Introduction
Making investment decisions is a regular exercise performed in the daily operations of life, investing is among the normal course of activities involving decision making. What is essential for decision making is the basic, profound knowledge of getting started and refining decisions based on the sound knowledge collected.
Art is one such area which is a complete profitable investment source; similarly like the positive reception of art, investing has its negligible rules and can open wide to waiver among the various personal perception and interpretations that hold regarding ‘Art Investments’. Investing is an art as an investment are areas which can be open to various personal elucidations. The thriving and flourishing art market has been one of the past years sensational upcoming markets for making secured future investments (Rediff News, 2008). It is an exclusive phenomenon comprising of varied and distinct cultural and financial operations.
It is a recently explored market by creative buyers which have captured the souk on a very large front, soaring up prices for the fresh, unconventional and contemporary artwork while making headlines in the process. Associating the excitement, fun, zeal and passion of artwork and recording prices is a mushrooming idea of art as a form of investment.
There have been various discussions among the highly experienced and professional groups including investment professionals and academic experts over the issue of incorporating arts in the investors’ portfolios incorporating various areas such as diversification, price appreciations, liquidity etc.
The endorsement of art as an authentic and lawful asset class is an audacious component of the current market flourishing phase. Till recently investment in art was not taken to be an imperative part of the asset category as it was considered more off an incomprehensible and obscure field and highly illiquid involving diversified range of artworks which lack uniformity and irregularity of art trading. In art trading, price variations are more frequent in comparison to the stock market with very high operational costs and expenses.
Investing in art market is a very high risk prone investment channel. Depending upon the art fashion trends and rage for artwork, the prices and the appropriate return keep fluctuating, art can be assumed as a new class of asset and nothing but a ludicrous concept. Art as an investment is certainly opening up as a beneficial option for the ingenious investors (Singh K, 2006).
The correlation between art and the investor’s conventional portfolio apportionment is the vital cause for the soaring up of the prices in the Art index. The lessened prices or the lower correlation results in high margin of heterogeneous and diversified investments (Camphell R, 2004).
There is a famous old saying which says that beauty lies in the eyes of the beholder, but the actual beauty of the painting is judged by the value of the art piece in the market, the art investment market is flourishing with an overwhelming response of $23.4 billion credit creation market in the past years in the fine arts and decorative art segment (Campbell J A R, 2004).
The surprisingly thriving art market has attracted many investors in creating art price indices. As per the past data statistics, the Fine Art Foundation reveals that US accounts for a major share in the global art market exceeding the European market leader market.
The rising and falling interest in the art as an investment source has lead to the initiation of various art-investment funds, for instance Fernwood Art Investments, the London-based Fine Art Fund etc. Such investment funds were created especially to facilitate the investors to create a portfolio of artwork and make use of hedging as a tool to protect oneself against the stock-market precariousness.
Earlier people took art as a work of an artist and didn’t hold much value to it but with the growing sophistication and erudition, the art recognition in the security analysis and the portfolio management and planning has been continuously augmenting. The value of the art market is determined by repeat sales of various pieces of art that add in the value of the art work. This is considered to be the fair method of art pricing but does not include all kinds of perspectives such as the transaction fees etc which raises questions from the detractors.
Buying a piece of art is not a very easy job like buying stock due to variations in change of time and trends in the market, however Investment in art can be terrific; art in twentieth century is rising over the past 50 years, the price fluctuations and the structural modifications makes it important for an investor to keep a close eye on the market transformations.
One of the greatest limitations of the art world is that artists are the real losers as the value of their unique masterpieces keeps on appreciating over the period.
The Art of Investing (In General)
Investment in art is a strategy which is gaining a wide acceptance worldwide. Art auction has proved to be a vital secondary market which provides sufficient liquidity in the modern art segment (Goodale G 2004). Art has been considered as a vital component in creating shareholders wealth in the medium to long term investment, with almost negligible risk involved. The appreciation and pricing of art is valued through education, culture, beliefs, ideas, perceptions and critics play a very important role in directing and framing up of ideas and opinions.
