Investing in art: Finances vs. taste

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Nazi art loot expands; public patience ends

Nazi art loot expands; public patience endsTraditionally, collecting art has been a hobby, and a popular passion.

Collectors bought art they liked, did not lose sleep if they “over-invested” in one artist or time period, and generally tried not to overpay.

But as art prices rose higher and higher, the landscape changed, and with the British Rail Pension Fund the industry came into its own.

Launched in the 1970s, the fund acquired many high profile art pieces. In the 1980s and 1990s, the fund began to divest of the pieces, netting tens of millions and eventually leading to an 11% return.

This, argues Barbara Guggenheim, partner at Guggenheim, Asher Associates, Inc, and art consultancy firm with offices in Los Angeles and New York, launched the modern art movement we have today.

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“For the very first time, Wall Street had something very concrete to look at as a model,” Guggenheim has noted.

“And Wall Street loves graphs.”

Art as an asset

As an asset class, collecting art has made a lot of progress over the last ten years, and the worldwide art market is now worth an estimated USD 60 billion.

Buyers are increasingly more likely to make potential profit part of their decision, whether with a financial advisor who focuses on long-term profit, or an art fund which uses the expertise of staff to buy and sell artworks as a collective (often with large discounts on buying fees), and share the profits relatively quickly.

In addition, private collecting is still popular.

Particularly important is art’s ability to hold its value well during periods of financial difficulty – and its supersonic speed of recovery compared to other asset classes such as equity.

The 2008 crash saw worldwide global demand for art – in particular blue-chip pieces (including work by Rembrandt) – to soar exponentially.

In addition, the global reach has broadened; spreading from European and American markets into China, Russia, Latin America and the Middle East.

And with a constantly increasing client base competes for a shrinking pool of museum-quality pieces, the supply shortage pushes prices ever higher.

Rate of return

Yet before a person becomes a collector; a note of caution.

Generalising the financial performance of art is a complex arena, combined many variables such as the mix of many genres, the current financial climate and the current availability of good quality artworks.

With this in mind, a general rule of thumb for a diversified portfolio bought at auction (and thus including buyer premiums) should give a return of around 1% to 5%.

Yet returns in general are susceptible to change like everything else, but one thing is fairly certain – “long-run real returns [in art] are less than investing in stocks,” notes Kathryn Graddy, a Brandeis University in New York economics professor.

On needing to enjoy the work for what it is

This makes personal enjoyment important.

If you are looking at pieces of art purely as investment pieces, your own taste should not come into the auction room with you, and an investor attitude of “you win some, you lose some,” is imperative.

On the other side of the coin, as Professor Gaddy notes, if the art is not purely an investment, the need for you to enjoy the art with your own personal taste is one of the most important factors, and may serve you best in case markets (and art values), change.

“There is no guarantee of increasing value and potential for profits, even if art consultants or a private-equity art fund is used,” Gaddy states.

“In fact, art funds overall do not have a great history or reputation. Hence, buyers should at the very least enjoy what they purchase.”

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