When the gavel struck confirming the final bid in Sotheby’s Manhattan auction house in May, Picasso’s Garçon à la pipe (Boy with a Pipe) sold to an anonymous buyer for $104 million. It was the highest price ever paid for a work of art.
What kind of return did the seller realize for that princely sum? The masterpiece, painted in 1905, had been purchased in 1950 for $30,000 by John Hay and Betsey Whitney. According to Michael Moses, a finance professor at New York University’s Stern School of Business who comanages one of the leading indexes tracking art auctions, that works out to a 16 percent annualized rate of return over the past 54 years, excluding the $11 million commission that was part of the final purchase price.
A 16 percent annual return is a nice premium to the 13 percent average of the Mei/Moses all-art index over that period. (The values in the index do not include transaction, insurance and preservation costs.) The Garçon à la pipe gain also beat the Standard & Poor’s 500 index’s 11.8 percent average annual rise since the middle of the 20th century.
Of course, buying and selling a Picasso is a far cry from trading 100 shares of General Motors Corp. The art market is relatively small -- Dallas-based art economist David Kusin figures that sales last year totaled just $22 billion -- reflecting a fairly illiquid, inefficient and generally opaque field. But art is increasingly becoming a small part of the portfolios of very rich investors who are searching for alternative assets that offer risk-adjusted returns uncorrelated with publicly traded securities.
“It’s all about the search for viable alternative investments,” says Bruce Taub, chairman and CEO of Fernwood Art Investments, an art investment firm with offices in Boston, Miami and New York. “Art can effectively diversify high-net-worth portfolios.”
Advocates like Taub point to the very limited correlation between art and U.S. stocks and government bonds. Over the past 50 years, the Mei/Moses all-art index posted a correlation of 0.17 with the S&P 500 and 0.12 with ten-year Treasuries (1.0 is a perfect correlation).
But others are more skeptical. “I don’t recommend art as an investment,” says Yale School of Management finance professor William Goetzmann, who has studied returns on art over the past 15 years. “It has not proven to be an effective hedge against deteriorating equity markets, at best offering only moderate returns with substantial risk over the long term.”
Notes Mary Hoeveler, managing director of Citigroup Private Bank’s Art Advisory Service, “If you’re looking at an artwork in exactly the same way as you would at shares, for example, I’d say art tends to perform as well as any very low-risk investment but with all the volatility of higher-beta investments.”
The physical condition of a painting or sculpture, its ownership history and concerns about its authenticity are all factors that may affect an artwork’s commercial value at any given time.
Further, as Wolfgang Wilke, an economist at Dresdner Bank in Frankfurt, says, “For various segments of the art market, not even experts can keep track of total supply and demand.”
Even some of the industry’s sales and other performance figures are subject to debate. In surveying the sales of 4,200 French impressionist paintings for the period from 1985 to 2001, economist Kusin found material errors involving final sales prices, dating of works or anticipated presale prices in one third of all reported transactions. However, many art professionals, including Yale professor Goetzmann, question the degree of statistical discrepancy that Kusin claims to have found in the information provided by data aggregators.
Still, art has performed fairly well relative to stocks and bonds. Between January 1, 1999, and the end of 2003, the Mei/Moses all-art index rose at an annualized rate of 8.7 percent. Ten-year Treasuries gained 6.7 percent a year during that period, while the S&P 500 declined 0.7 percent a year.
For the 20 years ended March 31, 2004, art returned an average annual 9.7 percent, versus 13.1 percent for the S&P 500 and 13.7 percent for Thomson Venture Economic’s private equity index.
Extend the time frame to 50 years, though, and art comes out ahead, returning an annualized 12.1 percent, versus 11.8 percent for the S&P 500 and 6.5 percent for Treasuries.
But volatility tends to be high. According to NYU’s Moses, during the past quarter century the Mei/Moses index reported an annualized standard deviation that was about 25 percent greater than that of U.S. equities. One of the most precipitous drops in art values came between the beginning of 1990 and the middle of 1991, when the then-overheated contemporary art market collapsed and the Mei/Moses lost nearly half its value.
Where might an investor find value in today’s market? Art investment advisers suggest that 13th- to 18th-century old masters and 19th-century European and American paintings should prove to be relatively low-risk investments. Their standard deviations are modest compared with those of the rest of the art market, and they have not attracted the frenzied buying that other periods have. Modern and postmodern paintings are rated moderately volatile, while the priciest works -- impressionist, contemporary and emerging art -- are deemed the riskiest plays.
Fernwood’s Taub suggests that good value can be found among modern and postmodern Latin American artists such as Cuban Wilfredo Lam and Mexican Rufino Tamayo, each of whose oil paintings sell for $500,000 to $1.5 million and sometimes more.
“There is significantly increased scholarship and popular interest in these works, and they are still inexpensive compared to the marquee European names,” says Taub.
Economist Kusin suggests a portfolio spread evenly across four categories that he believes would effectively dissipate volatility: early American modernist drawings, from 1930 to 1950; French Barbizon paintings, from the late 1860s to early 1880s; second-tier 17th-century Dutch paintings; and Japanese bronzes from the Momoyama period (1568 to 1600). “These specialized segments of the market have demonstrated distinct pricing behavior that expands portfolio diversity while minimizing downside risk,” Kusin says.
Investors typically use private bankers or art advisers to construct their art portfolios. To date, only one art investment fund is up and running. The London-based Fine Art Fund is a limited partnership. Its founder and CEO, Philip Hoffman, is a former deputy managing director of Christie’s London. Last year the partnership raised $70 million, with about 70 percent of the funds coming from private investors and the remaining 30 percent from institutions. One European pension fund committed $10 million. Requiring a minimum investment of $250,000, the fund carries a 2 percent annual management fee.
“A fund approach is an efficient and logical way for high-net-worth investors to access both qualified managerial talent and significant pieces of the art world at a reasonable cost,” says Hoffman.
Structured to last ten years, the limited partnership will devote its first three years exclusively to purchasing European and American canvases: 30 percent old masters, 30 percent impressionist works, 20 percent modern art and 20 percent contemporary art.
After the third year the fund may begin to sell off its acquisitions. The portfolio, which will be marked to market at the end of every year, aims to be completely liquidated by its expiration date. If market conditions warrant a delay, the fund can take up to an additional three years to complete the sell-off.
Fernwood plans to launch two funds to invest in art. One fund will diversify investments across eight major sectors: 13th- to 18th-century and 19th-century European old masters, impressionists, 19th- and 20th-century American masters, modern, postmodern and contemporary masters and emerging masters. The fund, which will require a three-year commitment of approximately $100,000 for qualified investors, will have a management fee of about 2.5 percent and no termination date. It aims for very low portfolio turnover.
Fernwood’s second fund will be a higher-risk, opportunistic venture. It will search out special opportunities and may trade aggressively.
Although both Fernwood funds are geared to high-net-worth investors, the firm is hoping to attract a few institutional clients as well. As a group, pension funds have been leery of this asset class, but over the years a few have made the move. In 1974, reports Fernwood’s Taub, the British Railways Pension Fund decided to allocate nearly 3 percent of its portfolio -- £40 million ($93.6 million) -- across ten art sectors. It took the fund six years to establish its positions. Between 1974 and the end of 1999, by which time the artwork was completely sold off, the fund’s art portfolio returned an average annual 11.3 percent, versus 10.9 percent for the MSCI Europe, Australasia and Far East index.
