Art as an Investment Class

Artworks tend to be one-offs that can’t be superseded by improvements, replicated or rendered obsolete. That combination makes them attractive investment vehicles.

Vincent Chok By Vincent Chok on 5 April 2019

There's a thriving art market centred on art as an investment rather than as a purchase for pleasure. While that’s always been true, there’s been a sharp uptick in the popularity of art as an investment in recent years. In 2015, three artworks — a Picasso, a Modigliani and a Giacometti — sold for over $140m (the Picasso fetched $179.4m). By 2017, 42% of art sales were in the USA, 21% in China, 20% in the UK, and 17% in the rest of the world. In the decade to 2018, the art market’s global value more than doubled.

More artworks, higher prices — the growing global art market

That trend is exemplified in the prices fetched by individual artworks. That Modigliani from the last paragraph went for $100m more than the record price the artist’s work has previously fetched.

"I knew the record would be broken, but not by how much. When you get a work that suddenly makes $100m more, that is the greatest single leap," the global president of Christie’s told the Financial Times.

The art market is finding sellers and buyers in new places. In 2017 the whole art market was worth $63.7bn, of which 52.9% ($33.7bn) was through dealers, while 44.7% ($28.5bn) went through public auction houses. The remaining 2.4%, accounting for $1.5bn in art sales, was online.

Investment in art sounds rosy viewed in these terms.

The difficulties: low liquidity, high sales costs, lack of regulation and standardization

Deloitte sugggests looking at things a little differently, though. They say the main characteristics of art as an investment market are that it’s "high-risk investment, illiquid, opaque, unregulated, high transaction costs, [and] at the mercy of erratic public taste and short-lived trends."

Equally importantly for investors, artworks don’t perform like many traditional investments. Deloitte goes on to point out that "artworks do not generate any cash flows that can be discounted, except to the extent that income can be obtained through lending and incurring expenses in the form of storage, insurance and associated costs. Art investments are also currently virtually 'unhedgeable'."

While those considerations may make art less attractive to many traditional investors, they also apply to many other alternative investments. Art can function as a diversifier, affected by short-lived trends and alterations in fashion and taste but largely unaffected directly by fluctuations in stock and share prices, for instance. In particular, art can be a good way to reduce tax exposure.

Wealth storage and management: Art in trust

Art is increasingly popular as a wealth storage facility: as BlackRock CEO and chairman Larry Fink told Bloomberg in 2015, "the two greatest stores of wealth internationally today include contemporary art, and I don’t mean that as a joke, I mean that as a serious asset class, and the other store of wealth today is apartments in Manhattan, Vancouver and London."

The sharp rises in art prices over the last decade or so mean that art originally purchased to decorate homes may have acquired significant financial value, and considerable value in art is held in private hands. With a slow-moving, illiquid and non-standardized market like art, then, problems arise when collections change hands — especially on the collector’s death.

Whether the impetus to acquire art was financial or aesthetic, when collectors pass on, they leave behind a legacy whose management requires multiple areas of expertise: in addition to the legal experts needed for apartments in Manhattan and Vancouver, for instance, experts in specific artists’ work may be required to verify and value works.

Naturally this places emotional strain on surviving family members. One solution is for collectors to place their collections in trust, allowing for smooth transitions of beneficial ownership to heirs without probate and without taxation worries and the related valuation processes.

This can take several forms. Most commonly, trusts will administer a well-established family art collection, preserving the assets of high net-worth individuals over generations using a trust vehicle created for that purpose. However, it is now increasingly common for artworks to form part of an investment portfolio rather than a private collection per se, and for trustees to be tasked with more responsibilities than simply maintenance. In some cases, trusts are asked to manage collections as investment vehicles.

Legacy Trust Company has been managing personal and commercial trusts for more than 25 years, taking every opportunity to bring our expertise to new markets and marry it with new technology and trends. Talk to us about art, or managing your existing collection!

Disclaimer:

Disclaimer: This publication is general in nature and is not intended to constitute any professional advice or an offer or solicitation to buy or sell any financial or investment products. You should seek separate professional advice before taking any action in relation to the matters dealt with in this publication. Please note our full disclaimer here.

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