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Art investing for the masses

Khairani Afifi Noordin
Khairani Afifi Noordin • 13 min read
Art investing for the masses
At almost US$2 trillion, the fine art market is one of the largest non-securitised asset classes. Photo: The Edge Singapore
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Investing in fine art is no longer confined to the universe of the super rich, thanks to funds and fintech

As inflation rises and interest rates reach unprecedented heights, investors may have few safe options to park their wealth. One option they can consider is fine art, which has emerged as a lucrative alternative for investors seeking to diversify their portfolios, providing potential for high returns amid broader volatility suffered by the financial markets.

The growing appreciation and accessibility of fine art as a viable investment asset comes on the back of a rebound in global art sales. According to The Art Basel and UBS Global Art Market Report 2023, the pandemic created a very difficult operating context for the art trade, with travel restrictions causing a contraction in sales of 22% in 2020 to US$50.3 billion.

However, sales recovered quickly to US$65.9 billion in 2021, driven by both rapid adaptations of the art trade and expanding wealth and spending power of high-net-worth (HNW) collectors eager to look for attractive alternative investments. On a y-o-y basis, global art sales increased by 3% to an estimated US$67.8 billion.

Within the different sales categories, public auctions generated US$5.5 billion in 2022. Although the value of public auction sales in the US was still the highest, those in Asia accounted for almost 20% and were stable at US$1.1 billion, including Singapore and Hong Kong. Singapore is also a notable exception to the Asia-wide decline in the sales of post-war and contemporary art, with double-digit growth in 2022.

The growth was driven by Sotheby’s live auction, which returned to Singapore in August last year after a hiatus of 15 years. The auction house describes the event, which raked in $24.5 million in sales, as a nod to the city-state as an art capital in the region.

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Fine art has provided healthy returns over the years as an asset class. According to data compiled by fine art investment platform Masterworks, contemporary art has appreciated a CAGR of 12.6% between 1995 and 2022, outperforming the S&P 500’s corresponding return of 9%.

Knight Frank, which compiles an annual luxury investment index, has also singled out fine art as the top-performing “passion investment” of 2022, ahead of classic cars and fine wine. The index — weighted to reflect the “collectability” of each of its constituents — found that art was the top performer last year, rising by 29%.

Knight Frank attributes the gain to stellar prices paid by ultra-high-net-worth (UNHW) collectors for museum-quality works of art. Several single-owner collections, such as works owned by late Microsoft founder Paul Allen and prominent investor Anne Hendricks Bass, fetched more than US$2.5 billion, doubling the collection sales in 2021.

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With such high-profile collectors lending provenance to the pieces up for sale, blue chip artworks routinely break auction records, and last year was no exception, with five achieving prices of over US$100 million ($133 million). The piece which fetched the highest price at an auction last year was Andy Warhol’s Shot Sage Blue Marilyn, which was sold at US$195 million, making it the second-most expensive work to ever sell at auction. The record continues to be held by Leonardo Da Vinci’s Salvator Mundi, which was sold for US$450 million in 2017.

The crowd at Art SG 2023 organised by UBS. Photo: UBS

At almost US$2 trillion, the fine art market is one of the largest non-securitised asset classes, says Allen Sukholitsky, CIO at Masterworks. He adds that historically, the post-war and contemporary art segments — which Masterworks focuses on — have generated positive price appreciation in recessionary environments.

“The art market does well in recessionary environments. Over the past three US recessions — namely 2001, 2008 and 2020 — the art market had on average generated positive performance, in contrast to the equity markets, which generated average negative returns,” says Sukholitsky.

Addressing barriers to entry

Art is not a typical investment asset class. While they can generate income if lent to galleries and exhibitions, they generally do not provide any cash flow. Hence, most HNW and UHNW collectors do not buy art to make monetary gains, despite contributing heavily to the overall market sales volume.

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One such collector is prominent investor and Dimensional Fund Advisors co-founder David Booth. He tells The Edge Singapore that he has always been interested in fine art, although he only started collecting the pieces about a decade ago. Despite not collecting to generate alpha, Booth says he has a good idea of the value of each piece he owns.

Aside from owning paintings from artists such as Picasso and abstract expressionist Mark Rothko, Booth also spends much time populating his property in Austin, Texas, with sculptures from renowned artists such as Michael Heizer, James Turrel and Ellsworth Kelly.

