The art of investment

Stocks and shares? Bricks and mortar? Or how about a Picasso? Roger St. Pierre examines an alternative investment avenue

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Read the metaphorical fine print inherent in any kind of investment and it always says: “Values may go down, as well as up.” Not that those pouring their cash into fine art investment right now are doing much listening.

Recent sales at Sotheby’s and Christie’s netted US$254.9 million and US$384.7m respectively. Record prices are being achieved around the world.

Mark Rothko’s “White Center” went under the hammer for US$73m, beating the previous record of US$52,7m paid for Francis Bacon’s “Study From Innocent X” – a figure that was itself achieved just 10-minutes earlier.

According to a report in The Economist: “Russian and Chinese millionaires, along with hedge-fund and private equity managers, have run out of houses to buy and yachts to launch and would like to display their wealth on their walls.”

UK and American investors too are seeing art as a hedge against the rollercoaster ride of the stock market.

In June 2006, Gustav Klimt’s portrait of Adele Bloch-Bauer went for a staggering US$135m at a Christie’s New York sale and bidders pockets seem to be getting deeper and deeper. One can only guess wildly at what the ‘Mona Lisa’, regarded as the world’s most valuable painting, would realise if it ever went to auction – which is almost certainly never going to happen as it belongs to the French nation and is the anchor of the Louvre collection. Guesses are that it is probably insured today for around US$350m.

The bubble keeps getting bigger and those who feel bullish say that it’s got a long way to go yet before it either bursts or slowly deflates. This, they aver, is thanks to the rapidly increasing numbers of super-rich with money burning holes in their pockets.

More sanguine observers cast their minds back to the days when auction prices fetched by classic motorcars – old Rolls Royce, Ferrari, Bugatti models and the like – soared higher and higher only to come crashing down to less than a third in value almost overnight. Of course, that market eventually recovered and a 1904 Rolls Royce Silver Ghost has just gone for a world-record breaking amount OF £3.5m.

The same thing occurred in Japan in the late 1980s when a Japanese insurance tycoon paid a then-world-record £20m for Vincent Van Gogh’s “Vase With Fifteen Sunflowers” then winced as its value crashed along with the Tokyo property and stock markets.

Those in for the long haul are unworried by the dramatic peaks and troughs that appear in the market from time to time however. In the long term, art, like quality housing is a pretty much bombproof market. It all depends on whether you can pick your own time to sell or might need instantly available liquidity, forcing you to take whatever value the market offers at a particular point in time.

My own experience at a far more modest end of the market underlines the vagaries. On our honeymoon in a quaint old inn down in deepest Kent, we bought for £35 a highly attractive oil on canvas that was part classic Kentish country scene, part abstract.

It was the work of a then unknown American artist named Richard Ackerman, who was living locally. Suddenly his paintings, which were decidedly 1970s in feel, became fashionable – even featuring on cards and posters available at Athena. Our painting’s value soared into the thousands, only to come crashing back down to nothing as everything 70s, from flair trousers to disco music, suddenly became regarded as the height of bad taste. And since then? Well, the value has slowly climbed back again and is probably now in the low hundreds if you can find someone out there for whom 70s is now back in vogue.

Not that I care, of course, because we bought the picture in the first place because we liked it and I now hold on to it for sentimental reasons.
It’s worth remembering that the value of a piece of art, unlike the worth of the more unfortunate of company shares, rarely disappears forever.

Contemporary paintings may be the current vogue and Jackson Pollock’s works may no longer hit world record prices but they will bounce back. So too will the works of 19th Century artists. Fashions in art wax and wane but are usually cyclical.

It’s also the nature of things that rarity value alone can be a major factor. Take the specialist sector of the Scottish impressionists for instance. Their paintings have little value beyond a hardcore of around 200 serious collectors but these people will pay amazing prices whenever a work comes on the market, which is not that often.

According to a survey by leading insurers Hiscox, who are heavily involved in the art world, English sporting paintings, especially from the likes of Stubbs, Weaver and Loder have close on doubled in value over the past decade, with old masters and contemporary art works in general showing 50 percent and 55 percent gains respectively over the same period – which matches gains in the FTSE All World share index.

