The international art market is having its time in the sun: auction records keep tumbling, living artists have become superstars, and their punchy paintings and shiny sculptures have become the billionaire’s playthings of choice. Amid all this noise, however, it is time to question the much-touted belief that art is also an investment-grade asset.
Most of the related books and headlines of recent years have extolled the potential of art as an investment, not least in comparison to the volatile stock markets and dwindling returns on alternative assets that have characterised the financial markets since the most recent economic downturn. One joke going around the City of London a couple of years ago was that UBS’s art collection had proved more profitable than its investment banking division.
It is understandable that the wider market gloom moved the debate about art as an asset into a new territory. Art, said its proponents, was not only a source of great value, but was also impervious to the world’s economic slings and arrows.
Yet when looked at more carefully as an investment category, art falls short relative to many of the other assets to which it is frequently – and favourably – compared. These include both traditional and alternative investments, whether public and private equity, gold, wine, or residential property. Its lack of correlation to such assets is also questionable.
The combination of the market’s illiquidity, opacity, lumpy supply and asymmetry of information undermines art’s profile as an asset. This is reinforced by the unique qualities of each work – including its history of ownership, trading and display – which create enormous ranges of pricing and valuation, and preclude sensible data aggregation or comparison. The market’s opacity further opens it up to unchecked manipulation.
Price transparency is another huge problem facing those who would map art’s returns on to a Bloomberg screen, alongside their other investments. Only 50 per cent of an already relatively small number of art trades are recorded (auction results are made public, dealers’ prices are not). To put this into perspective, Artnet, a database of auction sales, records that 1.8m works of fine art were offered at auction in 2012. By comparison, there were an average 1.5m trades per day through the London Stock Exchange alone in May 2012.
Even if the limited, patchy and inconsistent available data on art sales could be put into a hypothetical basket of all segments of art, its financial profile is hardly compelling. Most such theoretical analyses of the art market find that the average compound return for works kept for between five and 10 years is around 4 per cent.
Relatively speaking, this is already less than for gold, wine and both public and private equity, and also lower than the residential property market – another market of unique goods, but with more trading volume and available data (as well as an actual and economic utility) than the art market. And this is before considering the so-called risk adjusted return (the profits needed to make up for the peculiarities of any market). One investment professional whom I interviewed for my book* said that, given the risks in the art market, anyone who is content with less than a 50 per cent return on art “needs a lesson in investment”.
Meanwhile, art’s supposed lack of correlation with other markets is not entirely convincing. The price levels for art do not reflect its fundamental characteristics, rather the fortunes of its buyers. The art market as a whole crashed soon after the economic downturn began in earnest in 2008. Thereafter, only the top-priced works recovered as the wealthiest few emerged relatively unscathed from the credit crisis and new wealth was created outside the gloom of Europe and the United States. Many experts also agree that the data frequency to support the correlation claim is much too short to be meaningful, given how relatively infrequently art is sold for a known price. What may seem to be a lack of correlation may in fact just be a lack of information.
This is not to say that art doesn’t offer a different type of return – and even one with some grounding in economic analysis, should this be important. In a 2007 paper, the economists Erdal Atukeren and Aylin Seckin estimated the intangible joy of looking at a work of art – which they define as its “psychic return” – at around 28 per cent. While it would be difficult to persuade a bank to lend money on the back of this estimate (or indeed against most estimates of art’s value), owning and looking at art certainly offer something that a stock certificate or bar of gold do not.
Meanwhile, the social worth of art also cannot be ignored. In recent years, contemporary art in particular has become fashionable. Art fairs such as Frieze and Art Basel – essentially slick trade shows – have transformed themselves into “to be seen at” events around the world, complete with celebrities and VIP events. Participation in today’s art market offers an unparalleled presence in today’s experiential economy: how else could a hedge fund trader find himself sitting next to a film star at an exclusive dinner in a Miami Beach hotel?
For investment purposes, however, while all assets have their risks and peculiarities, art seems to offer none of the saving graces. Like gold, art is a hard asset with no intrinsic worth. But gold, which also divides opinion as an asset, has a daily, fixed, per-ounce price that enables it to be traded as a commodity and certainly a more convincing hedge against inflation. Private equity is a notoriously opaque and often illiquid area of investment, but still offers enough genuine data points from which to create indexes, assess risk and attempt to gauge returns.
Meanwhile, there does not seem to be any impetus to rectify the lack of verifiable and meaningful data in the art market – which underpins most of its profit potential anyway. There is a chance that you make money on your art, and a greater chance that you don’t; the difference is largely luck. Equating a popular asset with a profitable asset is misleading. From an investment point of view, art seems to be a very fragile prospect.
* ‘Art as an Investment? A Survey of Comparative Assets’ by Melanie Gerlis is published by Lund Humphries in the UK (£30) on January 17 and in the US in February ($60)
Melanie Gerlis is the art market editor of The Art Newspaper. She will be taking part in a panel discussion, “Is art really a good investment?”, at the London Art Fair on January 17, londonartfair.co.uk