Fine art investing involves many risks, including the lack of appreciation guarantee. Although many art pieces have consistently appreciated over long periods, many do not garner any positive returns. Art can also be a challenging asset class to understand, as the value of an artwork is subjective and depends on many factors such as authenticity, past ownership and prevailing condition.

As such, investments in fine art usually involve blue chip art, which refers to high-value artworks by well-established artists with a solid reputation, including Pablo Picasso, Jean-Michel Basquiat, Jackson Pollock, Keith Haring and Banksy. These artworks usually sell for the highest prices at auction houses and become valuable investments over time, making them a “safe” option for art investors.

These artworks are often not attainable for the general masses. The prices can go up to hundreds of millions, not to mention the maintenance and storage costs. For example, visual artist George Condo’s Transparent Female Forms was sold for US$4.6 million in June last year, while US hedge fund manager Kenneth Griffin bought Willem de Kooning’s Interchange for US$300 million in September 2015.

Many investors turn to art investing instruments such as art funds and fractional investment platforms. For example, US-based The Fine Art Group offers co-investment and pooled investment structures. The firm claims a track record of positive returns on 87% of its realised investments, with an average annualised return of 18%.

In Singapore, asset management firm Zheng He Capital has established ZH Bella Romaine Fund, an investment fund focused on museum-grade artwork. Zheng He Capital chairman and founder Eddie Law says the fund aims to acquire an art portfolio leveraging a team of experts and big data as well as artificial intelligence technology, aside from enhancing the value of the artworks by collaborating with market players.

“After analysing data on the art market from 1985 to 2020, we found that of the approximately $1.7 trillion value, 35% of it is contributed by 1% of the artists in the world. This inspired us to study what would happen if we could focus on the top 5% of the artists; what would be the meaning of the return? It is 16.3%,” says Law, a former Goldman Sachs banker.

“Last year, Warhol’s Marilyn Monroe portrait was sold for US$195 million compared to the first time it was auctioned at US$300,000, so the compound return is exactly 16.3%. That means that our manipulation of historical data for future projection is very close to reality,” he adds.

With a minimum capital commitment of US$5 million per investment, the fund has a target size of US$1 billion. The latter part of the strategy involves offering fractional investments to the masses.

Headquartered in Hong Kong, Zheng He Capital focuses on large-scale transactions and relies primarily on proprietary deal sourcing from its network of Greater China conglomerates. It previously invested in some of the largest players in the consumer and fintech space, such as lender Lufax and healthcare platform Ping An Good Doctor.

Further fractionalisation

Meanwhile, in the fractional investment space, there are players like Masterworks, which breaks blue chip art into more accessible investment amounts. This allows investors to diversify their art investment portfolio to manage their risks. Sukholitsky says the firm bases its investments on a rigorous, data-intensive approach, analysing 70 years of transaction history.

After acquiring art pieces it deems at a fair price, Masterworks will file a circular with the Securities and Exchange Commission as an IPO, allowing shares to be bought from as low as US$20. Masterworks would then hold the artwork for three to 10 years before the team sells it, and the pro rata proceeds are given to shareholders. Masterworks takes a flat 20% commission from the artwork sales, aside from charging a 1.5% annual fee.

So far, the firm has bought 244 artworks and sold seven pieces — one of which was German contemporary artist Albert Oehlen’s Doppelbild, which was sold for US$2.7 million, providing investors with a 33.8% internal rate of return net of all costs and fees.

Another party working on a fractional investment platform is Singapore-based fine art advisory and brokerage firm Art Works. The firm, which has consulted UHNW and HNW investors since 2011, is looking to launch Art Works X, a fractionalised art investment platform for accredited investors, in June. According to managing director Troy Sadler, the firm is currently securing the platform’s first asset, which may be a piece by Basquiat.

Art Works' Troy Sadler. Photo: Albert Chua/The Edge Singapore

Powered by blockchain technology, Art Works X will tokenise blue chip artworks. Sadler says it will partner with a London-based Financial Conduct Authority-regulated art analytics firm to tokenise the assets. By doing so, Sadler aims to solve the problem of provenance, given that one of the biggest challenges in the art market historically is its opacity. While there have been improvements in price transparency and access to information, the industry still needs clear benchmarks for certain art segments.

