Touch the heart of your customers with art
For the last three years, Deloitte Luxembourg has been creating awareness about the increasing recognition of art as an asset class. ArtInsight, and ArtTactic are part of this strategy: both are seminars for professionals who seek hands-on guidance on how to invest in the global art market. Adriano Picinati di Torcello has been analysing the evolution of the art market for several years and is in charge of coordinating initiatives and activities around art and finance at Deloitte Luxembourg. In an interview with LFF, he speaks about other initiatives and the role played by Luxembourg in the growing sector of passion investments.
What is the aim of the Art & Finance seminar series organised by Deloitte?
Wealthy investors are increasingly willing to consider diverse strategies that containing more exotic investment classes, such as art. Luxembourg is currently one of the first private banking centres to benefit from a unique programme on the investment aspect of the art market, such as offered in the Art & Finance seminars.
This seminar series is offered in two parts: series 1 is divided into three sessions (April, May & June 2011) and series 2 is presently planned to take place during the fourth quarter of 2011. Each individual interested in this topic may attend the seminars as a full package or each seminar individually, according to the topics presented.
What is the target audience?
Uncertainty in the market has made capital preservation a top priority. So-called High Net Worth Investors (HNWI) are looking for specialised investment information and deeper levels of advice on tangible assets such as art, gold and gems. Based on the 2010 Capgemini/Merrill Lynch World Wealth Report, a majority of HNWIs are likely to increase their investments in art if they have access to seasoned advice on the art market.
However, art as an asset class is not always familiar to the professional financial advisors who manage those clients’ portfolios. Through the Art & Finance seminars, wealth managers, asset managers, insurance companies, etc. will receive valuable insight which will help them participate in the art market in a knowledgeable and informed way, and cultivate an ongoing relationship with their best customers. The first seminar was attended by 27 people from 13 different organisations based in Luxembourg.
An increasing number of private banks are teaming up with experts to come up with an art market strategy beyond simply offering their clients access to art fairs and other concierge type services. The switching cost in private banking is so insignificant that banks are forced to develop products that appeal to client’s emotions – and art is a good place to start.
In November 2010, Deutsche Bank co-hosted a seminar at its London offices for its wealthiest clients, called Art as an Asset Class. At JP Morgan’s annual conference for ultra-high net worth clients in Paris last year, art investment was on the agenda for the first time. UBS, who dismantled its art advisory desk during the crisis, has revamped it this year.
What other events and initiatives exist regarding Deloitte?
We will be holding our fourth Art & Finance conference in early December 2011 in Miami, at the same time as the Art Basel Miami. We have just released our Art & Finance brochure, in which we present our audit, tax and consulting services for the art, cultural and financial sector.
For several years, now, we have been assisting the different stakeholders in charge of the implementation of the Freeport dedicated to valuable assets at Luxembourg airport, which is the first important building block for the development of an art and finance cluster in Luxembourg.
We expect the announcement of the second building block of this art and finance cluster very soon, which will be a breaking story for the art market and for Luxembourg. We also monitor the development of the Luxembourg intellectual property tax regime with the objective of increasing its scope to cover subjects such as copyright related to art.
Apart from this, we work on different assignments such as the structuring of art, collectibles and other passion investments funds and their regulatory audit services, tax estate planning solutions, art funds identification, assessment and selection, capital raising for art funds and art companies, etc.
Why make a passion investment?
There are many good reasons to make a passion investment. Passion investments are generally consumer durables that yield aesthetic return and capital assets that tend to appreciate in value over time. Additionally and more specifically regarding art, it provides benefits that make it a safe haven, such as the following:
- art provides a hedge against inflation and currency devaluation especially in light of the inflationary monetary policies employed by many countries in response to the 2008 credit crisis and resulting recession
- art is a store of value. There is little risk of losing your principal if you purchase wisely
- art investments enjoy favourable tax treatment
- art provides reduction of risk because of its low correlation with other financial assets, thereby helping to diversify the overall risk of an investment portfolio
- art offers the possibility of earning extra revenue by lending out the art work or participating in events, such as exhibitions and meetings of experts
- art has no geographical risk and can be moved easily. The lack of regulation of the art market provides unique opportunities for arbitrage.
