Friday, 24 October 2008

Art as an Investment

Art now, more than ever, is seen as an effective asset class for the management of wealth. International wealth management firms and funds are increasingly pitching ‘art banking’ and ‘art investment’ services, against a backdrop of auction houses constantly breaking records as massively liquid collectors seem to buy ‘at any price’ to secure works of prominent global artists. In this article, I investigate whether art is an effective wealth management instrument, gaining an insight into the operation of the art investment market, and interviewing Mr. Randall Willette, founder of one of the world’s leading Fine Art Wealth Management firms.


October 24th 2008, Thought Economics, Vikas Shah

Art”, according to Oscar Wilde, “…is the most intense mode of individualism that the world has ever known”, and throughout our history, individuals have collected art as a method of capturing societal zeitgeist, history, or even to reflect their own passions. Curiously, while civilisation has always had creativity on mass, there has been a distinction between an individual being creative and ‘art’. Carl Gustav Jung sums up the essence of this distinction, and of art perfectly when he says, “What is essential in a work of art is that it should rise far above the realm of personal life and speak to the spirit and heart of the poet as man to the spirit and heart of mankind

This ‘essence’ is the intrinsic value of art, and is the power which has meant that through our history, the great and the good, from royalty to commerce, have sought to own art, in all its forms.

Purists have always argued that art, particularly where part of a nation or culture’s history, should be owned in the public domain. The reality is, though, that art is, to the market, like precious jewellery or fine watches. An esoteric and illiquid commodity with near limitless price.

Examining the past decade alone, art sales have created headlines as buyers often adopted the attitude of ‘at any cost’ to purchasing works.

Jackson Pollock’s “Number 5, 1948” - $140 million in 2006
Willem De Kooning “Woman III” - $137.5 million in 2006
Pablo Picasso “Garcon a la pipe” - $104.1 million in 2004
Francis Bacon “Tryptich 1976” - $86.3 million in 2008

While many would point the finger for these prices at the ‘new wealth’ of Saudi Arabia, Russia and Asia, these buyers, rather than setting the prices, are simply new liquid entrants into what was a growing art market as ‘international scale’ wealth has become more commonplace through the growth of commerce and industry in the last half century.Increasingly, art has been put forward as an asset class (though still firmly in the alternative category) for use as part of a wealth management strategy. Art is gaining value, as new generations come to appreciate its value, and as newly opened international markets seek to reclaim their artistic cultural heritage from overseas, and develop collections of their own. Many banks (UBS being a prime example) and independent funds provide ‘art investment’ services, and the number entering the market is increasing.

Traditionally, UBS and a small number of other private banks have offered clients interested in art a limited number of services (mostly around collection management). Few banks, however, have approached art as a separate asset class which can help diversify a portfolio of investments or serve as collateral for raising capital. (who track international art prices at auction) described how, In 2007, the art market posted its 7th consecutive year of price inflation. In global terms, art prices rose 18% over the previous year. The higher prices were accompanied by a higher total Fine Art market revenue at 9.2 billion dollars, up 43.8% compared with 2006 and driven by a substantially higher number of sales above the million-dollar line: 1254 compared with 810 in 2006. The same group are also responsible for producing a global art price confidence index, using the same sophisticated tools as you would see in the production of financial markets indexes. Talking of the economic instability seen in 2008, they comment, Indeed, analysis of the recent art market price volatility suggests that 2008 could be “correction year”. Of course, we can expect a certain lag behind financial markets in view of the relative inertia of catalogue price estimates and the time it will take to liquidate the related stocks. However a recrudescence of buyer vigilance could well start to manifest at auctions as a higher bought-in rate and we have perhaps already seen the very first signs of this: in 2007, the bought-in rate rose to 35.5%, vs. 34% in 2006. Once a price correction starts, past experience tells us that prices can unwind quite quickly. Many readers will remember that the Artprice Global Index, based on works that came to the market more than once between 1990 and July 1992, posted a 44% contraction.” The reality seems, though, that in an uncertain world, where ‘traditional’ asset classes are risky or under-perform, art has also served as an increasingly safe-haven for money.

For artists, this boom has created an incredible opportunity and purists have spoken of their displeasure that many artists now appear to create for sale, rather than creating for art’s sake. “To demand purpose from an artist”, said Goethe, (speaking on the morals of art creation) “…is to make him ruin his work”. Pablo Picasso (one of the highest auction turnover artists of history) also spoke out on the trade of art saying, “The people who make art their business are mostly impostors.

To investigate the value of art as a wealth management instrument further, we spoke to Mr. Randall Willette, founder of “Fine Art Wealth Management”, a specialist art investment consultancy. Prior to establishing Fine Art Wealth Management, Mr. Willette was executive Director and Head of Art Banking for UBS Wealth Management in London, developing their art banking service globally. His firm’s advisory team comprises globally significant art, collectables and valuation experts, and in this interview he speaks more about the art banking and the art investment marketplace.

