Profit OR Pleasure? Exploring the motivations behind Treasure Trends

Here's an interesting article on investing in so called collectibles like Art, Wine etc. Enjoy

In May 2012, a version of Edvard Munch’s The Scream, sold for a record USD$120 million at Sotheby’s in New York1 after a period of bidding lasting just 12 minutes. It joined one of only a handful of paintings that have exceeded the USD$100 million mark, including Picasso’s Nude, Green Leaves and Bust, which sold for USD$106 million.

The world of collectibles thrives on such fairytales. Stories of investors who bought paintings, wine collections or antiques for a song and then sold them years later for millions abound in the popular media. In 2011, a painting by Roy Lichtenstein sold for almost USD$40 million. Thirteen years previously, its owner purchased the artwork for just USD$2 million. Also in 2011, Gimcrack on Newmarket Heath by George Stubbs sold in London for GBP£22.4 million (USD$36 million), which was amongst the top five highest prices ever paid for an Old Master at auction. The painting had been previously purchased in 1951 for GBP£12,500 (USD$20,000).

These stories of exponential growth understandably stoke investor interest in the world of collectibles. With traditional financial markets still highly volatile and interest rates at record lows, the possibility that art, wine, antiques and other collectibles could earn handsome return that is uncorrelated with broader financial markets is certainly alluring. Add to that a post-crisis mistrust of esoteric financial instruments, and a perception that tangible, scarce and non-fungible investments could provide a stable store of value in uncertain times, and it is no wonder that a growing number of investors have increased their exposure to art, wine and other collectibles.

For today’s wealthy investor, acquiring and holding collectibles is akin to building a store of treasure. The rationale for accumulating this treasure can vary considerably. First and foremost, wealthy individuals acquire treasure because they enjoy it. It may give the man emotional or aesthetic pleasure, or be an interest that they want to share and discuss with friends. They maybe passionate and extremely knowledgeable about art, antiques or sculpture. They may enjoy exhibiting it in museums, or basking in the status that the ownership of a rare and beautiful item can bring. These are perfectly legitimate reasons for accumulating treasure, and these personal holdings can rightly form an important part of any individual’s total wealth.

Gaining access to the market for collectibles, or treasure assets, is now easier than ever. The Internet has opened up the auction process, enabling collectors more easily to bid for and acquire objects anywhere in the world. Collectibles now increasingly share the characteristics of broader financial markets. There are market indices and specialist funds, which enable individuals to invest in art, wine or other treasure assets indirectly. There are even asset-backed financing products that enable collectors to borrow against their treasure assets.

This combination of increased investor interest and more robust market infrastructure has led to a surge in activity across a wide range of different treasure assets. According to Art price, 2011 was the best ever year forsakes of art at auction. Auction house Christie’s had bumper year, with sales up 9% over the previous year to a record USD$5.7 billion. Rival Sotheby’s did even better, with a 21% increase in annual sales to USD$5.8 billion.

Boom times for auction houses however do not automatically translate into strong returns for investors. Collectibles markets are riddled with inefficiencies, are frequently opaque and illiquid, and are extremely volatile and risky. They involve high transaction, storage, insurance and appraisal costs. Appreciation in value can also incur a higher tax burden in some jurisdictions, such as the U.S. Some categories of treasure are also highly susceptible to vagaries in fashion, which can cause prices to fall as dramatically as they have risen. Of course, for many collectors the cost and financial risk of treasure are irrelevant given the intellectual stimulation and aesthetic pleasure it brings to them. But when acquiring such assets primarily for their financial benefits, extreme caution is essential. It has long been known that investors in equities and other financial asset classes can be susceptible to a host of cognitive biases that make it difficult for them to make rational decisions. With art, wine and other treasure assets, these biases can be even more pronounced. When buying a painting, for example, collectors can all too easily let their heart rule their head. The emotional and social attachment to treasure means that investors are extremely likely to make sub-optimal decisions about when to buy, sell or how much to pay.

