An asset class with three beauties
Michael Moses is the keynote speaker at the Art as an Investment conference, organised by Luxembourg for Finance in collaboration with Deloitte Luxembourg. The associated professor of New York University’s Stern School of Business has developed the Mei Moses Fine Art Index that compiles data allowing him to track the long-term performance of fine art. In the LFF interview he talks about the true market size and the comparison to more classical indexes.
What is the Mei Moses® family of fine art indexes used for?
The indexes can be used for several different purposes. They can be used to compare the returns achieved at the major auction houses to those of other asset classes. They can be used with other indexes in wealth management for the design of optimally balanced portfolios. They can be used to mark art assets to market.
How do you measure relative performance of art indexes compared to other more classical indexes?
Once you have an index that explains well the true returns achieved by the underlying assets that make up the asset class then the index can be used just like any other financial index. Each of the Mei Moses family of art indexes explain at least 50% of the variability in the returns of the repeat sale pairs that make up each index. The post war index is at the 50% level while the old master and impressionist index explain over 70%.
What is the demand for art and the market size?
No one really knows the true size of the art market. The only public information is what transacts at auction and that can run from 10-25 billion dollars depending on the year. There is no price transparency in the dealer market and therefore it is impossible to know how big it is on a worldwide basis.
Our guess is that the markets are of about the same size since if one was better than the other it would drive the other out of business which has not yet happened. If you add to these figures the inventory of museums and other institution we would not be surprised by a market capitalization of 2-5 trillion dollars for the entire art and antiques market. Therefore art is a major asset class!
Why make a passion investment?
Art is one the few asset classes that possess three beauties. The observational beauty of the object, the fun of being a collector and the positive, above inflation, return the asset produces. Passion investors get the latter for free, financial investors get the first two for free.
Do you have to be an expert to invest in this relatively new class of assets?
Like any other class study and information gathering are important characteristics of successful investing. Over the last ten years a substantial body of research and transactional databases has become available in the art market to help the fledging investor.
One important fact that any art investor should understand is that art is very democratic. Our research has shown that you do not have not to buy the most expensive works to get the best financial performance. Masterpieces tend to underperform the overall art market.
Is art a safe haven investment in times of crisis?
Our all art index tends to lag the S&P 500 by 6-18 months. It is often the case that for short downturns the art market is not affected at all. However during significant periods of global wealth destruction, like 2008, the art market will not be untouched. Our all art index dropped by about 30% in 2009.
How can an art fund generate return?
Like any other funds an art fund can generate return by the wise buying and selling of the underlying assets. It can also act like a gold or other commodity fund whose assets appreciate on a market to market basis without the paying of a dividend.
Does high quality yield high return?
We have found no quantifiable definition of quality that uniformly implies high returns or less risk based on our database of over 15,000 art objects that have sold at auction at least twice. As mentioned earlier, if price is your definition of quality, then that does not work. If the number of cumulative citations and exhibitions achieved by a work of art at the time of purchase are used to define quality, then a larger count does not yield higher results.
Which works of art have the highest liquidity?
Liquidity in the art auction based market is difficult to measure. Objects are usually not left on the auction house walls for long periods of time, or from auction to auction, waiting for a buyer. We therefore measure liquidity by how likely an object will sell between the auction house estimates or not sell at all.
The question then is: do high price works perform better on these measures than low priced works? This can be studied since the impressionist and modern sales at the biggest auction houses are divided into day and night sales with the really pricey works selling in the night sales.
We collected over 20 years of data on these sales, over 20,000 potential transactions, and found that the no sale rates and the out of estimate rates for both the day and night sales were almost identical. There seems to be no liquidity advantage based on price.