Reducing the risk with art
“Art as an investment” was the title of a conference organised by Luxembourg for Finance in collaboration with Deloitte at the Musée d’Art Moderne Grand Duc Jean (MUDAM) in Luxembourg. Bringing together, for the first time, artists and gallery owners, wealth managers and service providers engaged in the art market, this first foray into the world of art investment was designed to build awareness that art is an asset class worth discovering.
Investing in art is an art in itself. Making predictions about the future performance of artefacts would be about as realistic as trying to foretell the weather in ten years’ time. The art market is much less transparent than traditional investment markets. It is controlled by its own rules and is more affected by factors such as psychology and emotions, says Fernand Grulms, CEO of Luxembourg for Finance in his welcome address.
He commented that the art market hardly responds to the usual indicators that send shares plunging. “It doesn’t move if oil prices fall or somebody corners the chocolate harvest. Like investment in cars or watches, these purchase decisions are highly influenced by personal taste. The size of the market cannot be measured accurately and is subject to trends and fashions, as well as subjective appreciation of particular artists and their works.”
A developing market
“Fine Art markets have been in continuous evolution expanding to new countries and new customers around the world to reach today a truly global dimension with art centres all around the world” reported Adriano Picinati di Torcello, Senior Manager at Deloitte Luxembourg.
The conjunction of a number of factors, such as knowledge sharing, increasing academic research, a growing population that enjoys a rising disposable income, increased cultural interest, new communication channels and the recognition of art as an investment asset class all support the view that Fine Art markets have entered a more mature phase which should support continuous growth of Fine Art markets over the long term.
For almost three years Deloitte Luxembourg has been monitoring this evolution, so as to increase awareness of the market and understand the potential business opportunity for the Luxembourg financial centre and the Grand Duchy as a whole.
Some concrete projects have already been identified and are in their implementation phases. Deloitte Luxembourg is organising its third annual art and finance conference in Paris on October 21st, following similar events in Luxembourg and London.
Much has happened in Luxembourg
Enrico Lunghi, Director of the MUDAM, gave a condensed introduction to the development of the Luxembourg cultural scene in Luxembourg over the last twenty years. “The cultural landscape in Luxembourg changed totally”, he declared. Today Luxembourg offers a wide variety of cultural institutions and the art scene is very lively, especially in the field of contemporary art. Having largely bypassed the changes of the twentieth century “it’s up to us not to miss the twenty first” he commented wryly.
Michael Moses, associate professor at New York University’s Stern School of Business was the keynote speaker at the Art as an Investment conference. Together with Jianping Mei he developed the Mei Moses Fine Art Index that compiles data allowing investors to track the long-term performance of fine art.
The Mei Moses Index aims to track the historical financial performance of artwork sold at the major art auction houses. “In order for it to be of interest to the financial community it had to be based on transparent prices, and the only way you get transparent prices is through the auction market” he commented.
He stressed that he was not a financial advisor but that he just looked at history. Currently there is no way of buying the index, since it is not traded. Potential investors seeking to reproduce the performance of the index have to buy the underlying assets.
A painting for every purse
“Art is very democratic” he said. “There is a painting for every purse, so if you want to spend 5,000 dollars on a painting, there are paintings at auctions for that price.” Another interesting fact is that the highest returns are achieved in the lower price categories.
Michael Moses works on a database of over 15,000 art objects that have sold at auction at least twice. The average return of all those objects is around 8.5 per cent. To him, the beauty of art is that over the long term – here he was referring to the last 50 years since World War 2 - the performance of art has been very similar to the performance of the S&P 500, with a similar risk level and no correlation.
Applying modern portfolio theory to the available statistics indicates that adding art to your portfolio helps to increase returns for a similar risk level, but the down side is that it is not liquid. “Since you can’t trade the index, it has to be a passion investment for most people. A lot of people who invest into art want to show off their objects.”
Art as an investment is an asset class with three beauties. Financial return is one; the other two are the aesthetic pleasure of possessing a beautiful object and the fun of collecting. “Many collectors love collecting more than they love making money”. CW