Auction Sales of South East Asian Paintings (27 November 14)

An investment in art can bring you more enjoyment than stocks, but payoffs can be chancy.

The first art investment fund dates back at least to 1904 when a Parisian financier, André Level, persuaded 12 other art lovers to contribute 212 francs each to set up a fund that would buy modern paintings. They quickly accumulated works by Picasso, Braque and Matisse amongst others and by the time the entire collection of La Peau de L’Ours (“the skin of the bear”) fund was sold 10 years later their investment had quadrupled.

But most art funds have not been as successful; consequently it is an area that has seen limited development. “Enthusiasts have sought to market professionally-managed funds to institutions and high net-worth individuals,” says Bruce Arnold, director of Caslon Analytics, a research, analysis and strategies consultancy in Canberra. “But overall there hasn’t been a lot of support for such funds, and in practice there has been only a handful of art investment funds. Major institutions have abandoned plans to establish funds or wound them back after discovering that there wasn’t much interest from potential investors.”

The best known funds that have stayed the course are those from The Fine Art Fund run by Philip Hoffman. He spent over a decade working for Christie’s, where he managed the European Old Masters Division before moving to the auction house’s highly regarded fine art dealing operation.

The Fine Art Fund I, which was launched in January 2003 and currently manages over US$60 million, is now closed to investors, but the Fine Art Fund II launched in November last year still remains open for investment until May 2008 and has a target of $50 to $100 million.

Though it may not be as attractive as owning a painting outright, clients are able to borrow the art works. Hoffman also launched The Chinese Fine Art Fund last year and hopes to raise $20 million, and this year The Indian Fine Art Fund was launched with a $25 million target. The minimum investment for The Fine Art Fund II is $250,000, for The Chinese Art Fund it is $100,000 and for The Indian Fine Art Fund $100,000.

“We have a target rate of return for The Fine Art Fund I, The Fine Art Fund II and The Chinese Fund of 15 to 20 percent,” Hoffman explains, noting that The Fine Art Fund I was meeting this target and had an average cash on cash return on assets sold of 69 percent. 

“Increasingly, as investors watch the growth of the market in general, and our track record specifically, they realise that the art market can be a very attractive area for investment. Originally there was a lot of resistance to the idea of art as a legitimate asset class; the art market is highly inefficient, lacks transparency, is unregulated, relatively unexploited and has low correlations to more traditional financial securities such as stocks and bonds,” admits Hoffman. “All of these aspects make it a great market to invest in only if you know what you are doing.” 

Hoffman, who is based in London, says he is completely passionless about art and makes value-based as opposed to emotion-based decisions, “which is an advantage when investing”. While there are a few other art investment funds around, especially those specialising in Indian art, private bankers are extremely cautious about recommending them to investors.

“We do not recommend or currently sell any art fund,” says Karl Schweizer, managing director, head of Art Banking, Gold and Numismatics, UBS Wealth Management. “I personally believe that no art fund that I have seen in the world is structured in a way that I would have a good feeling to recommend it. Most of these funds do not speak about future opportunity and transaction cost and only speak about future estimation. They buy on the retail price level and if they have a fixed holding period it’s very dangerous because if the market knows you have to liquidate these assets you could be in big trouble,” he adds. 

But while most banks do not offer art investment funds, several do provide art consulting or investment services for their clients ranging from research and market analysis to buying and selling at auction or privately, insuring the work, and minimising the tax implications. One of their strong selling points, they claim, is their “objectivity” — unlike art dealers, they are unlikely to have a conflict of interest in the market. Though they are ready to meet the needs of their clients, even providing art collateral loans, bankers remain cautious about advising their clients to consider art as an investment. 

“At Citi Private Bank, we recognise art as an asset class but we do not recommend that clients buy art purely for investment. There are many other investment vehicles that give higher or more predictable returns than art. Of course, there are dealers and others who speculate on art and sometimes do quite well. But in general, serious art buying is for those who are collectors by temperament, and who derive a real pleasure from it. Not surprisingly, these collectors most often end up being the best investors,” explains Mary Hoeveler, managing director of the bank’s Art Advisory Service based in New York.

