an art fund and Murray explains that investment rationale behind the fund is based on the quantity theory of money. This states that money supply has a direct, positive relationship with price.

In summary, this theory states that money supply multiplied by velocity of money (the rate at which money is exchanged) is equal to the price of something multiplied by its quantity.

Murray explains further: “Imagine that the whole world only has a pen and you put a £10 note down on the table. Then you put another £10 on top of that. Either the pen is now worth £20 or the money’s worth half the value.”

Therefore if the value of things rises – which is, in effect, inflation – investors need something to offset that. Murray believes that some form of real asset would be the best inflation-hedge since their returns cannot be distorted by leverage.

This concept forms the basis of the investment philosophy behind the Castlestone art fund. The firm only buys art by an artist who is deceased or non-producing. Therefore no more of these works are produced and the artist’s talent has already been recognised.

Murray explains why. Harking back to the quantity theory of money, he says: “If you buy post-war art, Impressionist art or old masters then the ‘Q’ is 1 because it’s constant, no more are being produced. Therefore ‘MV’ [the money supply multiplied by velocity of money] has the greatest influence on ‘P’ [price/value]. Therefore, art is the purest form of a link to hedging against money supply in a normal economy, because that is what will drive its price up.”

Throughout the recession the price of art was severely depressed, Murray says that in June and July the market was around 30% down; “you could see that in the prices”, he says.

Unfortunately this did not necessarily lead to the opportunity of buying good quality pieces at lower prices. “There were very poor quality works of art and nowhere near the availability of mainstream artists we’d have seen a year ago… It’s a good time to buy because prices are depressed but it’s harder to get good works of art,” Murray says.

So bad was the market earlier this year that auction house Christie’s International scrapped its plans for launching its own art fund.

But the current state of affairs is not quite so grim anymore. According to the quantity theory of money, as the world economy improves, the price of art should go up, which in turn will lead to the availability of better works of art.

Therefore, the art market should be in for a good run in the near future and it may have already begun.

World-famous auction houses Sotheby’s and Christie’s International brought in about $596m (€404m) combined from their semi-annual sales of Impressionist, modern and contemporary art in the first two weeks of November. The total surpassed the houses' $409m spring sales in May. This gain could signal the return of a certain level of confidence in art valuations.

The increasing confidence is further supported by the results of a survey conducted by ArtTactic. After an 81% drop in the ArtTactic Art Market Confidence Indicator in December 2008, the market research and analysis firm said that confidence is cautiously coming back again.

Rosy hue
Paul Johnson, British historian and author, advocates not investing in art. “Buy because you want to possess certain objects and have them in your home to look at and enjoy. But don’t collect in order to make money,” he was quoted saying. He claimed art values are determined by unpredictable trends that are rarely linked to quality.

He may have a valid point, when talking about contemporary art. Buying a piece of work by a contemporary artist is to a very large extent speculative.

In a working paper Gianpiero Favato, programme director, who taught MBA programmes at Henley Business School, says: “There is a value of putting a portion of one’s assets into art, as the art market has echoed the stock market over extended periods. Different kinds of art investments offer radically different risk-return profiles. Buying the works of contemporary art, such as brand new ‘undiscovered’ artists is a very high risk/potentially high reward approach.”
Art that has already proved its quality and value is an entirely different matter.

Murray of Castlestone talks about why the firm’s portfolio is focused on post-war art. He says: “We don’t buy impressionist or old masters because each work of art is too highly priced… if each one is worth between $5m and $20m, then several investors [in the fund – which has a minimum investment of £100,000] end up buying into one picture and therefore their risk isn’t spread. Also, it causes us a liquidity issue, because if 20 of those investors wanted to redeem we may be forced to sell the whole picture.

“But you can buy a post-war artwork for somewhere between the value of $300,000 and £1m (€1.1m). So, you can end up acquiring very good quality works of art that are representative of that type of art.”

He reiterates that the aim of the Castlestone art fund is not to buy and sell works of art and to try and outperform by flipping paintings according to what’s in fashion. “We’re trying to represent the asset class and give people access to that asset class via this fund,” Murray concludes.

There is no denying that art is a niche investment and will never be allocated a large chunk of any investors’ portfolio, hence the low minimum investment of the Castlestone fund. But as the art market improves investors may come to realise that art can play a small but useful role in their portfolios.

Tracy Frost, editor at Art2Bank, a professional network dedicated to promoting the relationship between art and business, says: “An investment in art can be an effective tool to reduce the risk exposure of a carefully planned investment portfolio. This would be an ideal measure to employ during a period of market volatility. The prerequisite is top-quality art and a long-term view of ten years or more.

“Research supports the ability of quality art to survive economic downturn, the value of the holding never going down to zero, compared to many other investments. Art prices have been consistently shown to recover more quickly after crashes than equities.”

©2009 Funds Europe