Does art make sense as an investment class?
In the 1970s the British Rail pension fund famously started buying art as part of its investment portfolio, selling out at a substantial profit at the end of the 20th century. Does the case for art as an alternative investment asset still make sense?
Art has always been appreciated for its aesthetic qualities, but for some years it has also been gaining a reputation as a good investment. The simple fact is that the supply of fine art is strictly limited and while demand may well fluctuate the supply is actually contracting.
One excellent example of this is "cultural regeneration" in many emerging markets where the speed of museum construction is matched only by the demand for art to fill them. China alone expects to build 1,000 new museums by 2015. It is now believed that there are only three Rembrandts remaining in private hands.
A portfolio diversifier
The Holy Grail for investors is to discover an asset which increases investment returns while reducing volatility. This can only really be achieved by finding a suitable mix of assets which have low correlation, and a tendency to outperform. While no one disagrees that art prices are highly volatile, some analysts believe that if it is held in conjunction with shares and bonds a higher return can be achieved.
One of the earliest studies into art as an investment was conducted by Michael Moses and Jiangpin Mei, a couple of professors from the New York University Stern School of Business. They compiled data to track the long term performance of art as an investment, by analysing actual sales. The result was the "Mei Moses Fine Art Index". Unfortunately, it's only available on a subscription basis but their research showed that over 50 years the art index delivered 10.5% pa and the S&P 500 10.9% -- but significantly art was shown to have a very low correlation with shares. Over the long term its record is slightly better; from 1875 to 2000 art gave an annual return of 7.7%, the S&P 500 6.6%.
Further research by Rachel Campbell from the university of Mastricht looked specifically at how art performed during bear markets and found that art, as measured by the Art Market Research Index, provided considerable downside protection. In bull markets art tended to under perform equities, but this research was carried out in 2004, well before the 2008 bear market which saw so many supposedly "uncorrelated" assets sink at precisely the same time.
To bring matters as up to date as possible I've obtained the Art Market Research 100 index from 1999 to 2008 and compared returns to the FTSE 100 excluding dividends.
| Year | Art Market Research 100 index | FTSE 100 |
|---|
| 1999 | 1% | 18% |
| 2000 | 19% | -10% |
| 2001 | -13% | -16% |
| 2002 | -6% | -24% |
| 2003 | -9% | 14% |
| 2004 | 41% | 8% |
| 2005 | -12% | 17% |
| 2006 | 55% | 11% |
| 2007 | 46% | 4% |
| 2008 | 25% | -31% |
| 1999 - 2008 | 210% | -25% |
But there are pitfalls
I think it's fair to say that the academic research indicates there might be a place for art in some portfolios, but for some well needed balance, let's have a look at some of the (considerable) downside.
For starters, in the table above I've excluded dividends from the FTSE 100. Art of course pays no dividends, but it's even worse than that -- art generates negative dividends, in as much as it costs money to insure and protect as it hangs on your wall (or in your vault). When you want to sell shares your friendly broker obviously makes a charge. I don't know about you, but my dealing costs are well below 1% for each transaction.
Well those kind of numbers would turn your average art dealer purple with apoplexy. He's used to a Krug-swilling 25% on each sale. Furthermore, news of forgeries, fakes and other skullduggery is not unknown in this industry, which in any case is subject to the whims, fashions and tastes of a small number of collectors.
For those reasons I'm not tempted by this asset, despite the academic research. My gut feelings have been confirmed in the last couple of years by major funds being cancelled at the last minute because of lack of investor support (including one advised by Charles Saatchi). Even Christies have recently announced they are pulling plans to establish an art financial services division with an art investment fund.
One fund (offshore and domiciled in the Virgin islands) has launched recently, the "Collection of Modern Art" fund. I won't be investing yet -- but I will be tracking its progress. After all, that British Rail Pension Fund did make 11.4% a year on their art investments -- and I wouldn't say no to that.
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