“We don’t provide investment advice in arts in the classic sense, because nobody can forecast in the same quality level, as you would for stocks, the future Originally there was development of art,” adds Schweizer. “What we do provide is advice on the historical side, provenance, artist relevance.” 

The recent resurgence of interest in the art market, especially in contemporary art, has certainly attracted the attention of investors. Prices have been going through the roof again and few seem to remember what happened to the market in the early 1990s when art prices tumbled. In July, Christie’s International announced historic worldwide sales of nearly $3.25 billion for the first half of 2007, up 45 percent on the same period in 2006. At Christie’s salesrooms around the world, 358 works of art sold for more than US$1 million, nearly twice the number of pieces sold at such prices during the same period last year. “Never before has interest in art and collectibles been so widespread,” noted Edward Dolman, chief executive officer, Christie’s International.

But with prices at such high levels, investors should be extremely cautious. “We’re clearly in a period of ‘irrational exuberance’, buoyed by media hype and the availability of capital for hedge funds and other investment vehicles. There will be a substantial correction, with major declines in prices paid for some contemporary US, UK and Latin American art,” Arnold warns. 

“Will a pile of Brit Art cigarette stubs and condoms or plastic toys have the same value in real prices in 50 years’ time? Certainly not, given that those works are unlikely to be seen as aesthetically pleasing or culturally significant or even displayable and thus they can’t reward the investor with a major tax deduction for donation to a public gallery,” Arnold continued. 

“The contemporary art market is a blown-up one that is often artificially created around a few artistic productions. There are some Chinese artists that are very interesting, but only very few of them will pass the test of time,” adds Schweizer. 

Private bankers also caution that art is much riskier than stocks or bonds and investors should be ready to buy and hold for the long term. “An investment in art is a long-term investment. I would not recommend investing if you’re going to need those funds during the following 10 years,” says Stephane Mathelin-Moreaux, director, Banque Neuflize OBC, a subsidiary of ABN-AMRO in France and responsible for the department that has 70 percent of the French professional art sector (merchants and auctioneers) as clients. 

Mathelin-Moreaux also points out that although there is no immediate correlation between what happens in the financial markets and the art market, there would be a delayed reaction of six to 12 months down the line, especially in the case of a sharp financial market correction. 

“The world is awash with money and more and more people are getting interested in the art market. This explains the strong recent rise in art prices. Demand is much higher than what is on offer,” he says. Art investors should also factor in transaction costs (substantial buy/sell commissions) and insurance, storage, transport, framing and conservation costs.

“You have to look at this specific type of investment in a very careful manner. With bankable investments like shares and bonds, you can do the research on the quality of the company and forecast the future development (which might be wrong); but you don’t have basic economic background with art, you don’t have the possibility of analysing a management’s strategy or its business plan,” says Schweizer who is based in Basel, Switzerland. 

While art is certainly a more enjoyable investment than stocks and can be proudly displayed in one’s home, investors should keep in mind that over the long term art may not have appreciated as much as stocks, professionals say.

“Buying a cache of Warhols or Pollocks in the 1960s for sale in 2007 looks clever in dollar terms, but the investor would have got better returns from buying Apple and IBM!,” Arnold quips. We’re clearly in a period of ‘irrational exuberance’, buoyed by media hype and the availablity of capital for hedge funds and other

FIVE Tips to begin an art collection

Mary Hoeveler, managing director of the Art Advisory Service at Citi Private Bank, offers these tips to would-be collectors:

1. Select one area of interest to start and visit major museums to learn more about the art you like and research great collections in your chosen area, both past and present.

2. Start visiting galleries and auction houses to evaluate what is available.

3. Talk to experts. For example, learn how to evaluate the condition of the art work by visiting conservators. Don’t be shy, they can help you avoid pitfalls and help you learn quickly. The more you see and hear, the better informed you will be.

4. Study market trends and pricing and attend auctions to observe the techniques of auctioneering and bidding.

5. Auctions can present opportunities, but they can be dangerous if you have not done your homework in advance.

Sonia Kolesnikov-Jessop
The article was first published in the PRESTIGE Magazine,October 2007