Q – What are the core “reasons” for an investor to get involved in the art wealth management marketplace?

We approach art and wealth management in a context which is much broader than treating art ‘simply’ as an investment. Apart from the benefits of art as an alternative as an alternative asset class , we believe there is a growing need for financial solutions around existing portfolios of art assets currently held by private clients.

We offer three streams of business activity to wealth managers focused around art including: art finance, art succession planning, and art investment. Our clients include private banks, family offices, and investment management boutiques seeking to integrate art into their overall wealth management strategy for private clients. We believe clients will significantly change the way they manage their portfolios of art in the future.

1 – An art collections requires the same strategic planning as other investments and with the help of skilled advice can become an effective working asset. There is a growing demand among private clients to unlock the liquidity in their collections much like a mortgage provides financial flexibility to owners of real estate. The profile of many HNWIs is to be asset rich but cash poor. These individuals are used to effectively leveraging their assets however until recently, few financial institutions have been prepared to lend against high value works of art.

2 – A great deal of art wealth has been accumulated in the past several years by the so-called “baby boom” generation. It has been estimated that private collectors own more that $1 trillion in art and collectible assets. Equally important, wealth transfer is estimated to reach $41 trillion during the first half of t he 21st century. Collectors are starting to think about tax and estate planning issues and needing solutions for how they will deal with leaving their art. Within the next few years, there will be a tremendous opportunity for art succession planning.

3 – There is clear evidence that art is taking on the role of an alternative asset class which should be a part of an overall investment strategy. One simply needs to look at the growth of art investment funds in recent years. Private clients are looking to increase the ratio of non-correlated instruments in their portfolios and making use of sophisticated strategies such as art investment funds to create more dynamic asset allocations is one way of doing this. Previously “hedge funds”, private equity funds and real estate have dominated the alternative space.

Q - Is art an effective wealth management asset class?

Yes, There is growing attraction to art as an investment due to its low correlation with other asset classes and its diversifying affect on an investment portfolio. We are seeing the art market going through similar transformation as the real estate market did a number of years ago.

All of this is coming at a time when alternative investments have also been gaining in acceptance with sophisticated investors. In fact, many of the gains HNWIs have reaped in recent years have been the result of strategic diversification of their holdings via moves into a broader range of asset classes.

Price movements in the art market follow long term trends in global economic performance. However during shorter intervals, there is volatility of prices in the art market that moves independently of the markets for other assets. This non correlation of can be employed as an effective risk management tool to achieve attractive diversification benefits within an investment portfolio.

Research shows that art exhibits both a highly favorable return-to-risk ratio relative to other asset classes as well as consistently low and negative correlations to the stock market and other financial markets. As a result of such strong diversification attributes, art can be a valuable addition to an investment portfolio. Also, because the market remains highly inefficient, there is a substantial opportunity for out performance through active management much like the value that private equity or venture capital funds create.

Q - In the global art market, we regularly see 'hedge fund managers' and those of international grade wealth purchasing pieces for large sums. Has the more overt visibility of these individuals aided in the increase in valuation of art in the rest of the market?

wealth creation over the past several years has been a key driver to the art market. This wealth creation is coming from a variety of places including emerging markets (where there is tremendous wealth from booming economies). To some degree, this tremendous wealth has helped to drive the market upwards and in that sense it has, in certain sectors (eg: contemporary art), created a bubble.

Much like the financial markets the art market is not immune to bubbles. In fact, the rate from which prices in the market are driven by taste and fashion is much greater than financial markets where value is more a function of market fundamentals.

The most talked about bubble in the art market occurred in the late 1980s and early 1990s in the Impressionist sector and was caused by soaring Japanese demand. Today, it is widely believed that the contemporary art market is experiencing a similar bubble. A large number of these buyers include successful hedge fund managers who have achieved enormous levels of personal wealth. In addition, a substantial level of new money has also poured into the art market from new collectors in countries of emerging wealth such as China, Russia and India.
If these sources of new wealth dry up, it is possible that the Post Modern and Contemporary sectors could experience a significant correction over the next few years.

Q - How has the arrival of UHNWI's from Russia and Saudi Arabia affected the art markets?

This ties into the previous answer, and we can see they have definitely affected the market. If you look at research from the likes of Merrill Lynch and Cap Gemini (world wealth report) clearly they have highlighted the tremendous growth of “investments of passion” (clearly art is in this category, at the top of the list). It is important to point out that particularly in emerging markets, as one begins to create wealth, many of these individuals want to invest in art from their own heritage and their own cultures, and you see a huge amount of wealth moving into art they [international wealth] can relate to and from their own artists. This has also spurred ‘western’ investors to start looking at these markets and investing in international artists, thus driving prices even higher.

