Art has long been considered an investment of passion, one that not only offers aesthetic pleasure but the potential for economic benefit. Only recently has art investing been viewed through the lens of modern portfolio theory and considered as a potential alternative investment in a portfolio of assets. Though research continues to shed more light on what has been historically an opaque market, studies show that art can offer long-term return potential that is uncorrelated with other asset classes.
Market paradigms have shifted dramatically over the last several decades, as newly created wealth in emerging markets such as China, Russia and the Middle East has increased the number of participants in the art trade, giving the market greater resiliency. Undeterred by a rough economic environment in recent years, collectors globally are paying record sums for top works. Despite art’s attractive upside as an investment, the lack of market transparency, illiquidity and high object costs have generally limited participation to a select class of wealthy individuals, leaving most institutional investors on the sidelines.
Given the murky nature of the art market, it is often misunderstood. Unlike traditional asset classes such as stocks or bonds, there is very little transparency associated with art trading. A large segment of the market is executed through private transactions, making it difficult for outsiders to gain insight. This overall lack of transparency also makes estimating the size of the market a true challenge.
According to The European Fine Art Foundation (TEFAF), the size of the global art market is roughly US$56 billion,1 which reflects public auction data and an estimate of art gallery and private art dealer sales during 2012. That total represents a six-fold increase in size over the last 20 years.
As wealth has grown exponentially beyond North America and Europe in the last several decades, the art market has become more globally influenced than ever before. According to the 2012 RBC/Capgemini World Wealth Report, which analyzes economic factors that drive wealth creation, 2 Asia-Pacific surpassed North America in its high net worth individual (HNWI) population to become the largest HNWI region for the first time. With newly acquired wealth, the demand for luxury goods increases. Fueled by triple-digit growth in recent years, China (including Hong Kong) overtook the U.S. for the first time as the world’s largest market for art and antiques in 2011. However, an economic slowdown in 2012 pared back art market participation, and China slipped to second place behind the U.S. in terms of global market share.
So why invest in Fine Art?
The rich have always surrounded themselves with masterpieces of art – and not only for their physical appeal. There are two main reasons for owning fine art. The first is a love of beautiful things. The second is the fact that the majority of artworks increase in value over time, making them an excellent capital investment.
Long before the appearance of shares or bonds, Europeans knew that investing in art was a profitable and secure way to hold onto their capital. For centuries, old families remained wealthy by traditionally keeping one third of their capital in land, one third in gold and one third in art.
This remains true to this day. Over time, fine art always outlasts and outperforms such riskier assets as stocks, bonds and cash. Art has no credit risk, currency risk, maturity risk or any other kind of risk. It can never go bankrupt. Even if the stock market collapses, you will still be able to enjoy a painting or a sculpture. Your art will probably outlive you.
Besides acting as a good capital investment, collecting art offers you an important psychological boost. Objects of great value and beauty not only provide aesthetic pleasure, but also demonstrate to others your high status, fine taste, good education and financial solidity. They say that the rich buy property, while the super-rich buy art.
Recently, less than 2% of the world’s wealthiest individuals collected fine art. But the good news is that buying art as a capital investment is now making a comeback. Following the 2008 crisis, financiers are increasingly seeking new and alternative investments outside stocks, bonds and cash.
One such alternative is buying fine art – although, as we have seen, it is difficult to call collecting a new type of investment. In every other period in human history, wealthy people have known that investing in fine art is not only a fascinating and absorbing pastime – it is also the best way to retain and multiply your personal wealth.
Today it is accurate to say that Art reduces risk in an investment portfolio without reduction in expected returns. Art must be considered as an independent asset class and should consequently be included within a balanced asset allocation. Art has become a well-known asset thanks to the existence of indexes that compile more than a century worth of data and sale records providing quantitative assessments.
The Benefits of Purchasing Fine Art
There are several important benefits to owning and enjoying fine artworks:
- Art strongly contributes to the preservation of wealth for yourself and your heirs.
- Art offers a unique medium and long-term yield.
- Art has outperformed other asset classes during all of the wars of the 20th century and during the last 27 recessions.
- Art protects you against future inflation, currency devaluation and currency war.
- Art is transportable and can be safely stored and shown.
In an ultra-low or negative interest rate environment, with overvalued global equity, bond markets and chronic pension fund shortfalls, fine Art is drawing the attention of institutional investors seeking greater non-correlated returns on capital.
Fine Art, A Separate Investment Class
Fine Art has become a separate investment class. This asset class is trustworthy, stable, durable and much less subject to violent price swings than the equity markets. Art has proved to be a consistently good investment. According to a survey conducted in 2014 by Deloitte and Art Tactic, an Art -research firm, 76% of art buyers viewed their acquisitions as investments, compared with 53% in 2012.
More museums were created between 2000 and 2015 that in the 19th and 20th centuries combined! 720 museums of more than 5.000 m2 will open all over the world, considerably boosting the demand in fine Art.
Today, the “collecting” community no longer needs to be convinced that their money is being well spent: that is viewed as a given! So, in the same way you hire an investment advisor to manage your securities portfolio and a corporate consultant to streamline your business, Asset Management Protection acts as your personal advisor to help you decide what Art and artists to invest in.