Art as an Investment Class

A work of art catches your eye. You buy it, bring it home and enjoy living with an object of beauty. Many, if not most, of the greatest private art collections started no more strategically than this. As your collection grows in scope and value, however, additional considerations come into play. Your art collection becomes a strategic asset and, like every asset class in your overall investment strategy, it should be managed with a clear-eyed understanding of how value is created and maintained.

In thinking about art as an investment, it’s important to note that it is an asset class unlike any other. The art market, by and large, is confusing, fragmented and inefficient, conferring considerable advantages to those who have the best information over those who are new collectors. It does, however, offer several attractive investment attributes. Investment-grade art has a low correlation to other major asset classes and often experiences lower price volatility. An art collection also offers rewards that transcend the bounds of modern portfolio theory. It can capture your imagination, stir your soul and allow you to surround yourself with objects of beauty.

Art collecting as asset management

The escalating value of certain art genres has raised the visibility of art and collectibles as an alternative asset class. Every month, it appears that new world auction record prices are established for artists. Vaults in the duty-free zones of Switzerland are overflowing with masterworks that never see the light of day. The art world has rapidly expanded into a global market with significant works flowing across borders with a magnitude that probably hasn’t been seen since the Crusades.

All of this extraordinary activity begs a simple question, “Is art a good investment”? Of course, the simplistic answer is, “It depends on how good you are at investing in it.” As Andy Augenblick, President of Emigrant Bank Fine Art Finance, points out, “People tend to think of the overall art market going up or down, but just like individual equities, the price performance of artworks varies considerably from genre to genre and from artist to artist.” The art market, in fact, consists of thousands of submarkets, and effective diversification within the class is very difficult to achieve. While there are indexes that track the art market, notably the MeiMoses® indexes, there is really no equivalent to an equity index investment. You manage this asset class by buying and selling strategically — genre by genre, artist by artist, piece by piece. Just like picking individual securities, success depends on which ones you buy, when you buy them and when you sell.

 

 

INTRINSIC ADVANTAGES AND DISADVANTAGES

By many measures, art as an investment compares poorly to other asset classes. For example, would you buy a piece of real estate that didn’t have a valid title? Would you pay a 20% buyers premium to buy a share of stock? Would you hire someone to spend days to determine whether or not the bond you wanted to buy had been stolen from its rightful owner, then weeks more to ensure that it’s a real bond?

The disadvantages of art as an investment class include:

 

  • Exceptionally high transaction costs
  • Lack of transparency
  • Potential illiquidity
  • Unfavorable tax treatments
  • Sporadic market manipulation
  • Potential fraud and forgery 

 

So, with all those factors working against art as an investment, why are so many astute investors increasing their allocations to art and collectibles? Three reasons:1

 

  • Art has can be used to diversify a portfolio by including assets that do not necessarily move up and down with the financial markets.

  • Second, high-quality, collectible art has tended to hold its value over time.

  • Third, art works can appreciate significantly if you buy the right artists at the right time.

 


Pursuing your collecting passions strategically

As a result of these advantages, art has risen in popularity as a store of value in turbulent times. For it to perform productively in this capacity, however, it must be purchased strategically, maintained properly and sold when the time is right. Any art investment that falls outside the realm of a simple luxury purchase should also be given careful consideration for how it fits into the collector’s overall wealth management and estate plans.

 

 

1 Emigrant Bank Fine Art Finance. http://www.emigrantbankfineart.com/

 

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Morgan Stanley Smith Barney LLC, its affiliates and their employees (including Financial Advisors and Private Wealth Advisors) do not provide tax or legal advice. These materials and any statements contained herein should not be construed as tax or legal advice. Individuals should consult their personal tax advisor for matters involving taxation and tax planning and their attorney for matters involving personal trusts and estate planning.

© 2017  Morgan Stanley Private Wealth Management, is a division of Morgan Stanley Smith Barney LLC.  Member SIPC.

 

CRC 1959851 (12/17)