One very notable trend has been the massive interest now shown in contemporary artists. David Hockney’s ‘The Splash’, for instance, recently changed hands at auction for a princely £2.9m, a clear million more than his previous best, recorded just a month earlier. It seems that the living are now becoming as valued as the dead!

Of course, it’s the rules of supply and demand that drive prices ever higher – and the new wealth in the burgeoning economies of Russia, the Middle East, India, South East Asia and the Far East means there are more buyers for high-priced artworks than have ever existed previously,

The galleries and museums of the world may be strapped for cash these days but private buyers are more than taking up the slack. One way to start a modest collection is to search out unknown talent – made easy through the website – applying the cardinal rule of buying pictures you actually like and can live with so that any increase in value becomes a bonus rather than a raison d’etre.

If you want to be really serious about art as a financial investment, then you could do worse than tap into, the website of Fine Art Wealth Management, the first consultancy dedicated to analysing and managing the complex field of art investment, with the mission statement: “Combining the rigours of investment management with the specialised knowledge of art experts to integrate art into the overall wealth management strategy for wealth managers and their private clients.”

Explains the consultancy’s Randall James Willette: “Many of the investment gains that private clients have reaped in recent years have been the result of strategic diversification of their holdings into a broader range of asset classes.

“Investments in art, wine, antiques and collectibles have long been attractive to certain private clients; however, there are precious few investment advisors with the experience and knowledge to offer specialist advice in these areas to help their clients expand their portfolios.

“An art collection requires skilled management if it is to become an effective working asset.

“There is a growing demand among private clients to unlock the liquidity in their collections, much as a mortgage provides financial flexibility to owners of real estate.

“A client may wish to exploit the value of an existing collection to finance the expansion of their business, to facilitate new investments or to acquire additional works of art. We can structure and arrange transactions designed to enable private collectors to leverage the capital resources tied up in their collections.”

The most frequently quoted index of art as an asset class is the Mei/Moses All Art Index, compiled by Jianping Mei and Michael Moses, professors at Stern Business School, New York University, which is based on repeat sales of the same paintings and auction price records going back to 1875, allowing art to be compared with other forms of investment.

According to Fine Art Wealth Management: “Art indices tend to have a high volatility while not achieving significantly greater gains than the stock market. However, the extremely low correlation with other asset classes has resulted in art investment funds becoming a highly beneficial investment vehicle that can provide a fruitful avenue for alternative investment strategies.

“The introduction of art investment vehicles has come about because art is now seen as an alternative asset class providing diversification benefits and often superior returns.”

Tax planning is an important consideration for serious collectors. The legislation and practice in this area is complex, obscure and seemingly ever-changing. However, opportunities have long existed to defer and mitigate capital tax charges, applied at death or otherwise, in regards of works of art and other objects of heritage quality: “Art collectors need to make provisions for the ongoing preservation of their collections and their transmission from one generation to the next.”

Generally, capital gains tax is due on the profits of any sales of art for a total price above your CGT-free tax allowance, which is currently £8,800 a year, and the profit will also incur your highest rate of income tax. However, if you sell privately for £6,000 or less there is no CGT while, in the case of a couple, the art can be sold in the name of the partner who is in the lower tax bracket.

As with any investments, the wise kept up with what’s happening in the marketplace. Visit the galleries and exhibitions, read the magazines and newspaper art sections and trawl the internet for tips and trends.

So how to choose your pieces? Consider the artist’s background and influences, their public profile and how regularly and where they exhibit. Is the work part of their mainstream output or a one-off piece not easily recognisable as one of theirs and thus likely to be less appealing to collectors than other examples of their work? Is the painting or piece of sculpture riding high on a wave of fashion that may soon pass or will it still be interesting in five, 10 or 20 years time? And, maybe above all, do you actually like it and would you be content to hang it on your wall and wait patiently for the right time to sell while enjoying it in the meantime?