COMMENT
Art As An Investment

Some investors, disillusioned with low returns from shares, have turned to art. As a result of this interest, some pundits reckon that art should be treated as a separate asset class.

Traditionally, asset classes are investments in shares, bonds, property and cash. But some private banks provide their wealthy clients with portfolio valuations and market research for art. It has also been reported that some institutions may even lend against a work of art to buy more art!

According to the recently released Barclays Capital Equity Gilt Study, interest in art as an alternative investment has grown in the aftermath of stock market crash. However, as this article pointed out, Railpen (formerly the British Rail Pension Fund) invested in art as far back as 1970 – long before the stock market took a tumble. When Railpen invested in art it bought a wide collection that spanned Chinese porcelain to African tribal paintings. However, the bulk of the fund's returns came from just 25 impressionist paints. In my view, this highlights the fact that art can be a difficult market to understand.

In fact, the art market is not one market but many. For example, each well-known artist can be a market in his or her own right. Additionally, particular schools of artist and styles can be grouped into separate markets too. Consequently, simply saying that art has done well or badly can be a little misleading because what art are we talking about?

Some experts have tried to take the subjectivity out of investing in art by constructing indices to track its performance. They include the Mei/Moses All Art Index and the Zurich/AMR Art & Antiques Index.

These indices can be useful to compare to the long-term performance of art against other investment benchmarks. They show that since 1925 art has performed better than cash and gilts, but poorly against shares. They also show that art is pro-cyclical. This means it tends to do well when the economy is strong, but poorly when the economy is weak. Property is a pro-cyclical asset too.

The indices also reveal that art can be a poor hedge against inflation over short periods. This is largely because art prices can be volatile. It is estimated that to consistently achieve positive annualised returns, art needs to be held for at least 35 years.

Despite the objectivity introduced by art indices, it should be remembered that art has aesthetic value but no intrinsic value (e.g. you don't get any dividends or interest - in fact, holding costs like storage and insurance will dent your returns). The value of a piece of art is governed almost entirely by what is considered to be hot at the moment. Furthermore, there is very little transparency as art investments are understood by only a handful of experts and professionals.

Personally, I'm quite happy to leave my small collection of art where it belongs – on my walls. Furthermore, since it is not possible to invest in an art index I'm quite happy to stick with stock market index trackers, which should deliver a much better return over the long run.

Find out more about investing in index trackers here.