Why Do Most Art Investment Funds Fail?

Art achieves record prices at auctions. The art market has been generating stable returns over decades. So why do most art investment funds disappoint investors?

The Art Market’s Average Returns Are Convincing

A long-term study by Citi revealed that the art market has returned yields similar to the bond market between 1985 and 2018. In that period, the contemporary art market has returned an average of 7.5%, impressionism 5.0% and the art market in general 5.3%. During the same 18 years, investment grade bonds from developed countries returned similar returns of 6.5%.

The firm also pointed out that art typically outperforms when interest rates are low, because the opportunity cost goes down. Time periods of low real rates do correlate with rising art prices. Under current market conditions, this performance aspect might be of particular interest to investors, as low interest rates appear to be the new normal.

Another study by Artprice.com showed that the ideal holding period should be over 15 years to benefit fully of an artist’s price construction.

© William Iven

Opaque Art Market: The Scientific Evidence

Writing about the art market is not an exact science. Korteweg et al. registered 2.3 million painting transactions between 1960 and 2010. They found a staggering 32,928 paintings with a total of 69,103 repeat sales. Less than 2% of these paintings have been sold at auction during those 50 years. For us, the key question of this study is: What about the majority of the artworks, what about the other 98 percent?

At first sight, the answer to this question does not motivate to buy into the art market. There are additional arguments proving the art market’s opacity:

– a lot of transactions are executed privately

– there is no real art market benchmark respected by the top asset managers

– considerable reservoir of underperforming artworks, distributed across numerous privately held portfolios and thus impossible to discern

– some auctions are the result of bidders with high inventory of an artist protecting the value with price guarantees

– museum accessions with high price tags also go hand in hand with the philanthropic giving for taxable estates

It is impossible to calculate returns without neutralizing those specific market distortions that are not common in other asset classes.

© Austin Distel

Why Transparent Markets Are not Interesting to all Market Participants?

Some investors do require transparent markets. However, for many professional investors, intransparent markets that allow for additional returns once they have studied the market intensively are considered to be ideal for investment. Prices in transparent markets reflect all public knowledge. Prices in opaque markets are very interesting for investors who invest a lot of time and energy in market analysis and can find hidden jewels with extremely high earnings potential.

Robust Market for Works Below 50,000 EUR

Newspapers like headlines like Leonardo da Vinci’s “Salvator Mundi” having been sold for a record 450.3 million USD. The Wall Street Journal published that art achieved a 10.6% return in 2018. However, for most art collectors the much more interesting news refers to stable returns of artworks with a value below 50,000 EUR. This price segment is interesting with regard to both, return and risk.

Why Do Most Art Investment Funds Fail?

An art investment funds invests in individual art pieces. Compared to stock or bond investing, cost management is much more complex. Additional costs to consider include premium for non-liquid assets, framing costs, restoration costs, sales tax, auction fees, insurance fees, appraisal costs and storage costs. The expense ratio that reflects how much investors pay annually in management and administrative costs is higher than in other investment classes. Art does not return cash-flows and the only two options of realizing gains is lending artworks out to museums or selling them outright.

Many art funds simply have too high fixed costs, the wrong portfolio manager with superficial knowledge of the art market and have contributed to negative headlines across financial publications. There are excellent art investment funds, but they are difficult to find and do usually invest in niche segments of the art market. Furthermore, some newspaper journalists prefer to write about scandals and non-performing art funds.

© Markus Spiske

Art Investments Allow for Diversification

Despite higher volatility, art allows investors to diversify their portfolio as its performance is not correlated with any other asset class. Art is independent of strength or weakness in other financial market segments.

Do you think we should investigate further into art funds and create a detailed analysis of returns generated by well known art investment funds as well as hidden art investment champions? Please leave your opinion and suggestions below.

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