Art investment is a practical and feasible mode to earn money in comparison to other sources of paper assets such as stocks, bonds etc. all depends upon the right selection of the art work which can help in increasing the value manifolds in future. The art of investing begins with a basic knowledge of what investment actually should aim for, its objectives and ultimate focus. In-depth research on various mediums of art forms such as paintings, lithographs, pottery or any artistic creation is one of the initial steps of investing.
Corporate finance and investment banking are different forms of art, where the ultimate aim lies in exploring the financial solutions which is almost similar to compose a fine piece of music or creation of fine art (Shvartsman D, 2004).
Many eminent personalities are involved in the process of providing an investment perspective on the modern art economy. The art of investing but requires certain qualities or characteristic features which embody a well defied vision, thorough knowledge, skills, versatility, innovation and constant improvisation on the past techniques and ideas.
In defining the art of investment one needs to be very clear about the three areas including Asset, Risk and Time. Anything that fetches an incoming value is an asset which can vary right from to property to painting, one need to identify these building blocks which are termed as asset. Risk is the most important element of investment and it requires a careful understanding of various risks and their results before plunging on to any sort of investment.
Lastly time factor which can change the entire outlook of things targeted for the future, getting the time right and choosing the right time in investment is the key to the complete investment decision making process. Timing of investment s can have a major impact on their performances.
Art of investing is not about preventing the losses in future but it aims at attaining the pre defined gains and profits. Any investor who has a interest in investing his assets in equities expects a higher rate of return in comparison to other categories available such as bonds, stocks etc.
The art of investing incorporates minimization of the damage or the loss that can be incurred in future due to major price declines. Here three important considerations regarding longer the investment sphere, higher the equity return, diversification of investments in different markets and making regular investments over some time can end up in fruitful results of making investments.
Many institutional investors are being attracted towards making alternative investment, art being one of them look out for portfolio optimization (Camphell R, 2004). Art in investing is about targeting absolute performance by making careful selection of available funds by making use of ranking methods to prioritize the best alternatives from the options available (Alexander C, 2004).
Historical evidences reveal that when funds are selected meticulously and then are reallocated in projects which have minimum variance, then maximum returns are achieved. In art investment which is another option of diversified investments, minimum variances are observed which increases the chances of attaining the best possible performance (Alexander C, 2004).
Investment skills include an accurate interpretation of the available information which can help in assessment of feasibility and viability of the investments according to their risk-return ratio (Campbell J A R, retrieved on 18th Oct, 2008). Having interest and appreciation in art itself in art extends an unquantifiable element of risk to art investment.
Art as a direct investment is risky but is bagged by a personal attachment that overpowers all financial gains or losses whereas on the other hand art as an indirect investment should opt for an alternative protective shield such as such as Art Mutual Fund where risk diversification can enhance the pace of higher financial returns.
Art as an Investment
Art is been regarded as the only product after gold which incurs a steady growth rate from the conception of art as a mode of investment. Art has a potential and a capacity to create money over a substantial period, in the modern scenario, art is sold by the mode of auctions. Making an entry into the art world is open without any trade barriers. In earlier time, people were fond of purchasing artistic commodities, paintings out of shear interest and appeal but now people have started associating art with pure investment goal. In most of the cases, good paintings have been able to fetch almost 100 percent or more or rate of return in the current times.
Many art funds have been created to promote art as an investment; such funds are generally operated by pooling in money from few selected investors who have deep and innate interest in purchasing art objects and also possess a profound appreciation, acknowledgment and admiration for artistic works. However no exact figure can be deduced which can reflect the total quantity of art fund collected. Art is an areas where one requires a lot amount of expertise, the entire process of making art an as investment is an intricate mechanism. The trick is just to nurture the innate talent for making up a good investment.
