The art of investing in first-rate paintings
Catherine Graddy, Brandeis University
In the fall of 2018, a Banksy work, âLove is in the Bin,â sold for $ 1.4 million.
Now the original buyer has put the artwork up for sale and it is expected to make over $ 5 million which would represent a return on investment of over 250%.
What if, instead of the art market being the exclusive preserve of the rich, ordinary people could buy shares of an expensive work of art and sell the shares as they pleased?
This is exactly what a new platform, Masterworks, seeks to do.
Art investment funds have been around for over a century. Masterworks, however, has given a new twist to an old practice, in that the platform allows individuals to purchase shares of specific artwork in $ 20 increments. Investors can then sell those shares in an easy to use secondary market or wait for Masterworks to sell the coin and receive pro rata proceeds.
For almost 10 years, I taught economics and the arts with art historian Nancy Scott. In this course, we spend time discussing the history and profitability of investing in art, both in theory and in practice.
For those who are considering buying art purely for investment purposes, it is important to understand how art investment funds have traditionally worked and whether experts think it is. a good investment.
The French pool their resources
One of the first art investment funds was called La Peau de l’Ours (La Peau de l’Ours), which was based in France at the start of the 20th century.
The name comes from a French fable which contains the aphorism “never sell the skin of the bear before you have killed it” – the French equivalent of “do not count your chickens before they hatch” – and he alludes to the fact that investing in art can be a risky business.
Designed in part as a way to support emerging post-impressionist artists, such as Picasso, Matisse and Gauguin, the fund was run as a syndicate in which a small number of partners each contributed identical amounts to purchase a collection of paintings. .
Businessman, art critic and collector Andre Level managed the fund and organized the sale of the paintings. After the paintings were sold, he received 20% of the selling price of his work. The artists received 20% of the fund’s profits in addition to the money they received from the original sale. Investors would then receive the rest in equal proportions.
This concept – returning part of the selling price to the artist – is known as the artist’s resale right. Versions of this are now the law in most parts of the Western world other than the United States.
This first art fund was a success. It created a demand for new works of art and supported innovative impressionist and modern artists, while providing significant return to its original investors.
All funds are not created equal
Another famous investment in art has been made by the British Rail Pension Fund.
This fund was created in 1974 to manage a small part of the pensions of the company’s employees, and the objective was to buy works of art for 25 years before selling them. The fund generated 11.3% compound returns annually, but due to high inflation for most of that time, actual gains were much lower.
Other notable artistic collections ended in failure. The Banque Nationale de Paris art fund sold its investment at a loss in 1999 and a fund managed by British art dealer Taylor Jardine Ltd. did the same in 2003. The UK Department of Commerce closed the Barrington Fleming Art Fund in 2001 after determining that it was set up under fraudulent circumstances. And Fernwood Art Investments, founded by former Merrill Lynch director Bruce Taub, failed to even get started after Taub was convicted of embezzling his investors’ funds in 2006.
Nonetheless, there are art funds that are still in operation, such as Anthea and The Fine Art Group, and, of course, banks and auction houses have long described investing in art as a strategy. appropriate diversification for the rich.
But what do economists say about art as an investment?
Is this really a “floating shit game”?
Economic theory suggests that by definition investing in art could offer lower returns than investing in stocks. This is because it is considered a passionate investment. Like investing in sports memorabilia, jewelry, or coins, part of the return on investment in art should be the intrinsic enjoyment of the objects themselves. The total return consists of the monetary return and the enjoyment of the property.
Since stocks do not offer this enjoyment value for most people, the monetary returns from investing in these financial instruments should, in theory, be greater than the monetary returns from investing in art.
But it is important to really analyze the numbers.
One of the very first papers on the monetary return on investment in art was published in 1986 and written by the late eminent economist William Baumol.
The title? âUnnatural investment: or art as a floating shit gameâ.
Baumol estimated that the long-term inflation-adjusted returns for investing in art, over a 300-year period, were only 0.6%. Some researchers have since estimated higher yields. For example, the work of Yale finance professor Will Goetzmann and economists Jiangping Mei and Mike Moses found inflation-adjusted returns of 2% over 250 years and 4.9% over 125 years, respectively. Estimated returns vary depending on time period, sample and methodology.
In addition, these studies do not include transaction costs, which, when it comes to art, can be substantial, thanks to the large commissions collected by auction houses or private dealers to act as intermediaries. They also do not take into account the selection of samples; paintings that often fall in value cannot be auctioned.
However, both Goetzmann’s and Mei and Moses’ studies find that stock market performance does not appear to correlate with returns on investments in art. It may therefore be beneficial to invest in art as a way to diversify your portfolio.
Art for all?
Masterworks, however, is a little different from the traditional art funds discussed above. Investors buy shares of a single work of art, rather than investing in a fund that includes multiple works. The entry price is much lower, and as long as there are willing buyers for the artwork, investors are not stuck in the fund for a period of time. Investors can earn a return simply by selling stocks that increase in value, without waiting for the artwork itself to be sold.
But like traditional art funds, investors in art stocks sold by Masterworks will earn money if the price of their artwork goes up, and lose their money if it goes down.
Ultimately, Masterworks seems innovative and fun. The format will likely appeal to a younger generation of investors, many of whom may have started investing small amounts through apps like Robinhood.
The site is easy to navigate and could be fun – even I was tempted to try and buy stocks.
But should we hope to become rich by investing in art? Probably not.
Plus, unlike Skin of the Bear, it doesn’t necessarily benefit emerging artists. Masterworks focuses on works established with professional experience, by artists such as Banksy, Andy Warhol and Claude Monet, to name a few.
That being said, Masterworks could get a mass audience to invest in art. But, emptor caution: art is a risky investment.
Kathryn Graddy, Dean, Brandeis International Business School and Fred and Rita Richman Emeritus Professor of Economics, Brandeis University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
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