In this report, we examine the financial and emotional motivations for holding treasure assets, and explore how they should be treated in the context of an individual’s total wealth. We look at recent trends in key collectibles markets, and assess the risks and behavioural biases associated with holding treasure as part of a broader financial portfolio. At a time when investors continue to be concerned about financial markets, tangible assets, such as art and antiques, hold strong appeal. But as we argue, they should primarily be held for the pleasure they bring, rather than any potential financial benefits.

Originally published in "Wealth Insights" from Barclayswealth.com

Motivations to Invest in Art

March of Progress, Jitin Hazarika, courtesy Monsoon Canvas

Diversification: An investment in art can be an effective tool to reduce the risk exposure of a carefully planned investment portfolio. This would be an ideal measure to employ during a period of market volatility.

The prerequisite here, is top-quality art and a long-term view of 10 years or more. Research supports the ability of quality art to survive economic downturn, the value of the holding never going down to zero, compared to many other investments. Art prices have been consistently shown to recover more quickly after crashes than equities.

In addition, art market prices have been shown to have outperformed the S&P500 and more conservative investments in the long-term (Mei/Moses' extensive research of paintings sold at auction over a 50 year period compared to US stock market prices- note both asset classes were ex transaction costs).

Economic slowdown: During these periods investors begin to turn to alternative investments, such as art, when equities and property seem fully valued.

Capital appreciation: This benefit attracts those investors wishing to achieve long-term growth that beats inflation and has a good chance of outperforming the stock market. The factors fuelling this upward trend are an ever-increasing demand of art due to globalization, increasing need for corporate identity, rising incomes and more information lending to better art market transparency. This increasing demand is met by a falling supply of top quality art, as works cannot be produced at will.

Speculation: The best conditions for this aspect are when stock markets are booming and interest rates are low, when investors wealth and confidence is growing. Recently the ability to speculate has also been lubricated by the increasing transparency; availability of comprehensive research and information from the media and Internet, which is helping to define art as a new asset class.

However, caution should be exercised. The art market is illiquid compared to equities, having a lower turnover rate, thereby contributing to the opaque nature of art prices, which can be vulnerable in some sectors due to subjective pricing and faddish trends. Art works normally produce no income streams, they are unregulated and difficult to compare.

In addition, transaction costs, due to agents, often essential for securing the best deal, can be as much as 25% and may wipe out profits in the short term. One should also budget for negative income: storage and insurance. This can be recouped by renting out to museums, corporations and galleries, and having a long-term view.

Extended Boom Period: Art market prices have been shown to carry a beta greater than 1, art prices move up more than equities in boom times and drop lower in crashes (William Goetzmann Yale School of Management). Fortunately there is usually a time lag of between 9mnths and 2 years. For example Oct 87 Crash, Sotheby's and Christies achieved record prices in that year, the art world only crashed at the beginning of the 90's. This is good news for those wishing to engage in art investment with speculative motivations.

Taxation benefit: For those seeking capital gains rather than income. This is of best advantage in a corporate environment because art can be written-off over time as an expense.

Philanthropy: For those investors who want to contribute to, the development and safe-keeping of culture, stimulating growth of the local and world economy at large by investing in the Creative Economy, while also providing much needed support for working artists.

Emotional dividends: A work of art can providing a lifetime of visual pleasure to its owner. In a corporate setting, art well chosen work of art can improve employee wellbeing and productivity.

Social status, Corporate Identity and Brand Management: Through self differentiation, this function has served acquirers for thousands of years...

Remember: Non-speculative reasons for investment in art should be a priority, because most people who have made money have not made it by purchasing art as an investment. The key to a great investment is the combination of knowledge, focus, diversification and passion.


