The attractive long-term gains in the art world
Sotheby’s eagerly awaited impressionist and modern art sale in New York last week raised a staggering $194m (£105m). Famous paintings, such as Paul Gauguin’s masterpiece Maternité (II), which sold for $39.2m (£21.2m) - a record for the artist - contributed to Sotheby’s highest total in 14 years. Smart investors were paying close attention, says Lina Saigol in the FT. Burnt by stockmarket turbulence over the past five years, many more-adventurous souls are currently turning to the art market as an alternative asset class.
On the face of it, this makes good sense: works of art are not dissimilar to equities - pick the right ones and you may see their value rocket in years to come. The difference between art and equities, says Ariel Salama, head of ABN Amro’s art advisory group, “is that art is tangible and comes with a lifestyle”.
For the super-rich, owning an object of beauty and fame that will impress friends and clients is a significant incentive. One effect of this is that the risk of a market bubble is potentially greater. But even ordinary private investors can hardly ignore the fact that, since September 11th, average art valuations have outperformed average annual stockmarket valuations. According to art-market analysts Artprice, $100 invested in art in September 2001 was worth $140 by July 2004. This compares to an average return of only $8.50 from $100 invested in equities (the Dow Jones index) over the same period.
But what about over the longer term?
A few years ago, two professors at New York University’s Stern School of Business came up with the MEI Moses Fine Art index, says Edmund Conway in The Daily Telegraph. Their index measures the sale prices of paintings at major auction houses over the past 50 years. What did they find? That, in the long term, art performs very similarly to equities, coming within 0.5% of the S&P 500. Art also presents more of a risk in that the returns are much more variable. But art significantly outperforms bonds, with which it has a negative correlation, and also gold.
The long-term case for art as an investment vehicle is admirably illustrated by the example of Railpen, says Peter Temple in Superhobby Investing. Railpen (the British Rail pension fund) began investing in art in 1975, primarily as a hedge against inflation. It put £40m into more than 2,400 works of art - a collection that was gradually sold by the 1990s, earning an average 13.1% a year. Cannily, Railpen lent many of its pieces to museums to reduce storage and insurance costs.
Art works best as a long-term investment: paintings can’t be resold quickly at a profit, and won’t provide capital to live off. “Trading volume in art is very low,” says David Darst, chief investment strategist of Morgan Stanley’s Individual Investor Group. “There is a small group of people who buy art to sell, but most buy to hold.”
