Collectors should look beyond aesthetics when investing in art
Art collectors can be a determined bunch. Their drive to research, source and capture the object of their desire can result in expensive school fees and the sacrifice of retirement funds in pursuit of "the collection".
Because guilt often accompanies such acquisitions, a rationalisation process invariably begins and the most powerful argument is that a recently acquired work will serve as a wonderful investment.
Although many collectors will not sell any part of their collections, reframing it like this temporarily soothes guilt-ridden minds. Though understandable, this can be a dangerous line. The number of collectors who buy art not only for enjoyment but with an eye on investment is growing and is of concern.
Allocations to art and other "passion assets" in the portfolios of ultra-high-net-worth individuals are expected to increase over the next 10 years, according to Deloitte’s 2017 art and finance report.
Following a slowdown in the global art market throughout 2016, total auction sales at Sotheby’s, Christie’s and Phillips were up 18% in the first half of 2017 compared with the same period the previous year. However, new art collectors should be reminded of the risks inherent in "investing" in art, as well as the more deep-rooted risk of regarding art as a traditional investment asset. Those who treat art as an investment may very well lose money.
Investing in art is a relatively recent concept, christened perhaps with the sale of seven paintings belonging to Erwin Goldschmidt at Sotheby’s in October 1958 for £781,000 — at the time the highest price achieved by a single sale.
But this is a meagre sum compared with the sale, for example, of one painting — When Will You Marry? by Paul Gaugin — for $210m in 2015.
To invest in art is to speculate. Would-be investors will buy with their ears and therefore often buy fashion; but true collectors buy with their eyes and their collections stand a far greater chance of holding value.
True collectors are not driven solely by the desire to acquire objects but also by a desire to acquire knowledge. However, even a collection thoughtfully assembled must still be distinguished from a good investment that outpaces inflation.
Owning and managing an art collection is a complex business requiring frequent advice from a variety of experts. Many experts will have their own agendas and, unlike investment management, the art world is largely unregulated. This means that it is one of the most manipulated markets.
A conservative estimate of forged or misattributed art in circulation is 40% and the actual value of most art is only known after it is sold.
Investing in art is not so much about making money as it is about not losing money. Much art will not appreciate in value and the contemporary art market exhibits elements of a Ponzi scheme, with a large proportion of such works of art having little value shortly after purchase.
Some people buy art because they are seduced by the luxury goods lifestyle. This explains why prolific contemporary artists fetch high prices, which is at odds with normal demand and supply dynamics and an expectation that rare works might be more valuable. Waiting lists to buy such art are often followed by waiting lists to sell.
Consideration must be given to the illiquidity of the art market, the substantial fees involved in both buying and selling a work, insurance costs, storage and conservation of a collection, and the risk the artist may well drop out of favour. It is rare for an individual to become wealthy from an art collection. The very best collections sold return an average of 10% a year. This is not much different from that of the S&P 500 over an equivalent period.
Novice and experienced collectors alike should buy less often and try to choose works that have been tested by history, unless you wish to speculate
Although the visual dividend cannot be quantified, it is possible to calculate foregone yield or opportunity cost of this capital, which is significant over time.
In recent years a predictable "art fund" market has sprung up, but it remains small for the good reason that art is not an investment asset class. Art funds generate neither appropriate investment returns nor enjoyment.
Owning only a small share of a work denies the owner its most obvious utility: aesthetic pleasure. Moreover, the performance numbers are poor and the attractiveness of art as a collective investment vehicle is reduced when lack of liquidity and the inherent volatility of the art market are factored in.
Novice and experienced collectors alike should buy less often and try to choose works that have been tested by history, unless you wish to speculate. A disciplined and patient approach to building a collection will yield a collection of substance.
• Kettle is a partner and head of client management at Stonehage Fleming.