The article originally appeared in http://art2bank.com

Tips for your art investments

Art became an investment fad even among the uninitiated a few years ago. And the inevitable correction followed. We may not see those fancy prices for works of art again says Pheroza J. Godrej, founder of Cymroza Art Gallery, Mumbai.

Her call: After a correction, art sales have picked up within a range of up to Rs. 5 lakh.
Her investment idea: Start small. Buy works of art that you are prepared to live with. Returns will come eventually.

To many people, Indian art became investment-worthy, a commodity to trade in, when the capital market peaked three years ago. Investors, some of whom did not know a brush from a spatula, bought, bought and bought more. They were heavily influenced by the growing interest in Indian art, on the back of highly successful auctions and increasing participation of Indian artists in international exhibitions. Naturally, they did not want to be left out. These “money rollers” had already invested in real estate, commodities etc., and came to art last. Unfortunately for them, that was when art had attained a high premium. When the inevitable correction came, many such investors were romping mad.

Today, the changed scenario in the art market is that there is no desperate selling. Prices are not increasing. There is not much good work available that can be bought at a throwaway price. If people who bought at the peak of the market were to sell now, their portfolios would receive a terrible blow. What I do see now is that artists whose works were artificially priced high — and this happened through auctions — cannot expect their works to continue to command those prices now.

Sales have picked up within a particular price range. Works under Rs.5 lakh are selling briskly. This is a healthy trend and the price level could gradually be pushed up to Rs.10 lakh. However, any price upwards of that would be difficult. People are getting 5 percent returns. They are not even getting their hurdle rate, if they had committed a hurdle rate. This is not a very healthy sign. My personal view is that something as precious as art should not have been treated as a commodity to be traded in the market. Art is something personal. You have to develop an interest in it, you have to do so with a passion – not just to make money and definitely not for a short-term.

The surge had taken place during all of 2007 and the first half of 2008. The top of the moderns went up haywire. There were paintings being sold for a crore, a crore and a half, rupees. Similarly, in the case of the contemporaries, works of the top ten kept rising.

I believe that the correction has been a big leveller. Frankly, I do not think that we are going to see those prices again unless something radical happens — even in the case of F.N. Souza’s work of which there is no shortage in the market.

In the present scenario, however, you may wonder how should artists react. There are two things that celebrated artists can do: if they are working independently, they could negotiate a price with the buyer; or they could instruct a gallery to act on their behalf. Between the gallery and the artist, the price would again be lowered. I have been in this field for 38 years and I know how difficult it is to negotiate with artists, sensitive as they are. This is the ground reality and artists have no choice but to learn how to face it.

In the case of sculptures and similar works, the material cost is high, be it for copper, marble, bronze or brass. Besides, many artists don’t do everything on their own. They bring the creativity aspect, but have studio assistants for the execution. They have these costs to take care of. Further, there is a saturation point up to which a work can be pushed. A new phenomenon is that of Indian galleries tying up with reputed galleries overseas. These galleries have done well for themselves by taking Indian art to the international market. They have also raised the profile of our artists. However, when the recession started hitting America and Europe, this led to Indian art taking a knock as well.

Source: ArtTactic Research
Being connected with an art fund as an advisor, I naturally have to be very, very selective and calculating. How do we go about purchasing works, you may ask. Frankly, for every work that we recommend, the first question I ask myself is, if this work goes on the market, would I buy it. As a result, except for one painting in that fund’s collection, I would buy all the paintings, if I had that sort of money. It is indeed a very good collection.

Investors in art funds should at first look at the credibility of the people managing the funds. There are no paintings when the fund is launched. Purchases come later. Investors have to take the trouble to find out who the people are, under which group are they operating. They should form a personal relationship with the asset management people and get to know, if not meet, the people entrusted with the buying. One would be skeptical of giving away one’s money to someone who would just turn it around very quickly. One could do that by investing in gold or bonds or in something one is familiar and comfortable with, but not in art.

