Record prices draw investors into art world

May 6, 2012 @ 12:01 am

By Jeff Benjamin

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((Photo: Bloomberg News))

Last week's record-setting sale of “The Scream,” one of the most recognizable paintings in the world, not only impressed art enthusiasts, it also got the attention of the investment community.

The $119.9 million that an un-identified buyer agreed to pay for Norwegian artist Edvard Munch's 1895 pastel made it the most expensive artwork ever sold at auction, and is all the more striking because the piece was expected to attract bids in the $80 million range.

The sale price broke the record set in 2010 for public auctions when Picasso's 1932 “Nude, Green, Leave and Bust” sold for $106.5 million.

The idea of purchasing art as an investment is probably as old as art itself, but only over the past few years has it started to evolve into something that looks like an asset class.

While it is still beyond the reach of most retail investors, art is finding its way into more investment portfolios held by institutions, family offices and wealthy individuals.

“Art has become a real asset class, because people are now recognizing what art is worth as an investment, and they are seeing the appreciation,” said Steven Halliwell, managing director at The Collectors Fund LLC, which manages portfolios of private art investors.

Mr. Halliwell said that while only about a third of all art sales take place at public auctions, the high-priced deals are helping to fuel a growing appetite for investments in art.

As impressive as “The Scream” sale is, it still doesn't get halfway to the record set in February in the private art market when Paul Cezanne's 1893 “The Card Players” sold for $250 million.

Mr. Halliwell cited several factors driving up prices, including the price strength of art during inflationary periods, a growing awareness of investors, and the impact of large pools of money entering the market.

“While bidding is most apparent in the auction prices for works like "The Scream,' the upward trend is clear in many parts of the art market,” he said.

Consider the two private-placement offerings from The Collectors Fund. The first fund, the American Masters Collection I, raised $20 million between 2007 and 2010 by selling shares starting at $100,000 each.

The fund, which invests in 20th and 21st century American works of art, has generated a 28.5% annualized rate of return since inception on pieces sold from the portfolio.

The second fund, the Twentieth Century Masters Collection, which will expand beyond American works to include artwork from Europe and Latin America, has just started raising capital and will try to raise $100 million by December, with a $500,000 investment minimum.

"A LOT OF SENSE'

Thanks to a growing list of art investment brokers and private portfolios, as well as the emergence of various price-tracking indexes, a case now can be made for art as a legitimate alternative investment.

“It's not just fashionable; it really makes a lot of sense,” said Bob Rice, managing partner at Tangent Capital Partners LLC, a broker-dealer and investment banking firm specializing in alternative investments.

“Art is definitely becoming more of a bona fide asset class than it was even five years ago — when people would have raised an eyebrow about that claim,” he added. “I wouldn't say it's a mainstream asset class yet, but over a very short time, art has gone from zero to a very serious topic.”

If art is being taken more seriously by investors, it is because of the way it has performed. A recent study by Tangent Capital compared the performance of art investments with that of the S&P 500 during four recessionary periods.

For the 1913-20 period, the art composite produced a 12.3% annualized return, compared with 9.9% for the index.

During the 1937-46 recession, the art index's annualized gain was 9.7%, while the S&P 500 was flat.

From 1949 to 1954, the annualized return for art was 15.8%, compared with 10.8% for the index.

And from 1966 to 1975, art had an annualized gain of 15.2%, while the index had an annualized decline of 3.4%.

INFLATION HEDGE

In addition to long-term annualized returns that can hover between 10% and 16%, art investments have proved not to be correlated to most broad-market securities and, as a hard asset, are considered to be an excellent hedge against inflation.

The Tangent Capital study showed that over the 10-year period through December 2010, the AMR American Art 100 Index had just a 0.02% correlation to the S&P 500, a correlation of negative 0.6% to the 10-year Treasury and a 0.7% correlation to gold.

Considering the speed and adaptability of the modern financial services industry, Mr. Rice said he wouldn't be surprised to see an exchange-traded fund or closed-end fund tapping into the art space at some point in the near future.

“I think it will happen, although it might not happen to the same degree we've seen other alternatives, such as hedge fund strategies, reach the retail market,” he said.

The art-investing world still is largely illiquid and closed to the public, with about three-quarters of all sales involving private parties, as opposed to public auctions.

From that perspective, art investing today is comparable to hedge fund investing 20 years ago, according to James R. Hedges IV, a veteran fund-of-hedge-funds operator who two years ago started Artistic Endeavors LLC, a firm that invests in contemporary art on behalf of investors.

“At this point, art investing is still very much opaque and governed by relationships and personalities,” he said.”Investors are certainly starting to view art as part of wealth management and diversification, but the inevitability and the discussions feel like the ones we were having 20 years ago about hedge funds.”

While many of the art funds are structured like private-equity funds that require large upfront investments and commitments of eight years or more, there is nothing stopping anyone from doing the research and investing in art on their own.

CAVEAT EMPTOR

However, as Mr. Rice warned, if you're buying art as an investment, treat it as an investment.

“This isn't magic, where you can just buy art and it automatically goes up in value,” he said. “If you don't know what you're doing, you can easily overpay; that's why you should be riding behind an expert who knows what a reasonable price is.”

jbenjamin@investmentnews.com

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