One other challenge that Sadler aims to address is liquidity. Like other collectables, art is an illiquid asset, as transactions between a buyer and seller usually involve complex processes. Additionally, these transactions also incur high transaction costs.

To provide more liquidity to investors, Art Works X intends to set up a secondary market for the tokenised assets. However, the firm will be locking in the tokens at a price based on the valuation of the assets to avoid the assets from being sold at extremely high or low prices, says Sadler.

Masterworks’ Sukholitsky says liquidity is an important consideration for art investors. The platform typically guides investors to expect their investments to have a time horizon of three to 10 years, similar to private equity investing. However, Masterworks aims to deliver performance to its investors — this means that if there is an opportunity to sell its assets at an attractive premium within less than three years, it will do so.

“Most of the paintings we have sold until now were sold in less than three years. Nevertheless, we still tell investors to expect a three- to 10-year time horizon as we do not want them to expect quick returns,” says Sukholitsky.

Continuing the private equity comparison, Sukholitsky says the returns are “not far off” between the two assets. For example, Masterworks sold a piece by art sculptor Simone Leigh just after 36 days, held at 325.5% annualised net return in the first quarter of this year. While he acknowledges that this is an exception instead of the norm, it shows that reaping attractive returns in art is possible.

“The long-term performance of the top quartile post-war and contemporary art is within the low to mid-20% on a gross basis. This means that the performance of art is comparable to private equity, except the biggest difference is that the latter is correlated to the equity markets. Meanwhile, the correlation between the art market and major asset classes is approximately zero, making it a truly unique investment opportunity,” says Sukholitsky.

Sadler says that, ultimately, there is no way to predict asset class returns accurately. However, he points out that the top 100 artworks have grown about 29% per annum over the last 20 years, and there is no reason to think that the trend will not continue.

Wealth-driven demand

There is a clear pick-up in art sales on the demand front, partly driven by the growing wealth among individuals. Since 2009, billionaire wealth has grown by over 380%, far outpacing the growth of the aggregate art market, which has increased only around 75% between 2009 and 2022. According to a survey by Arts Economics conducted in collaboration with UBS, HNW collectors were spending more in 2022 than they had before the pandemic, including a greater share at the high end of the art market.

Citing last year’s survey by Art Basel and UBS, Adrian Zuercher, chief investment officer and head of global asset allocation at UBS Global Wealth Management, explains that HNW collectors are spending more in 2022 due to a variety of reasons, including the growth of wealth and a full reopening of the economies, which have helped to mobilise pent-up demand for the art market.

“This is why after two years of disruption from the global pandemic, 2022 started as the first year of a more regular momentum for art market sales and activities. The year was marked by some notable sales highlights in both the auction and the dealer sectors,” says Zuercher.

Wealthy individuals are also spending more on the high-end market. While their share of spending at prices under US$50,000 had more than halved between 2019 and 2022, the proportion in the over-US$1 million range increased from 18% to 31% while the over-US$10 million level doubled to 12%.

Although art sales in many markets recovered in 2022, sales in mainland China and Hong Kong have declined 14% y-o-y to US$11.2 billion, falling to third place behind the UK. This is due to lockdowns, which stalled activity in some regions and restricted access and supply. Although sales in 2022 were still 13% above 2020, they were at their second-lowest level since 2009.

Despite this, Zuercher points out that some of the highest levels of optimism by dealers ahead came from mainland China and Hong Kong, where 58% were expecting a better year in 2023. While the art market in China may have shrunk in global sales earlier, it is reasonable to predict that plans for a full reopening by the middle of the year will help its art market to recover, he adds.

Moving forward, global HNW collectors remain optimistic about the global art market in 2023, with the majority (77%) positive about its outlook. The survey also indicated strong spending plans for this year, with the majority (55%) planning to buy art in 2023.

Art Works’ Sadler agrees, saying that he had gotten many more inquiries for art investments in the past year than before the pandemic. “There seems to be a shift happening currently — we had more new clients contacting us out of the blue looking to learn more about art investing than ever.

“We believe this may have something to do with the past couple of black swan events that have convinced people that they must allocate more to assets that hedge against inflation. We expect this to continue as more investors start seeing the value in owning these finite assets,” says Sadler.

Read more: NFT's role in art democratisation

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