Why do you think passion investments have a serious role to play as a new financial niche?
People have always invested in emotional assets; however, wealthy investors increasingly view art less as a passion and more as a serious asset class in its own right. Art and collectible assets represent sizeable assets for many HNWIs. It is a trillion Euro market, at least, and currently barely served by financial institutions.
Why would you only take care of a portion of the clients’ assets? There is a real opportunity for asset managers, private banks and family offices to expand their service offering by integrating the concept of collectible assets into the overall asset allocation strategy. It is a completely new field which provides room for innovation.
It is also a way to differentiate you from the competition, to keep or attract clients. It is also a complex subject which requires high value-added services to support customers, such as tax, wealth structuring, insurance, conservation, trading and art lending.
What can Luxembourg offer in this domain?
As an international centre for investment funds and private banking, the Grand Duchy offers a wide range of investment vehicles and services to international investors. This trend, art as a new asset class, is an opportunity to broaden the scope of services of the financial sector and strengthen its position as an innovative leader. We believe that art and collectibles are essential to any UHNWI (Ultra High Net worth Investor) or HNWI diversification strategy.
Moreover, when dealing with tangible assets, developing these financial activities will have ripple effects on other sectors, such as the logistics sector, the cultural sector and even tourism, provided that the appropriate measures are implemented.
In collaboration with the Luxembourg Government, we are working on sizeable initiatives to create an art/collectibles and finance cluster in Luxembourg, such as the Freeport, because we believe the particularities of Luxembourg make it the ideal location for this: the presence of an international financial centre, Luxembourg’s political, economic and social stability, the low crime rate, its geographical position, etc. These elements combine to make the Grand Duchy an ideal candidate to offer logistic and financial services around tangible assets.
How do you measure relative performance of art indexes compared to other more classical indexes?
Performance analysis of the art markets have been conducted for more than 30 years. The long-term trend in inflation adjusted for art prices follows the general economic trend, i.e. art prices rise above average compared to the prices of other goods. Historical performance monitored by ‘valuable indices’ demonstrates that over the long term, art generated moderate positive real returns that have a low correlation with the return on stocks and treasury bonds, which gives it a place in a well-diversified portfolio of financial assets in normal market conditions.
In case of a major crisis, all assets move in the same direction. Including 5% to 10% art in a theoretical portfolio shifts the efficient frontier and improves the risk-return ratio of an investment portfolio. Currently 32 indices are accessible on Bloomberg using the ticker all ArtQart index. These indices should be understood as only an indication since they do not capture all the auction house information nor any of the dealers or private negotiation sale prices. Also they are not tradable and do not include the cost of buying and selling art, that can be large.
How can an art fund generate return?
Art funds employ a variety of investment strategies to generate return. The major strategies typically utilised by art investment funds include traditional ‘buy and hold’ strategies such as:
- ‘geographic arbitrage’ strategies, which aim to exploit differences in price realisation for certain artists’ works in different geographic locations;
- ‘regional art’ strategies, which concentrate on investing in art from a particular geographic region (i.e., Chinese art);
- ‘period strategies’, which focus on investing in a particular period of art (modern, contemporary, impressionist, etc.);
- ‘emerging artists’ strategies, which centre around the investment in artists that are not yet established and therefore have the potential for rapid price appreciation;
- ‘intrinsic value’ strategies, which involve investing in works by artists perceived by the fund manager to be selling at deep discounts to their actual or potential value;
- ‘distressed art’ strategies, which focus on the acquisition of artworks at deep discounts from collectors facing bankruptcy or insolvency;
- ‘co-ownership’ strategies, which involve the art fund acquiring works jointly with other third party investors to share the risk of a particular investment and provide for further diversification of the art fund’s investment portfolio;
- ‘showcasing’ strategies, which seek to increase the value of the fund’s art portfolio by arranging for the placement of such works in important museum shows;
- ‘medium’ strategies, which centre on the investment in a single form of media of art (i.e. photography) for which the art fund manager has particular expertise and deal flow.
Most art fund managers employ a diversified investment approach using more than one strategy simultaneously to realise gains for the fund ’s investors. CW