The art market, like the larger economy to which it is so closely linked, has gone global. As wealth has proliferated in the developing economies, the newly wealth are reclaiming their artistic heritage by acquiring art from their own countries. Fuelled by an economic boom a new generation of collection is emerging for which art is increasingly becoming an important component of their alternative investment strategy. China's spectacular economic rise over the past quarter-century has started to create enormous wealth, and prices for Chinese art have risen steeply, especially in the last several years. The value of contemporary Indian art work has also risen substantially, reflecting an explosion of interest that closely parallels the increasing wealth of Indians at home and abroad. It is interesting to note that India has more art investment funds than any other country in the world (according to research conducted by Mr. Randall Willette).

Q - There have been many criticisms in the public domain of art collectors depriving "society" of access to significant pieces of art, what is your view of that? And do you feel it an obligation, as a collector, to loan pieces to display?

Philanthropy is quite important among collectors and is thriving as over the past several years, you have seen more high net worth collectors set up foundations and museums to make art public and to share their collections leaving wanting to leave a legacy. Philanthropy is something which is quite strong in the art world, and there are many who are very active in this area, gifting work to museums or foundations.

Q - Do you feel the 'monetisation' of art has taken away some of the 'purpose' of art? (i.e. are artists becoming production lines rather than creatives [citing many criticisms of Damien Hirst et. Al])?

. The fact that art is now being viewed as an asset class, and you have more financial players looking at art has added transparency to the market. Art is one of the last remaining unregulated markets. This [change] is one of the principle roles we see in the marketplace for our firm, where we aim to bring due-diligence and independent analysis to the investing public.

Increasingly, we are seeing two types of art buyers in the market. One type has a detached, financial point view, treating art like real estate and other financial investments and his expertise lies in following the market. The other is the collector who may have mixed motives, but whose first motive is to be a player in the art scene. For him, it is about intellect and passion and less to do about investment.

Historically, very few major collectors and art professionals endorsed art investment outright. The general view was that one should only get involved in art if you love the subject and what you are buying

Q - What has been the impact of forgery on the current marketplace?

The art market has become more litigious. As the art market has expanded and “professionalized” the need for due diligence has increased, especially considering the sheer sums of wealth being exchanged. This means that checks into fakes, forgeries, title and authenticity are critical, as well as due diligence on around cross border transactions, restitution, and purchase and sale contracts.

Q - There has been a surge of activity with art from emerging markets, are you finding prices and volumes of trading activity on pieces in these sectors is mainly from individuals from those countries (and their diasporas) or do they have wider appeal? And what impact will the "Overheating" of these economies have on valuations?

If we look at the “wealth creation effect”, it is clear these booming economies have had an effect on the prices of art. We now see Russian, Asian and Indian investors bidding in the UK for their own cultural art, and internationally known pieces. The question is whether this will continue in light of the slowing global economy.

There is a distinct and growing divergence between mature and emerging economies with the advantage going to emerging nations. With few exceptions the mature economies have weakened significantly. By contrast, up until recently emerging market proved resilient and posted robust gains uncertainty grew in the mature markets.

Up until now, the resilient emerging economies have offset slowdowns in key mature economies. The balance between emerging market strength and mature market recovery will be a delicate one.

Q - Does art make an effective 'safe haven' for funds?

I don’t think that across the board art will provide a “safe haven”. Certain sectors of the art market will undoubtedly be effected, such as the contemporary market. Where one has referred to art as a safe-haven in the past, typically this is at the very high end of the market among established artists, with established track record and history.


It is clear to see that for any pragmatic strategy to manage wealth, art should form an essential part of the asset classes in the portfolio. Art, like many alternative classes, is an investment of passion, and while many critics say that this defeats arts purpose, the monetisation of the market has contributed much to funding new art, spaces, and encouraging a wider awareness of art in general.

Regardless of the recent contraction in economies worldwide, we are left with an environment where wealth is far more global and diffuse, and as long as mankind is fascinated, illuminated and intrigued by art, in all its forms, this surge will continue.


Fine Art Wealth Management (in their own words)

“Fine Art Wealth Management (FAWM) is a specialist investment consultancy dedicated exclusively to art as an alternative asset class. We deliver independent solutions for wealth structuring of art assets and provide global art fund identification and assessment services to institutional and qualified investors.

In recognition of the growing importance of art as an alternative investment, FAWM combines the rigours of investment management with the specialised knowledge of art experts to integrate art into the alternative investment strategy of wealth managers and their private clients. As wealth has exploded in the developing markets of China, Korea, India, Middle East, Russia, and Latin America the newly wealthy are reclaiming their artistic heritage by investing in art from their own countries. These developments come against a backdrop of increasing investment in art globally and a new generation of collectors for whom art has become an important component of their overall wealth management strategy. Access to these services is available to professional advisors and institutional investors only.”

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