The recent trend for investment diversification has extended to art, as investors shift their concern from weathering the financial crisis to anticipating the inflationary effects of struggling Western governments’ rising debt. Art, like gold and commodities, is considered to be a ‘real asset’ and has a proven record as an effective hedge against inflation. The launch of a number of art investment funds and clubs – which offer
investors the chance to invest indirectly into the art market – has also resulted in art attaining its own status as an alternative asset class. According to research by Capgemini and Merrill Lynch last year, HNWIs are returning to investments of passion. With financial markets still in flux, many HNWIs surveyed indicated that they considered art a good financial investment, and sought out those items perceived to have tangible long-term value. The report highlighted that art investors in places such as India, China and the Middle East have a higher predilection to hold tangible assets – such as art – as a possible inflation hedge. Although there has been surprisingly little research into art’s appropriate allocation in an investment portfolio, we do know that the demand for investments of passion overall is likely to increase in 2011 as wealth levels rebound. The trend is confirmed by the fact that auction houses, luxury good manufacturers and high-end service providers are all reporting signs of renewed demand.
Art is increasingly becoming a small part of the portfolios of HNWIs who are searching for alternative assets. Two distinct strategies in this regard are emerging. The first is designed to emulate the world’s top collectors who tend to focus on specific sectors of the broader art market. Under this approach, investors pursue their goal of medium- to longterm capital appreciation by managing portfolios that cover the most established art sectors – such as Old Masters, Impressionist, modern and contemporary. These sectors are identified for having significant size and maturity of collector base; independent market behaviour, including price performance and volatility; and a long transaction history allowing greater predictability.
The second strategy is pursued by those leading art dealers and auction houses that seek superior short-term returns. Transactions of this nature are considered propositions with increased risks and rewards and often involve the creation of trading opportunities that allow investors to buy and sell works quickly, so they can achieve an immediate return.
An investment approach to managing an art portfolio should combine traditional portfolio management with art world best practice, by drawing on a combination of research, expertise and market intelligence.
The process of determining where assets should be allocated should include a thorough assessment of art market conditions, global economic conditions, the availability of attractive investment opportunities, and suitability of investments to the risk/return profile of the investor. Similar to industry analysis in traditional fund management, the investment process should include a review to determine how trends in each sector are likely to influence the future performance and risk-management benefits of the portfolio.
For the first time, a wealth of data is providing investors with a better understanding of the risk/return potential of art investment.
Established techniques used in the management of all types of asset can now be employed in art investment – allowing investors to incorporate art into their alternative investment strategy.
The last few years have seen the development of art price indices that have aided the comparison of art to other assets such as equities, bonds and gold. The MeiMoses All Art Index and Art Market Research are among the most widely quoted.
However, both are reliant on data from the sales at the main auction houses – due to an absence of data from the dealer market and private sales. Investment in art, as with other investments, involves a substantial risk loss. Economic movements and market trends that could affect
future buying behaviour should be constantly analysed and reviewed. For example, precipitous art market declines are often the result of bursting bubbles within geographic regions or market sectors, such as the one we have just experienced in the contemporary art market.
Equally, investors must make themselves familiar with the risks associated with the purchase of individual works. These include questions of authenticity, title, condition and provenance. Expert advice from both the commercial and academic art world is often required and experts’ credentials should include membership of officially approved associations; vetting committees for major international art fairs; and their acting as consultants to major museums and collectors
Information courtesy of the Weath Report 2011 by Knight Frank and Citi Private Bank