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Art & Finance Part II: Investing in Fine Art

Art & Finance Part II: Investing in Fine Art

04/13/2015

This is the second installment of learnings from this year’s Deloitte Art and Finance conference at The Armory Show. The central question of the conference was: should art be considered an asset class?

This is the second installment of learnings from this year’s Deloitte Art and Finance conference at The Armory Show, co-sponsored by ARCIS. The central question of the conference was: should art be considered an asset class?

Despite the high volatility of the art market, art has produced on average a 3-4% return per year to investors – not much better than investing in safer alternatives. Regarding the argument that art does not provide dividends, it’s noteworthy that real estate does not produce dividends either, yet it is certainly regarded as an asset class. While it is possible to make money investing in art, collectors should consider the intrinsic value of art when purchasing, which is the primary reason many acquire art – for the joy it brings them.

If you are serious about investing in art, the panel advised looking at repeat sales over time to judge the investment value of a work or an artist. When looking at repeatedly sold works, a good compound return of 6.5 to 7% can be found.

One of the panel’s speakers, Philip Hoffman, manages several hundreds of millions of dollars for his company, the Fine Art Fund Group. He acknowledged that there is a different price point for every collector to enter the art investment game, but found that the best returns come from lower priced paintings – specifically those priced between $25-50,000. As prices go higher, the risk inflates as well.

Another interesting point that was made during this discussion was that works with strong exhibition history don’t always perform as well financially as those without. This was long thought to be a good barometer of whether an artist would perform well in the market – whether he or she had a strong museum presence. Yet many advisors are finding the contrary. Similarly, an artist receiving positive press doesn’t always generate substantial sales.

The panel of speakers predicted that as demand for art increases, the transactional costs will decrease due to increased competition among the mediators of art sales. The holding period of artwork will likely increase as well, differentiating art from the “day trading” of some stockbrokers. The panel noted that most investment-minded collectors expect an art fund to buy and sell art within a 1 to 5 year period.

One fund manager noted that on average, when selling the art he invested in after 2 years, he netted a 15% return. However, if he had held onto that art for 10 years, he would have netted a 40% return. Thus, the average time for holding an asset as an investor should be 7 to 10 years, but definitely not more than 10.

As with any investment strategy, a good art investment strategy includes diversifying your holdings; analyze which areas performed well and then focus on those types of investments. In the current market, the contemporary and Chinese art categories are performing the strongest. However, the past performance of certain artwork is not always indicative of future success, so it’s important to keep an eye out for undervalued markets.

The panel has found that collectors from Latin America, Asia and the Middle East are entering the art market with over $200 million to spend. The art market is not a liquid one but it can certainly be considered an asset class. However, investors in art should remain cautious due to the unregulated nature of the market and unreported pricing. Otherwise, buyers might find themselves involved in Peter Lik-style scheme.

Looking at the future of the art market, the panel predicted a slew of rising art advisors to surface, as well as other mediators who can guide new collectors on how to navigate the market. The popularity of collecting art does not show any signs of slowing down –rightfully so, as art has been collected for over 2000 years. As capital flows in, supply will rise.

Several Deloitte advisors then took the stage where they presented various tax and estate planning strategies. For example, collectors should think about using LLCs to hold art, and if selling their art at a gain, they should be prepared for it to be taxed as a capital gain at a maximum of 28%. This tax is unfortunately much higher than other assets. It’s also important to keep in mind the 3.8% Obama Care surtax on capital gains, so it might be advisable to hold on to these assets until death.

In conclusion, as many investors find art taking up a larger portion of their portfolios, the idea of considering art as an asset class has become more commonly accepted.

Our next post will cover the final topic of the conference – art crime prevention. Come back soon to check it out!

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Art & Finance Part II: Investing in Fine Art

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