Investment in art is an option which is distinct from the traditional ways of investment such as cash, money markets etc.
Art attracts many individuals because it is one such medium which is less volatile, risky and more stable in comparison to the old investing ways. Art as an asset helps in creation of wealth on a constant and sustainable magnitude even altering the economic forces system (Artforprofits, 2008).
Historical evidences prove that there have been numerous individuals who are a part of active trading in the old masterpieces, sculptures, coins, antiques etc.
However interest in art works has relatively seen to be little especially related to the commercial art fund than in shares bond etc which provided the investors with higher rewards.
Modern art investment vehicles (AIVs) were formed after the 2000. The main reasons for the creation of such funds was enhancement in the erudition of some part of the investment group which has keen interest in dealing with various derivatives and has the knick of conceptualizing true art work and antiques for accurate evaluation in the specialized market.
Such funds help in aiding of capital in diversified portfolios and maintaining pace with inflation either through the capital increases in value or by revenue flow. Another cause in development of early art funds was an eminent change in the art museums, commercial galleries and auction houses. Art funds are the investment vehicles similar to the hedge funds that act as a safeguard for people who finance capital for the attainment of the artistic work and individuals who are capable in managing funds.
People have conflicting views regarding art as an investment, according to some professionals and academics such as Professor William Goetzmann art should not be considered as investment. Goetzmann, 2003, conducted an in-depth research whereby he concluded that art was not a profitable investment opportunity and pointed out that art was an unproven hedge against falling equity markets.
Art as an investment can provide only a certain limited rate of return with an extensive risk from a long term standpoint. Art work has to be literary sold to capitulate gains not like stocks on which a fixed dividend is provided or not like bonds where a respective rate of interest is earned, art cannot be considered as an income generating asset.
Art as an investment cannot be compared with other kinds of investing decisions as it has its peculiar pros and cons , for instance the possible risks associated with investment in art include possibility of owing or selling frauds and fake art works which is unlike in trading of an financial derivative, art investment is an illiquid auction, it has its maintenance and restoration costs, they produce no such income until and unless completely sold in the market and they owe a high transaction fees (Shvartsman D, 2004)
All the above mentioned risks are not present in other kinds of investments, however on the positive side it cannot be denied that trading in art gives immense pleasure of owing a rare piece of work, it’s a non paper financial asset, it has more chances of future price rise.
Art has a very limited correlation with other derivatives which makes it independent of changes or market fluctuations; art investment helps in gaining all possible diversification benefits (Shvartsman D, 2004).
An assorted showcase of colorful pure artworks is the hot trend floating in the market waiting to become a part of huge investments opportunities shortly. Artists, art dealers and investors worldwide have become a pat of the process in coding suitable value for the unique and magnificent art woks and their future resale value as well.
Investing in Art is supposed to the most profitable, niche investment sector for the art dealers in the future as the price of authentic, classy and pure art works are only on the ladder, stepping towards appreciation and not depreciation on the valuable assets. The art investment can in other words be a fine deal for the buyer and seller when it fetches the dealer a high rate of return on investment.
The only thing which one needs to be careful about in investing in art is its genuineness. It is very important to be able to differentiate an original work from a fake. Thorough knowledge about the artists, their work experience, terms and conditions all need to be verified. To avoid the risk of buying fake art works, art magazines, galleries, internet services should be utilized to prepare oneself before deciding on any kind of investment. Adequate knowledge about the art world is foremost essential component when investing money in art.
Art as an investment lacks transparency and control which is imposed on the market by the Stock exchanges and the regulators of the market (Tuli N, 2008).
Correlation Between Art Market and Security Market (Stock Market, Bond Market)
A well balanced portfolio management aims at diversification and allocation of all assets. Investments that have similar outcomes or which behave in like fashions seem to possess a level of correlation exhibiting same levels of volatility and return patterns. As far as perfect negative correlation matters, such correlated investments are not a part of the real word.
