Tuesday, December 15, 2009
Guide to investing in art – Art Funds
There are primarily 2 ways in which one could invest in Art.
1. Investing in individual pieces of art work similar to buying shares of a particular company or
2. Investing in an Art Fund which is similar to investing in a mutual fund, where there is no possession of the art work
In an earlier article I had talked about investing in individual art works, this is the continuation of that article on investments into art funds.
What is an Art Fund?
An art fund is like a mutual fund for art, usually paintings. Instead of an investor picking out an artwork on his own, he relies on professionals to do it for him. Like mutual funds, art funds have managers who manage and run the fund. Most art funds are closed ended, with an average term of 5 years.
Art funds have several advantages over investing in individual artworks. Not every investor is knowledgeable enough to choose the right artist; in this situation, it may be wiser to let the experts do it. There is also the advantage of diversification among various artists, styles and genre. One of the main advantages over buying individual artworks is that, it is quite usual that an investor gets attached to the artwork, since the investor is admiring it everyday, and may hesitate to sell when the time is right. This is a quite common and serious disadvantage, because the investment value is lost without booking profits. This can be avoided by investing in an art fund.
Art funds are gaining popularity has an alternative investment option with investment banks like ABM Amro, Goldman Sachs and nearer home Religare, Yes Bank and Bajaj Capital are some of the traditional investment houses that have begun offering art as an alternative.
How does it work?
The fund manager and his team of professionals are mainly from the investment banking industry. The come from various spheres of the art world, like professional trade institutions (galleries, auction houses), publishing (journalism) and academics. The fund management creates an ideal portfolio of art and artists with their intended strategy. The strategy could be to acquire works of old masters and modern artists like Picasso, Titian, Monet through auctions, private collections, museums or commercial galleries. Wait for their prices to appreciate (which it is bound to with the supply being short), before liquidating them for a profit. The returns are then distributed among the investors. On the other hand, a more daring strategy would be to pick and choose currently undervalued artworks and wait for their price appreciation. Due to this most art funds are close-ended and take about 5 years to mature, in some cases even 10.
Once the strategy has been formulated, the selling process begins; at private parties, through investment banks and wealth managers etc. A brochure is printed detailing the artworks planned to be procured. Almost all of these funds target high-net-worth individuals who are on the look out for alternative investments to diversify their portfolio. They also target pension funds, private banks and other sources of cash reserves. The fund management team uses it network and referrals to convince and attract investors. The management then procures the artworks from the various sources, trying to make sure they are getting a bargain. The artworks are then stored in a storage facility or sometimes also lend out to exhibitions and museums for a fee. Some funds also lease the paintings to their investors for a fee. The art funds look for the right opportunity to cash in on their artworks; this is an ongoing process through the life of the fund.
The costs incurred in art funds can be quite high. They mainly include the cost of the fund manager and his team and the cost of storage, insurance and transport. The aggregated costs could come to 10% to 15% of the price of the work. Fund managers are also given a certain percentage of the profits before it’s divided among the investors.
How good are they?
This is the million dollar question. Everything depends on how good the team is and how their selection and art acquisition skills are. It may be too early to tell as, Art funds have emerged as an investment options only in the mid 2000s. One of the first funds of this kind was introduced in the mid-1970s; British Rail Pension Fund put $100 million, or 2.5% of its portfolio, into art. The fund amassed a broad collection of 2,400 pieces, from Chinese porcelains to African tribal art. The portfolio wound up with an annual compound return of 11.3%, but the gains came primarily from 25 Impressionist paintings. The fund sold off all of its art from 1987 to 1999. After a lull Art funds have again emerged as investment vehicles.
But the performance of some of the recent funds like the ABN-Amro Fine art fund and the Osian’s Fine art fund (India) are not very encouraging. They were not able to provide any appreciation to their investors, infact they led to depreciation of the capital.
I think waiting and watching the performance of the existing funds would make sense for somebody who is interested in investing in Art Funds. The next couple of year should see more art funds nearing their term.
Happy Art Investing….
Courtesy : Monsoon Canvas
Posted by Thomas Chacko at 10:03 PM