Evaluating the Current Art Market – Part 2 of 5

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In a recent post about the use of luxury assets in financial portfolios we discussed the use of art as an investment. But clearly art is a very different asset from almost any other – cars are driven, watches are worn, wine is drunk, antique chairs are sat on – but art is simply to be appreciated. In reality, luxury cars, watches, wine and antiques are not always actually put to their original use, but kept as collectibles. The same could be said for art, if it is being used to store and transfer value rather than appreciated for its own merits, does that diminish or even destroy its purpose?

“To attempt an estimate of the money value of the artistic content of our museums would be an intellectual vulgarism… art is a service to society as free from the rules of demand and supply as the service of law” – T. Adams, The Civic Value of Museums

The question arises as art investment becomes more and prominent among ultra-high net worth individuals, at what point does this harm those whose interest is purely in the art itself? As a curator, as connoisseurs, as collectors or as students, does fine art’s increased use as a physical currency diminish its cultural value? In theory the supply of art is unlimited, in reality there are a limited number of artists and works who fulfill the criteria that makes them worthy of study and appreciation.

Art Funds in Depth

The first recognised art investment fund goes back to 1974, though collective art investment pre-dates this by centuries, the British Rail Pension Fund was the first of its kind. A portion of the fund was invested in over 2500 pieces of art over a period of six years, delivering a return of 11.3% per year, between 1974 and 1999.

As of 2014 there were 72 different art funds globally with 55 in China and the rest in Europe or the United States. This is down from a record high in 2012 when 90 funds existed in China alone. In dollars terms, assets under management in art funds have declined almost 40% to around $1.3 billion since 2012.

A chief driver of that decline was changes to regulations in how art investment funds are run, previously there was a lack of transparency and oversight. It could well be this short-term dip in growth will recover in time and potentially be more sustainable with better regulation in place. Considering the total value of art transactions worldwide in 2013 was around $50 billion (£32 billion) we can see that art funds actually account for a relatively small amount of the market.

Benefits of Art Investment

Artnet posed the question of whether this massive growth in the art market was to blame for the decline in medium-sized art galleries. The theory being with more money at stake, that the winner takes it all – leaving only large enterprises and niche private galleries. “One truism is that the market now governs the art business as never before and that the market is subject to the 99/1 effect, as most markets seem to be these days.” – Anthony Haden-Guest, artnet.com.

Gallery owner Kristen Dodge felt that the new wealth in art had positive effects, saying “The so-called 1 percent have enabled us to run our small businesses, and have enabled many of our artists to make a living.”

The Art Fund association also believe there are a number of benefits to the art market – primarily that new money being invested adds liquidity to the art market and helps continue price appreciation during economic downturns. Inevitably this investment also trickles down to gallery owners, artists and art experts who help investors build their collection.

Browsing artnet’s list of “top 10 uber rich art collectors” – it’s also clear to see that those most heavily invested in art are also investing their time and emotion. Glenn Fuhrman for example is the hedge fund manager of MSD capital, but also serves on the boards of MoMA and the Institute of Contemporary Art in Philadelphia and opened a gallery in Chelsea, NY to display works from private collections. Eli Broad and his wife created the Broad Art Foundation in 1984, which lends works of art from their $2.2 billion collection to galleries worldwide.

Art vs. Investment

“If you do buy art, buy what everyone else is buying. It is an entirely false market and one day it will implode, but at the moment it is fiercely profitable.” – Renowned art critic Brian Sewell talking to the Telegraph.

There is always likely to be a conflict being purists and investors – but the two are not mutually exclusive. Investment in art can certainly have benefits for the art world, just as art has a financial and cultural benefit for those who invest.

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Evaluating the Current Art Market – Part 1 of 5 – In the first part we explored whether the current art market is in a bubble

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