| Art funds open up the market to smaller investors |
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Art funds are gaining in popularity amongst investors keen to diversify their art portfolio, and those with smaller amounts to invest. The funds function on the basis that pooled capital is used to purchase a variety of different types of art, and enable investors to achieve a diversified portfolio of art, writes Kay Cogan, founder of ARTFund,
a newly launched international investment fund which focuses on emerging artists - with galleries in London, Cork and Brisbane. |
When considering making an investment, art is not most people’s first choice. However, with some investors making a return of around 11.5 per cent and paintings purchased 20 years ago appreciating in value by 7,200 per cent, the often misunderstood art market is set to become one of the most desirable investment opportunities.
In accordance with increased interest in fine art as an investment opportunity, the aforementioned various art funds have now been set up in order to make the whole process less daunting and more remunerative. The main advantage of these funds is that they allow investors to pool their money together in order to purchase a wider selection of high quality works of art.
Various funds are currently being established, giving people the chance to engage in the art of investment and make very healthy returns on their money.
Art funds function on the basis that pooled capital is used to purchase a variety of different types of art. Some funds only require a minimum investment of ?100 per month over a period of three years and so the opportunity is available to a wide variety of people. The benefits of art funds become even more apparent when compared with the recent poor performance of more traditional forms of investment.
Art often performs best when over investments, such as stocks and shares, are struggling. Indeed, the recent erratic performance of many international stock markets has been the key driving force behind the search for greater diversification into alternative asset classes.
It was recently reported that last year the stock market was out-performed by the art market and sales of English watercolours grew by a third. Furthermore, investing in art is a clever way to diversify risks amongst a basket of assets because art, historically, has always had a very low correlation with other assets, especially stocks and bonds.
The Japanese led art bubble that burst at the end of the 1980s may live long in the memory, but it has served to create an environment where many investors have learnt from past mistakes and a more stable market is now in place.
The funds enable investors to achieve a diversified portfolio of art, removing the risk of investing solely in one medium or artist and being at the mercy of current buying trends. Diversification of risk is, after all, one of the most important elements to factor in when choosing where to invest.
One key advantage to investing in art is that it is not one market, but the aggregation of more than 100 distinct markets that have their own definable patterns of trade and risks. Therefore, investors are able to capitalise on a very specific sub-species of the market and exploit it whilst others are not performing quite so well.
Another noteworthy feature of the art market that makes it distinct from other investment opportunities is that it is essentially supply-driven. For example, selected works by Damien Hirst were famously bought by Charles Saatchi for a very small amount. When the artist became world famous, the works, including the now infamous preserved shark, were sold on to an American buyer for ?11 million, illustrating the fact that supply was completely outstripped by demand.
Therefore, supply is always limited and even for those wishing to invest in new artists, works are produced at a relatively slow pace. Stocks and shares, in contrast, are sold every day all over the world in vast quantities.
However, fine art often only comes onto the market following one of the ‘three ds’, divorce, death or disaster. Even contemporary artists who are in demand will not often produce enough works to satisfy the market and many are also unwilling to do so.
When assessing returns, it is arguably harder to do so in terms of art than other forms of investment. Stocks and shares often provide a more concrete record, as potential buyers can observe how other identical shares are performing in the market. Housing trends can also be extrapolated to offer potential investors a clear idea of what they stand to receive.
Works of art, in contrast, are unique, have a slow turnover and there is no mechanism to check how the price of a particular work or artist is performing. However, to overcome this problem, economists have created a variety of indices, primarily divided into two camps.
Hedonic indices control for the quality features of works and repeat sales regressions track the actual repeated sales of the works. Both these methods have their merits, but it is fair to say that neither provides a full-proof mechanism for assessing returns. In addition to this, taxation issues concerning art investment need to factored in when assessing returns. Insurance, storage and other handling costs vary greatly from country to country and auction house to auction house and these issues also need to be taken into account.
In spite of these ‘hidden’ costs, investing in art still provides a very profitable opportunity for the would-be investor. The key is to engage in risk diversification, best demonstrated by a having a wide-ranging portfolio that investing in an art fund can provide.
Undoubtedly there are risks involved, as there are with any investment. A fall in price is one most commonly associated with fine art, as are forgeries, risks surrounding titles and provenance. Political and economic factors can also alter the art market, such as increased regulation of the European art trade.
However, in choosing to invest in an art fund with a very diverse portfolio, investors are able to hedge against risk within the single asset class. Portfolios that typically mix various assets within art, combining different categories, are often the most effective at doing this. Funds also give scope for individuals to invest who would not normally be able to afford to do so, thereby enabling more people to capitalise on the buoyant art market. Recently there has been an increase in fine art funds, demonstrating how this sector is becoming more attractive to investors. Initially set up by financiers and entrepreneurs, the aim is to make art a more mainstream asset class, much in the same way that property did through the real estate investment trusts that began in the 1960s.
There has also been a marked change in where investment in art has taken place over the past few years. Many people are now choosing not to invest in past masters, whose prices have now more or less flat-lined. Instead, people have changed to contemporary art and, in particular, new artists who are starting out and stand to provide investors with higher percentage returns on their investment.
This is best illustrated in the aforementioned example of Saatchi buying selected works by Damien Hirst and then selling them on at a phenomenal percentage increase. Those investing in emerging artists often see very steep rises in terms of returns in the first few years of the artists’ careers. There is a tendency for prices to stabilise after this initial period and so early investment, as promoted by art funds, can be the most profitable option. |
Kathy Cogan is the founder of ARTFund
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| Article appeared in the November 2005 issue.
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