In uncertain times, the fine art market offers a reassuring investment opportunity. Largely immune to political change, it is less volatile than currencies or capital markets.
The global market was worth more than US$45 billion last year, a 1.7% annual increase, according to the European Fine Art Foundation Report 2017. Prices have fallen back a little from the peak of July 2015, but are around 15% higher than in the market trough of November 2012 and the market is “stable and robust”. The outlook is optimistic.
Wealth managers are looking beyond traditional investment products and there is a strong demand from investors – 88% of private offices and 75% of high net worth (HNW) and ultra high net worth (UHNW) individuals want art in their portfolios, according to the 2016 Deloitte Art and Finance Report.
However, the market can be daunting to newcomers. It has a reputation for being opaque and the major auction houses charge fees of up to 30%. Global auction house sales fell last year by 18.8% while sales by dealers increased by 20% to US$27.9 billion. Looking more closely at these figures, it turns out the big auction houses conducted more of their business privately, which does nothing for transparency in the market.
Most investors are not in the art market purely for sentimental reasons – the emotional benefit of collecting is a pull, but Deloitte Touche found that strong returns were more important to 64% of investors. They see art as a tax-efficient asset with the upside of capital appreciation and want as diverse a portfolio as possible.
Art funds can offer that, combining “defensive” pieces by established artists with some rising stars and a few emerging faces. A balanced portfolio might look like this:
- 50% spread across Old Masters, such as Botticelli and Raphael, combined with an Impressionist, perhaps a Monet, and a 20thcentury name like Modigliani.
- 25% allocated to post-war or Modern greats, such as Liechtenstein, Bacon, and Dalí.
- 25% in high risk categories, such as emerging Latin or Indian art and British contemporary.
That is a good way of managing risk, but art funds are not liquid, and tend to have a long lock-in period. With minimum unit sizes normally upwards of US$250,000, it can also be difficult for new art investors to join. And short-term investors should be aware that even the “blue chip” names can have a bad patch – last year, there was a 68% drop in the auction sales volume of Andy Warhol paintings, a 50% fall in Picassos and falls of more than 60% in Modigliani and Francis Bacon.
Meanwhile, betting too heavily on an emerging artist is as risky as backing a promising start-up. Several graffiti artists have attempted to move on to gallery work – Banksy managed to do it and one of his drawings from ten or 15 years ago, which was then worth a paltry £2,500 (US$3,259), can now reach 100 times that amount, but thousands more like him have disappeared without trace.
“The building blocks of the art market depend fundamentally on quality and trust,” concludes the European Fine Art Foundation Report. “Key to this is maintaining reputation and credibility to ensure longevity, stability, and resilience.”
“Key to this is maintaining reputation and credibility to ensure longevity, stability, and resilience.”
Fundamental Problems Faced in the Market
But for investors, two of the fundamental problems in the market are a lack of transparency and a lack of liquidity. Now, a new art investment platform is promising a unique solution by creating an online marketplace where owners, collectors, and investors can meet without intermediaries to trade in real time. It is taking the idea of art funds, where art pieces are evaluated in financial terms, to a new level by giving investors the opportunity to have fractional ownership in artworks.
Maecenas will use blockchain technology to tokenise and digitally allocate single pieces, or portfolios, to several co-investors who can trade with other parties through an art exchange. While the owner retains 51% of the piece’s value, the remaining 49% can be traded, transforming the dynamics of the market and bringing much greater granularity to art investing. Prices will be market driven and faster digital transactions will create more data points than ever before, allowing investors to monitor the evolution of pieces in a way that has never been possible.
A Secure and Open Global Platform
This will democratise the fine art market, creating a secure, open global platform. Blockchain technology has been used to bring greater transparency to the provenance of artworks; last spring, at the ICT summit in Luxembourg, Deloitte Touche unveiled its ArtTracktive proof of concept, which provides a distributed ledger for tracking the provenance and whereabouts of fine artworks. But this is the first time blockchain is being used to make art investment an easier, more transparent proposition. Lowering the barriers to entry will widen access to the market.
At the Affordable Art Fair in London, works by more than 1,000 artists are on display, ranging in price from £100 (US$130) to £6,000 (US$7,822). Getting investors involved at the bottom end of the market is important, but creating the first real-time trading market for fine art is a more ambitious vision, opening up all sectors of the market and allowing anyone to own a share of a masterpiece.
That could be a catalyst for change in a market that has remained largely unaltered for 300 years. Just about every sector you care to mention has been disrupted by technology – now it’s time for art investors to reap the benefits.