Investing 101: Art as an Investment

June 11, 2020 Posted by : Jorge Cardozo
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When I first heard the concept of art as an investment, I was both astonished and curious. I had many questions in my mind regarding this topic. First, how do you invest in art? How do you know the value of a piece of art? How do you calculate the future price? Why do people invest in art? And so on. 

If this is your first time reading about art as an investment, maybe you fell into the same false premise as I did: elderly and wealthy people are the ones that buy art. Well, I could not have been so wrong about something ever in many ways. Research shows that Millennials are the group with the biggest share when it comes to buying and spending in art, even in larger proportions than the Boomers. And it turns out that female collectors are spending more than men, although they are still fewer in numbers. As for the profile of an investor that invests in arts, now more retail investors are using this asset class as part of the diversification. Art is part of the alternative investments along with, Private Equity, Real Estate, and Hedge Funds, and is an asset class that has been increasing enormously in the last decade. 

The Art Market 

In 2019 global sales of art and antiques were $ 64.1 billion, decreasing 5% from 2018 figures, 

most of the sales (82%) came from 3 countries: US (44%), UK (20%), and China (18%). France was the most resilient country, even showing an increase of 7% in sales. Research suggests that this asset class has been lagging, as its growth rate has been at a slower pace than world wealth, blaming the lack of transparency and innovation in the market. Research suggests that wealth managers will have to rethink the client experience when it comes to offering new options to clients interested in art, moving to a more personal and emotional connection to stand out from competitors. 

The art market is composed of dealers, auctions, art fairs, and online, and it is estimated that there are close to 310,810 businesses operating in the global art market in 2019. As mentioned earlier, this market is operated mainly by High Net Worth collectors, who had on average 76 works in their collections by 2019. 

As for the returns, an index for the top 100 artists produces an 8% compound annual growth rate (CAGR) between 2000 and 2018, compared with 3% for the S&P500.

How to Pick Art Investments

The process of investing in art is almost the same as it is for stocks. You have first to understand what you are buying. The first thing you would like to know is about the artist. Read about her/him. Has he or she won any awards recently? How many times has the artist been in an exhibition for the last 2 or 3 years? This is why it is essential to attend art galleries and get familiar with names and trends around the world. 

Now, let's talk about value. The main characteristic of the type of investor that looks for art is passion. Of course, they do care about having profits but this is not the ultimate goal. You will often hear some advice for people who are starting to invest in art: 1) think of it as it is not part of your portfolio, and 2) beware that this might take even more than 10 years to see an increase in valuation (if there is any).

Unlike the stock market, there is not live-data as supply-demand that determines the price of an asset in the art market. As the art pieces themselves, their valuations are subjective too. The value might be determined by the economic cycle, an artist's reputation, trends, and curators that give a proxy figure. 

Buying Shares of Artwork

Let's imagine now, that you do your research, and you have the extra money to purchase work. How do you buy it? The first thing to come to mind is auctions. Brick & mortar auctions are still surpassing online auctions in terms of sales. As you might imagine, you can buy artwork as long as you have the money to do it. What's new in this market is that you can now buy shares in artwork as it was buying stocks in a company. Usually, the minimum ticket size is around $ 1,000 in this type of investment. 

As you can see, the world is opening up for retail investors today, allowing us to be part of things that were considered merely for wealthy individuals. The most important thing, whereas it is art or stocks, is to educate yourself on the matter and learn all the possibilities and risks associated with the investment. A benefit for investing in the art (as well as any other sub-asset class in the alternatives investments) is that it does not have a strong correlation with the stock market. This means that eventually, it could sort out the volatility problem that the traditional investment faces. 

At the end of the day, investing in art is not entirely for the money, but about the passion for the arts. It is about understanding the artist and the context that led that artist to create their artwork. Once you start on this path you might end it up to loving art as an investment. 

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About Author

Jorge Cardozo
Jorge Cardozo

Jorge has over eight years of experience in wealth management and economic research, managing more than 600 million USD. He has invested in all types of securities, ranging from traditional assets (fixed income securities and funds, global equity) to alternative assets (real estate, hedge funds, and private equity). Jorge holds an MBA from a top global program.