It is a general view that people hold regarding the linkage between the art market and the security market that the future of the art market depends upon the variations of the stock market but in reality as per the findings of Moses, there exists a very low correlation of art with stocks and almost negative correlation with bonds. Art investment serves as a profitable portfolio diversifier (Campbell J A R, retrieved on 18th Oct, 2008).
The art investing market is not directly linked with the stock market and the two have a queering low correlation mainly due to the reasons behind the purchase of art which are completely contradictory to stock purchase. Art investing is not usually done to earn a profit but to own a valuable work of art , both in regards to deep appreciation of the artistic input or may be from being granted the right for possession and bragging for the ownership of a masterpiece.
Art market just like the stocks is also vulnerable to fits of groundless high spirits and exuberance (Gross D, 2006). In recent years, financial careers have evolved investment products including stock, bond, and commodity indices but even more recently funds have been established to create an opportunity for the class of people who have enough surplus money to be invested in portfolio of fine art assets.
Investments such as stocks and bonds have become a part of activities initiated by the most inexperienced investor but art investment requires expertise and a rich experience in evaluating the apt pricing for the product (Andrew C. Worthington, Higgs H, 2004).
In the past statistics of five decades, the rate of return of both stocks and arts have been almost similar with stock giving a return of 10.9% while art with an average of 10.5% per cent per year. This percentage also reveals that both share a very low correlation (Campbell J A R, retrieved on 18th Oct, 2008, 2004).
Though it cannot be said that art investment is the best possible investment source due to its subjectivity to market fluctuations at different point of time and rates just as the financial stock market but the best investment could be a combined investment in art and stocks to reap the maximum gains of a diversified portfolio management.
The benefits that an investor may get by putting up his money in Art Index is mainly due to the low correlation factor. Even though art is highly volatile in comparison to stocks and bonds in the portfolio, yet art investment renders an investor high returns than past gains for a specific level of risk.
To find out the extent of the diversification in portfolio the MAR index can be used which acts as a benchmark in comparison with other types of indices. Investment in art can be though off as an insurance policy which results in benefits of capital value maintenance.
By studying the data available from 1875- 2002, a correlation can be marked between the Art index and the Security market which comes out to be 4.19% (Campbell J A R, retrieved on 18th Oct, 2008, 2004). This low correlation indicated by the US stock market reveals the fact investing in art can be a beneficial option. In the same period, the correlation between the art index and the Government Bond Index was also calculated which resulted in negative correlation.
The extremely low correlation between the All Art Index and Equities and Bonds results as a guarantee to Art investment being a highly beneficial boulevard for private and institutional investors. Looking to strengthen the use of art as an investment one can also study the Jiangping Mei and Michael Moses constructed, Mei/Moses All Art Index that shows an index of prices based on repeat sales of artwork at auction. The data revealed by this index can also be used in comparing price appreciation of artwork in relation with stocks and bonds in performance (Camphell R, 2004). The results of Mei/Moses Art index throughout 1875-2000 proved that art investments overpowered some fixed-income securities. The Mei/Moses index revealed a positive picture for art versus stocks and bonds.
The period ranging from 1999 and 2003, the All Art Index showed a jump of over percent while Ten year Treasuries gained 6.7percent a year and the S&P 500 declined 0.7 percent a year. Statistics reveal that over 20 years ending March 31, 2004, stocks were well ahead but art showed an incredible performance surpassing both stocks and bonds over 50 years (Camphell R, 2004).
There was also seen a significant reduction in the volatility rate of art prices in comparison to the past years, however in recent times seeing the rising interest of non art people in the field just to gain a knack of it has resulted in rising issues regarding the accuracy and reliability of the art indices.
