London Summit 2015 - Investing in Art as an Asset Class: Passion or Profit? (I)

Market Scale and Structure:

• The global art market is valued at approximately 51 billion euros (68 billion USD), roughly the size of the diamond market.
• The market is heavily skewed: 50% of the total market value is generated by less than 1% of auction lots (items over $1 million), while the remaining 50% is distributed across the vast majority of lower-value lots.
• Auction sales account for only 48% of the total market; the remainder consists of private sales and gallery transactions where prices are not publicly disclosed.
• The investable market is estimated at $15 billion within the broader $60 billion annual sales volume.
• Recent growth includes a 7% increase year-over-year and 1,530 lots exceeding one million euros.

Investment Strategy and Asset Classification:

• Panelists disagree on fundamental classification: some view art as an asset class, others as a commodity, and some as purely non-investment "art."
• The Fine Art Group invests in works priced between $250,000 and $10 million, citing this as the "sweet spot" for liquidity and returns.
• High-end sales (over $10 million) are considered poor investments for funds due to a "thin" group of buyers and sellers and high illiquidity.
• Low-end market purchases (e.g., $5,000–$20,000 works) are deemed a "minefield" with high risk of failure for young artists.
• Historical performance for top-tier art (e.g., a Van Gogh bought for $9 million, sold for $63 million over 20 years) yields roughly 10% annualized returns.
• Expected returns generally range between -10% (high-risk niche) and +15% (blue-chip contemporary/modern), though short-term volatility can freeze the market.
• Art is characterized as a speculation rather than a conventional investment due to a lack of regulation and low liquidity.

Liquidity and Market Mechanics:

• Liquidity has increased in the traditional market; works now return to auction blocks within 1–1.5 years, compared to the historical 5–10 year refresh cycle.
• Electronic platforms (e.g., Paddle8, eBay collaborations) and third-market circumvention (e.g., Murakami/Hearst bypassing dealers) are accelerating sales velocity.
• Online-only sales often exclude price transparency, moving stock away from public price records and creating a more opaque marketplace.
• Market sentiment is currently shifting; while some sectors (e.g., English Georgian furniture, Victorian pictures) have collapsed by 75% or more due to changing tastes, others (Impressionist, Modern, Contemporary) remain strong.
• A "shrinking supply" of works by dead artists (Picasso, Rembrandt) contrasts with "massively growing demand" from institutional and family offices.

Geographic and Regional Dynamics:

• The Chinese market is 70% auction-driven, contrasting with the Western hierarchy where galleries and dealers lead price progression.
• The Chinese market slowed post-2011 due to the anti-graft campaign (reducing gift-giving), supply quality issues, and a shift away from rapid economic growth narratives.
• Chinese buyers are increasingly participating in Western auctions, often spending $10–$50 million per group.
• Emerging markets (India, South America, South Asia) show volatility; the Indian market previously "flattered to deceive" and crashed, though long-term pension funds may find value in undervalued old masters.
• South American (e.g., Botero) and South Asian art markets are insular but contain blue-chip artists with potential for higher returns due to lower price points.

Authentication, Provenance, and Risks:

• Authentication categories include: autograph (by the artist), school (studio assistants), manner (imitation), and "after" (posthumous copies).
• Risks are highest in the "Old Master" market (attribution disputes) and Chinese antiquities (illegal trade/export bans), though modern art carries risks of forgery (e.g., Modigliani, Rubens).
• Scholarship and attribution are competitive fields; expert certificates can be influenced by financial interests (e.g., the Duveen/Berenson model).
• A specific case cited involved a claimed billion-dollar collection in Geneva that was valued at only $20 million by experts due to incorrect attributions (e.g., "school of Rembrandt" misidentified as autograph).
• Provenance gaps and "cleaning" of works can drastically alter value; some works sold by Sotheby's as by famous artists were later found to be significantly less valuable.

Costs of Ownership and "Hidden" Expenses:

• Transaction costs (buyer/seller commissions) historically range from 5% to 10% (20 years ago), though current structures vary.
• Carrying costs include insurance (~$1,000 per $1 million of value annually), storage (few hundred dollars/piece), and shipping.
• "Opportunity cost" is significant, calculated by a Swiss economist as roughly 20% of the art's value based on time spent viewing it versus potential financial returns.
• Total cost of ownership for a professional investor is estimated between 0.5% and 5%, whereas amateur speculation can result in costs up to 40% (due to poor buying decisions).
• Lending works to museums can provide full insurance coverage, tax benefits, and prestige, enhancing the asset's value.

Future Outlook and Portfolio Allocation:

• Major institutional players (e.g., JP Morgan, pension funds) view art as a diversification tool, suggesting an allocation of 1% to 5% of wealth.
• Art is increasingly used as a "reservoir of value" to secure liquidity during crises (e.g., a real estate developer used art sales to avoid foreclosure in 2008).
• The market is expected to grow significantly over the next 30 years as emerging wealthy populations allocate capital to art.
• Diversification across sub-markets (contemporary, modern, old masters, decorative arts) is recommended to mitigate the risk of taste shifts.
• Panelists caution against using the "junk bond" label for contemporary art; instead, a spectrum exists from "junk" (risky new art) to "gilt-edged" (blue-chip old masters).

Key Disagreements and Caveats:

• Claire McAndrew and Philip Hoffman disagree on the viability of the bottom market; McAndrew suggests it is where money is made, while Hoffman calls it a "minefield."
• The panel rejects the notion that art is purely a "passion" asset; even high-net-worth individuals entering the market are driven by financial rationale and the need to preserve wealth.
• The "Blue Chip" list is considered volatile; only about two dozen artists (e.g., Rembrandt, Picasso, Warhol, Richter, Rothko) are seen as reliable brand anchors.
• The distinction between "investment" and "speculation" remains a point of contention, with auction house staff historically reluctant to use the word "investment" due to the lack of guarantees.