A word of caution to young collectors who do the rounds at art galleries and find that every time they decide to buy a good painting, the price of that particular artist has gone up. My advise to them is to buy a smaller canvas within their budget. Don’t buy a signature for the sake of a signature. Be prepared to live with it. Buy one that you would continue to enjoy. You have decided to put your hard earned money into art, so why don’t you get yourself a good work of art? Don’t buy only from the point of view of how much it will appreciate. So I tell any new collector who I feel would value my advise: the gestation period is very long, buy what you like, enjoy it and look after it. Your returns will eventually come, and irrespective of what happens in the meantime, you will be the winner.

(Co-ordinated by Saumya Roy)
By: Pheroza J. Godrej/Forbes India

This article appeared in the Forbes Indian Magazine, 19 Jan 2010
 
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Book Review : Fine Art and High Finance: Expert Advice on the Economics of Ownership

Fine Art and High Finance: Expert Advice on the Economics of Ownership
Edited by Clare McAndrew
Bloomberg Press, $39.95, 336 pages

The art boom of 2004-07 saw such staggering growth, particularly in contemporary art, that it is hardly surprising that art is increasingly being commoditised, bundled into funds and flagged up as an alternative asset class.
But while most people can recognise a Warhol or a Picasso at 10 paces, they have far less knowledge of the complex issues inherent in trading something that is almost always heterogeneous, in an opaque and unregulated market.

The editor of this book, Clare McAndrew, has a PhD in economics from Trinity College Dublin and runs a consultancy focused on the art economy. Her book The Art Economy, published in 2007, was an investor’s guide to the art market. This book updates and expands the topics covered in that volume, using a team of expert contributors, from art law specialists Pierre Valentin and the Danziger brothers to insurer Jill Arnold.

After a brief gallop through the history of the modern art market, McAndrew outlines its current structure and main players before getting to grips with its economics. She makes the fundamental point that “one of the most important economic features of the market is that it is essentially supply-driven ... increased demand ... cannot necessarily increase supply ... and instead elevates prices”.

But the art market is also difficult to quantify, and even its size, as several contributors point out, is only an estimate: $65bn in 2008, according to McAndrew. Moreover, how do you assess the price of a painting when four Picasso portraits of Dora Maar, all from the 1940s and of comparable size, can sell for between $4.5m and $85m within a three-year period?
There have been many attempts to establish indices for art, none of them completely successful. As Dr Roman Kräussl of Amsterdam’s VU University points out: “All price indices for the art market suffer bias because of inherent problems in the available data.” The only available prices are those made at auction, which eliminates about 50 per cent of transactions, those made through dealers. Having summarised publications from 1974 to 2008, Kräussl concludes that “studies on the returns on art investment have produced very mixed results”.

In the light of this, it might seem surprising that so many art funds have been started. The enormous profits that could be made until last year were an obvious inducement – particularly in India, which, according to wealth management specialist Randall Willett, represented the majority of the 50-odd funds that were “active” in 2009. Willett outlines the various fund models, while McAndrew contributes a case study of the only art hedge fund, based in the UK. Chapters on insurance, government regulation, art banking, risk, taxation, conservation and the illegal art trade complete the book.

There are some inconsistencies in coverage: for example, taxation in the UK and the US are detailed but the chapter on the illegal art trade covers only the US, leaving out the world’s second-largest centre for art trading. Art-related litigation is growing, and UK and US legislation differ in a number of aspects affecting the art market.

What the book cannot do (and nor does it try to) is predict how the art market will evolve, as it is still in the throes of readjustment in the wake of the recent financial crisis. That crisis had a major impact, particularly in the area that had seen the biggest gains: contemporary art, where some artists have seen their value fall by as much as 50 per cent.

The decision to “invest” in art is complex but this book provides a wealth of information for those who are thinking of putting their money – as headline writers love to say – into Monet.

Review by Georgina Adam

Published: January 11 2010 03:47 , FT.com