Diversification is one of the fundamental characteristics of a successful investment portfolio, leading many to consider alternative investments, such as investing in art. Art can be a fickle, volatile market, but it can also be a quite lucrative one for the savvy investor. Indeed, on October 1, CNBC published a commentary written by Steve MacLellan, president of Northern Trust Wealth Management’s central region operations, discussing the increase in art collecting for investment purposes.
According to MacLellan, collectors buying art with a sharp eye toward return on investment potentials rose from 53 percent to 75 percent between 2012 and 2014. Annual art sales hit $60 billion in 2014, 67 percent higher than 2009 sales, indicative of a more active market in terms of volume and price. Investment opportunities have expanded beyond the direct purchase of art to include fine arts investment funds and even investment platforms that facilitate crowdfunded art investing.
While experts do disagree on the specific percentage or, for that matter, whether or not fine art even belongs in an investment portfolio, art investments shouldn’t be make up much more than 2 to 5 percent of the average portfolio. For the most part, art should be considered a long-term investment, perhaps even one made for the next generation to reap the return. There are investment experts who suggest that art should be seen more as a preserver of wealth than an investment, comparing art to gold in its ability to protect the value of money against inflation and other monetary system threats.
Art movements come in and out of vogue. Old masters are eclipsed by the art world’s rising stars, with some enjoying a renaissance of interest a generation or two later. Many artists were under-appreciated in their own era, such as Amedeo Modigliani, a contemporary of Picasso who occasionally had to trade a painting for food. A 1917 Modigliani nude is expected to sell for at least $100 million at Christie’s upcoming November art auction. True, deep art and art history knowledge or highly skilled professional assistance should be considered a must for successful art investing.
Investing Via Ownership
The most basic means of investing in art is buying it. Returns, naturally, can vary, but according to Brandeis University economics professor and art market specialist Kathryn Graddy, investors should expect returns between 1 percent and 5 percent. Her estimates are rather conservative compared to those of other industry players, such as London-based art consultant Constanze Kubern. An 8 percent annualized net return after keeping a work of art for at least five years is a reasonable expectation in her opinion. In addition to being an art consultant, Kubern has also managed an art investment fund.
The least volatile classes of art – which does not at all mean free of volatility – the works of the Old Masters are typically priced far out of the range of the average investor. These historic works tend to be traded among the highest echelons of wealthy collectors and investors. Modern art, or works created between 1880 to 1970, post-modern art and contemporary art are much more volatile classes of art and can offer significantly higher returns. Available through private purchases, galleries, auctions and, in the case of contemporary art, directly from the artist himself or herself, these classes of art are often more accessible to a wider range of investors.
Perhaps the most volatile, but also potentially quite lucrative, art market class is that of emerging artists. A knowledgeable investor or one with the guidance of a well-connected, experienced art consultant can do well investing in emerging artists demonstrating great promise, through awards or early art show or gallery successes. Investors in this market tend to hold these works for 10, 15, even 20 years, selling them when the artists have matured and their works are selling at much higher prices. However, history has clearly and often shown that great talent and promise are no guarantee of public appreciation or financial success, so this is a market to treat with caution.
Factor In The Costs Of Ownership
Acquiring and owning art does come with costs that must be considered when calculating investment potentials and possibilities. Aside from the fees associated with buying and selling art, which depending on the venue, can be as high as 25 percent of the price, what you may be paying if working with an art consultant and shipping costs, you’ll also need to pay insurance costs to protect your investment.
Depending on the condition of a work of art, there may be cleaning and restoration costs. This is not uncommon when buying older works, especially those that have been rediscovered after a long period of absence from public record or view. Some works of art will need special storage, such as specific temperature or humidity levels, and that also can be costly.
Sale Isn’t The Only Potential Financial Benefit
Return on art investments is typically thought of in terms of when the art is sold and, depending on the piece and how long it will be held, that return can be decades away. However, there are potentially other financial opportunities to be had before sale. You can rent or lease the art to high-end hotels, restaurants, corporate offices, banks and other places that invest in their décor and feature rotating art displays.
You’ll need a carefully crafted contract that includes all the details, such as length of time, fees and shipping specifics, including costs, responsibilities and standards. Be sure to include a contractual requirement for those businesses to insure your art against damage, theft and loss while in the custody and care of the business renting or leasing it.
A quality art collection can also be borrowed against. There are numerous lenders, including traditional banks, that are willing to make loans with a quality art collection as collateral. Some people use this option as a means to make further art acquisitions. Interest rates can be a bit steep, ranging between 10 percent and 12 percent and, of course, there is always risk involved in this type of transaction. If the loan isn’t repaid, the collateral is lost.
Art Investment Funds Another Option
While outright ownership of individual works of art can be a risky investment, investing in art via art investment funds can somewhat mitigate, but not eliminate, the risks involved in this investment class. According to Fine Art Fund Group CEO Philip Hoffman, his London-based art investment fund typically offers investors a net annual investment return of between 7 percent and 12 percent.
Hoffman cites advantages such as being able to receive bulk discounts in purchasing and lower auction fees as an institutional investing agent as helping to art investment funds to ensure better return rates on a more consistent basis than may be the norm for individual art investors. However, not all art investment funds are created equal and, before investing with one, it is essential to do your due diligence regarding the qualifications of the investment team and their investment return rate track record.
Crowdfunders Moving In
September saw the arrival of the first crowdfunding facilitating art investment platform, heralding the arrival of the market disrupting power of peer-to-peer and crowdfunding networks. Investors buy shares in 40 percent of a work of art’s projected value. The artist receives a portion of that money to help fund the work through completion, exhibition and eventual sale of the work. When the work is sold, the artist receives 30 percent of the sale price. The rest of the money goes to the investors, less any platform fees. The investment goal of this platform is for investors to make $50 for each $100 invested. Time, of course, will tell to what degree that goal will be met.
For as little as $10 a person can begin investing in art and potentially realizing returns on that investment over time. The potential benefits of this are as much social and cultural as they are financial, encouraging a greater engagement with the world of art in a much wider range of people and investors. This type of investment opportunity benefits not just the investor, but also emerging artists that may not have had access to the financial backing they need to take their talents to the next level.
Collect With Diversity In Mind
Diversification helps to reduce risk and opens more income producing options when it comes to rental, leasing and sales options for those who choose direct purchase or group purchasing as a means of investing in art. Spreading your collection over the various classes of art investment helps to insulate you against the risks inherent in more volatile art classes. You may choose to participate in an art investment fund in addition to having your own collection to further diversify your holdings.
Remember, art is a high risk investment and while you can reduce risk, you cannot eliminate it. While there is potential for lucrative returns on art investments, it is also possible that you may never realize any significant monetary return on your investment. Your children may not garner the returns you’d hoped for while assembling your collection. However, investing in art also offers returns beyond dollars and cents. Investing in emerging artists can make a lasting impact on the world of art, expanding it and helping to usher in tomorrow’s masters.