Art investing and Art Market

A recent post from AW

The art fund market has gone global

As interest in art as an alternative asset class continues to grow among sophisticated investors, we are finding there is an equivalent rise in the number of investment vehicles dedicated to art and other so-called “investments of passion.” Today we are seeing investment vehicles include everything from art, wine and violin funds to classic automobiles. Interest in all forms of passion assets has been accelerating at a rapid pace globally, with a new and discernible demand coming from China. The desire by Chinese investors in particular to preserve the value of their assets against high inflation and market volatility is spurring financial innovation in passion assets.

In our 2011 survey on the art and passion fund market we identified in excess of 40 art and passion investment vehicles at various stages of their development operating in over 13 different countries. Since then, Deloitte has estimated that the global art fund market reached approximately US $960 million in 2011, up from U.S. $760 million in 2010. With over 21 art funds established in China alone since 2010, according to Deloitte’s 2011 Art and Finance Report, one must ask if this rapid rise can be sustained. Art funds in India, which were, in many respects, pioneers in art investment vehicles, have come into the spotlight in the last several years for their poor investment performance due to lack of transparency and investment discipline. However, with the emergence of greater regulatory reform art funds in India are entering a new phase in their evolution and are likely to re-emerge stronger as they rebuild their operating models and invest in robust systems, processes and controls.

Developments in the US and Europe

While we are aware of a number of new art and passion investment vehicles under development this year in the U.S. and Europe, in our estimation the number of active funds has not changed substantially since 2010. To date, the amount of capital raised by art funds in general remains low relative to mainstream alternative investments such as hedge funds and private equity funds, and so far they lack the size and scale required to attract most institutional investors.

In 2009, a combination of factors—including the ongoing financial crisis, the Bernard Madoff scandal and loss of investor confidence—created a difficult capital raising environment for most alternative investment vehicles; art funds were no exception. Investors today are conducting wider-ranging and more in-depth evaluation of alternative funds than ever before as the past few years have brought risk management concerns into sharper focus. Although high net worth investors are gaining appetite for passion investments they are likely to be extremely selective as they decide which investment vehicles deserve their money and will remain slow to commit themselves to new funds which lack an established track record of performance. Recently we have seen the emergence of privately managed accounts from art fund managers seeking to provide investors with higher levels of transparency and control. A managed art account is segregated from any other pool of funds the art fund manager may provide service to, and is tailored to the needs of a specific investor.

Demand for portfolio diversification

Following the events of the past several months we have seen some new momentum around art and other passion investment vehicles among private investors amid the turmoil in the financial markets. Since our last report there have been a number of new developments which could significantly influence demand. First, as signs point to continued turmoil in Europe sophisticated investors are turning to what are called “real assets” to diversify their portfolios and help anchor their investment strategy. Historically, sophisticated investors have relied on “real assets” such as commodities to diversify their portfolios and to protect themselves against the damaging by-products of inflation and volatility. For many wealthy individuals high quality works of art with strong provenance are becoming the real asset of choice and an important component of strategic portfolio diversification.

Many of the gains realized by sophisticated private investors in recent years have been the result of strategic diversification of their holdings by moving into a broad range of asset classes. Most recently, this trend has extended to art, as investors shift their concern from weathering the financial crisis to anticipating the inflationary effects of rising government spending and debt. The low correlation with other financial assets makes art (or at least art in the form of a well -diversified investment portfolio) an attractive strategy. Also, there is growing interest in irreplaceable tangible assets such as art which exhibit defensive characteristics during weak economic periods.

While many investment professionals agree that real assets provide diversification benefits, there has been surprisingly little research into the appropriate allocation in an investment portfolio. Art used in the right way can enable investors to better tailor their investment strategies to address specific financial and investment concerns (e.g. controlling volatility, boosting returns or hedging against inflation). However, making a long term commitment to art and collectibles is important, as the key benefits are strategic in nature. Further, as most analysts will tell you, a long-term horizon helps reduce concerns about illiquidity and volatility.

Future of art funds

So what does this all mean for the future of art investment vehicles? As the market evolves it is clear that the winners will be those art funds that have the operational flexibility to adapt to market conditions and meet investor needs.

A new generation of investor is emerging for which art and other investments of passion are increasingly becoming an important component of their wealth preservation strategy. Looking forward we can expect a number of key themes emerging:

• Art and other passion investment vehicles will continue to grow and evolve, primarily appealing to sophisticated investors as part of a portfolio diversification strategy.

• Investors will intensify their scrutiny of alternative investments and are expected to conduct even more rigorous due-diligence.

• In 2013, we expect to see a growth of managed art accounts offered by art fund managers targeting high net worth individuals which are personalised and tailored to their specific needs.

• The number of art funds from developing economies will increase and will be directly linked to the economic expansion in these countries and the emergence of a new generation of wealth.

• Art as an alternative investment will gain momentum in 2013, primarily from investor disappointment in financial assets and growing demand for "real assets" which offer a long term store of value.

Argus

by

Salvador Dali

Rare graphic from 1960