Critics of art funds argue that art indexes can be misleading because they don’t include transaction costs into account which is the most important pricing feature of art work. Another problem with the art market is that they only take into consideration art sold at auction and not other avenues which result in lack of transparency (Goodale G, 2004). Liquidity in the art market is limited, and prices can fall but still the low correlation factor makes it stand tall in the portfolio investment rage.
The number of art sales is expected to reduce at times of downturns becomes more illiquid in creasing the liquidity risk for the investor which is very high in comparison with other financial assets such as stocks and bonds.
Under such circumstances, artworks are not able to reaching their reserve prices which have a significant impact on the art price indices (Andrew C. Worthington, Higgs H, 2004)
The positive effects of low correlation with other marketable securities is shown via the past three years trends where stock market has seen a considerable downfall, the art market has been pretty stable and consistent in returns though market volumes have fallen. For people who possess wealth in surplus and have greater concerns for co-relation issues, investment in art is a good asset to own due to low correlation for equities and fixed income bearing securities such as stocks and bonds (Caine N, 2007). Art performs in a fashion dissimilar to other asset classes under the same market conditions.
Keeping stocks and bonds aside, the fine art indices are themselves not highly correlated which is another positive indication of investing in a diversified art portfolio across numerous artists and different art sectors. As per the data available the correlation coefficients range between 27 percent and 53 percent for the 4 individual art sectors (Campbell J A R, retrieved on 18th Oct, 2008).
As per the data collected for the lowest 10% of returns on the UK equity market in the last 25 year period, the average return on other assets fluctuated between -6 percent for world equity and 1,4 percent for US corporate bonds. On the other hand art provided higher monthly return during the same period in comparison to other financial assets (Campbell J A R, retrieved on 18th Oct, 2008).
Stock Pricing vs Art Pricing
Stock market Investment result in maximization of wealth for individuals, or companies and leads to the desired amount of liquidity and capital appreciation in the form of right shares, bonus shares, dividends, interests etc. Unlike stock pricing, art pricing is significantly insulated by the unpredictability of investment markets providing important diversification when markets observe a down fall. The art market is comparatively less volatile and less sensitive to economic downfall in comparison to other kinds of assets. Art pricing is characterized by distinct features such as high transaction and holding cost (Kostigen T, 2005)
Art pricing is another mode of profitable speculation. The art pricing is reflected through the belief that is spread in the market regarding the irrational faith in a constant price rise. Art owners price their valuables by the purchasing power of the customer who is prepared to pay for the particular assets. The art pricing is observed, where the appreciation of price is almost ten times higher than the original or initial cost of the product. Art pricing rules and guidelines are based on the unique characteristics of each art work in combination with the external market forces, although all art is priced according to the same principles determined by an individual and other experts linked with the art field. Art pricing needs to be somewhat inflationary. (Shvartsman D, 2004)
Pricing in general is determined by the law of demand and supply in the market. As far as art is concerned, many artists have huge demand and supply while others have little or no demand at all. Although artists and galleries fix up their prices depending upon the market rates, still there remains an extra angle to the circumstantial basis that contribute to the final pricing of the product.
In art pricing an artists career, history, size, quality all play a crucial role in determining the final sales price unlike to the market of bonds and stocks where uniformity prevails. In art pricing, especially for the fresher or the beginners what matters most is stability atleast until the time when one achieves an increased sales or increases in the number of exhibitions or displays etc.
As far as a comparison between stock pricing and art pricing is concerned, it is evident that when the market value of an art work increases so does a simultaneous increase in the value of such as stock, bonds, funds is witnessed at a greater rate from a long term perspective. For instance, a Picasso painting would certainly earn a reasonable high return in a span of forty to fifty years but at the same time if the fund would have been invested in stocks of reputable organizations such as IBM, or Infosys, a remarkable growth in the rate of return could be expected in same time tenure (Chandran R, 2003).
Art market is considered to be one of the biggest black markets where now the money is shown to be white by organizing legal auctions and setting up art galleries. Art pricing is far less than stocks pricing, one can’t just click and sell a Picasso’s painting.
