FINE ART: AN INVESTMENT IN LIVING
Looking for the next hot, lucrative investment is nothing new; entire careers and institutions are dedicated to just this task. A diverse portfolio is key for investors looking to spread their risk and art investment funds are among the more unusual, alternative investment schemes available these days. Marketed as a diversified pool run by savvy managers with decades of experience in the field, art investment funds have popped up throughout the United States, China, India and England. The funds continue to receive interest from investors and money managers despite the lack of successes that has been recorded for many now-defunct funds.
The idea behind art investment funds makes sense upon first inspection. The funds are marketed as an opportunity to combine a rational analysis of the fine art markets with traditional connoisseurial expertise in the form of a panel of art-market ex-patriots headlining each fund. The hope is that these funds will attract "qualified" (read: wealthy persons who would not suffer from substantial financial loss) investors who want a piece of the lucrative art market. The fund experts are tasked with purchasing art and antiques that will produce an annual return of 10-15% and deaccessioning the work after a set length of time. However, after exploring the numerous failed attempts of the art investment fund idea, it is apparent that art can never be measured and quantified in a way that fulfills the investor's requirements. There are no operational guides or manuals about investing in or managing successful art funds.
The idea of the art investment fund is not a new one. Groups have been investing in art together for decades and probably even centuries. The British Rail Pension Fund (BRPF) is an art investment fund that is often referred to by fledgling funds as successful case study. This fund is so widely cited because it is the only example of a successful art investment fund in contemporary times. In 1970 the BRPF amassed more than 2400 art objects. The works were held until the late 1980s and sold off through 1997. BRPF's successful returns can thank the 25 Impressionist paintings responsible for the majority of gains. Upon reflection we must consider that these paintings account for approximately only 1% of the total objects purchased. What would have happened if the BRPF had not diversified as they did? What about if they had not purchased Impressionist paintings at all? Their speculation would have been hugely disappointing - and not oft mentioned.
Despite poor performance, the idea of the art investment fund continues to be marketed to investors. In recent years, more than a dozen art-only investment funds have tried to cash in on the art market's current boom. The new fund managers advertise their superior abilities to identify what artworks and artists are going to be hotter tomorrow than they are today, but do not deny the risk involved. As Fernwood Art Investments Chairman, Bruce Taub, explained in 2005, "We'll play the sweet spot, where we feel safe and where we are likely to make fewer mistakes."¹ In early 2007 Fernwood folded and was promptly sued by former investors.
Art consultants and dealers are making their opinions on such ventures known. Richard Philip, an art dealer in London, says, "It's appalling the way business consultants keep pushing the investment side. It's twisting the traditional way of collecting art round, and distorting it. If you look back at the great art collectors at the beginning of the century, the Pierpont Morgans and the Fricks of this world, they had a genuine passion for the art."² This passion for fine art will never be represented by money-managers and it is this passion that will ultimately lead to a positive experience for art collectors.
It is interesting to note that many major financial institutions, including Citibank, JP Morgan and UBS are all staying out of art investment funds. The party line is that these companies discourage their clients from investing in art for purely financial gains. Tom Werley, head of portfolio construction at the JP Morgan Private Bank explains, "When push comes to shove, art doesn't fit into any definitions of an asset class. There aren't enough data points; there is too much subjectivity when it comes to valuation. We suggest to our clients that they look at art as a quite separate pool of assets from their financial portfolio."³ Such financial institutions advise their high net worth individuals to diversify their personal investment portfolios by adding a token Andy Warhol print or Pablo Picasso painting to their property.
There is no denying that the right artworks have produced great returns. Because of this, most collectors look to invest in artworks that will produce financial as well as aesthetic returns. If you are interested in the art market and want to invest in art, it is a good idea to keep the fund small - either a personal investment or with a partner - and employ the guidance of an art advisor with market experience. The advisor should be a consultant that charges a fee rather than a money manager that is entitled to a percentage of your earnings. While no client wants to add a work to their collection that will depreciate in value, the primary consideration should be how a particular painting or object fits into a collection, as well as its place in art history. Buying art for art's sake has proven to be a successful financial strategy.
So, rather than invest your hard earned money in an art investment fund, take that money and invest in a personal collection that can be enjoyed by your family. Art Cellar Exchange considers investing in fine art to be an investment in living. We encourage our clients to spend time researching art and artists that they are interested in and spend time building a collection that can be enjoyed in their home or office. It is our belief that art does not have to be a purely financial investment; art can be a cultural investment that will provide you with new interests while expanding your cultural and financial horizons. There are many examples of collectors who have purchased art they love only to find out years later that it will sell for substantially more than they paid for it. Rather than a calculated move, this windfall is the perk of having a great art collection.
For the most part, your heirs will reap the benefits of your collection. Artworks that are well bought and carefully selected become more valuable as time goes on and on and on. The real money is being made by those willing to hold on to art for long periods of time. Art is for the aesthetic enjoyment and because of this we encourage our clients to fall in love with a work of art and purchase it with passion. If you do this, you will end up with an investment that will never disappoint.
1. McGee, Suzanne, "Aesthetic Assets: Investment funds offer a new twist on art appreciation," Barron's, April 18, 2005.
2. Flynn, Tom, "Smart Money," Art & Auction, July 2003, p. 34.
3. McGee, "Aesthetic Assets."
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