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