However, Due to a remarkable decrease in the diversified benefits, people have started looking for alternatives like investment in art which has a lower downside risk. Unlike Stock returns, Art returns have shown less extreme market movements (Gross D, 2006).
Art investing can be an equivalent or even higher profitable and successful business venture in comparison to the money investments in the financial stock and bond market. However the pricing of the works of art are quite different from the stock pricing.
Art is a tangible object which has more personal reasons attached to its price fixation such as peace-of-mind, appreciation, passion etc which is not in the case of stock pricing, a truly professional investment vehicle ( Andrew C. Worthington, Higgs H, 2004).
A painting may depreciate, but until unless it is destroyed, it is chances of raising its prices in the coming future which is not a feature of stock pricing because once the prices fall out of the market, the money invested in stocks may be lost for ever.
The art pricing is some what similar to the stock pricing as both of them have to undergo ups and downs due to economic and environmental constraints. Both depend upon the pricing which the market can bear.
Critics argue that art is a high risk investment, more than the stocks as well, because pricing of art fluctuate more than the pricing of stocks or bonds because art market is illiquid, opaque and unregulated (Caine N, 2007).
The prices also involve transaction costs which are almost 25 percent higher that sweep off most of the profit margins but other economists contradict the high intensity of art investment by saying that the intensity of risk is high only if investment period is too short. The art volatility is high in comparison to stocks and bonds in less time tenure (Campbell J A R, retrieved on 18th Oct, 2008).
Many experts have pointed out various commandments for fixing up art works, such as Robert Genn and many others in queue, starting with low pricing , then steadily increasing prices, having uniform pricing for all etc all such commandments can’t be a part of stock pricing due to the different market demand , trends and reasons for price fluctuations or variations.
Past research have raised another area in art pricing whereby art prices are also claimed to increase when the artist’s dies due to various reasons, one of them being his opus becomes scarce and antiques than originally anticipated.
In a study conducted by Ekelund, Ressler and Watson, artist’s death and their corresponding affect on the price of the art were analyzed with the help of a hedonic price regression (Ursprung W H, Wiermann C, 2008). Their data was evaluated based on the auction records relating to the art work of 21 Latin American artists who had died in the past twenty years (Campbell J A R, retrieved on 18th Oct, 2008). Leonhardt D, 2006, has revealed a lot about the age and the productivity.
As a result, it was found that the prices did rise in the following year of the artist’s death. Such theories are not applicable when fixing up Stock pricing. Death of the investors or the institutional leaders does not affect the pricing which is more subjected to market forces rather than personal emotions, feelings or value attached like seen with the art work (Ursprung W H, Wiermann C, 2008).
On the other hand, few artists linked Conditional life expectancy as a variable linked with the art pricing as researched by Maddison and Jul-Perdersen (2007). According to them the prices of an artist’s works is determined by the expected total supply which indirectly depends upon the artist’s life expectancy at the time of sale (Ursprung W H, Wiermann C, 2008).
They analyzed data which comprised of auction prices of oil paintings by Danish artists who died during the period 1983-2003. The results revealed that “conditional life expectancy” harmed art pricing. The study further reveals that the death effect is negative for artists who die young while price rises for artists who die at a ripe age earning all the reputation and fame in the market (Ursprung W H, Wiermann C, 2008).
In the end it can be concluded that Art has emerged as one of the safest forms of investment shortly, moreover art’s low correlation with other asset classes, creates an opportunity for realizing diversification benefits being a part of art portfolio investor. The various studies, data analysis and research done in the past as mentioned in the text above state the fact that optimal portfolio allocations provide a positive support for considering art as an attractive offer although it’s just a small addition in the overall investment strategy.
References
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Correlation Statistics for Fine Art Markets 1980-2006
Correlation Statistics for Fine Art and Financial Markets
