Panel, Conference Presentation
London Summit 2015 - Investing in Art as an Asset Class: Passion or Profit? (I)
- The global art market is projected to expand significantly over the next 10 to 30 years as capital allocation shifts, with expectations that 1% to 5% of wealth will be directed toward art, making current market sizes appear tiny by comparison.
- Market dynamics vary by region, with the contemporary sector facing near-term stagnation due to supply constraints and intervening factors, while the Indian market is predicted to eventually recover after a collapse that will take a long time to reverse.
- The Chinese market remains a primary driver of demand, with buyers targeting high-value transactions of $10 million, $20 million, and $50 million, though recent slowdowns are attributed to anti-graft campaigns and quality issues that created a short-term dive despite long-term regulatory benefits.
- Investment horizons are generally long-term; old masters are viewed as rare and inexpensive assets with potential to appreciate over 50 years, whereas a two-to-three-year view is considered too short, and specific asset refresh cycles have accelerated from five to ten years down to 12 to 18 months.
- Expected financial returns vary by strategy, with smart investors targeting compound annual returns of 5% to 15% or IRR figures ranging from minus 10% to plus 15%, while historical benchmarks like the British Rail Pension Fund achieved 11% annual returns before inflation.
- Risk profiles differ by entry point, with high-risk strategies yielding 100% to 200% returns in single years, while investments in the lower market (e.g., $5,000 to $20,000) carry precarious success rates for young artists.
- Operational costs for holding art range from 0.5% to 4-5% annually for professionals, whereas amateur investors face costs reaching 40%, emphasizing the necessity of professional advisors for wealth protection and market insight.
- Liquidity and transparency are constrained by the market's nature, which is described as illiquid, unregulated, and opaque, with online-only auctions lacking price publication and significant portions of sales occurring privately rather than at auction.
- Specific asset classes show divergent trends, such as the shrinking supply of works by deceased artists contrasted against high-output producers like Damien Hirst, and jewelry is noted as a highly liquid asset compared to other categories.
- Wealth preservation functions include using art as a crisis reservoir for rapid cash access, hedging against inflation and currency fluctuations, and mitigating risks associated with divorce, death, or bankruptcy through eventual re-circulation.
- Market segmentation reveals a skewed distribution where 1% of auction lots account for 50% of value, and high-value items over $100 million face limited buyer pools, while blue-chip brands like Rembrandt, Warhol, and Twombly are expected to remain strong or strengthen.
- Authentication and provenance present significant challenges, particularly in the old master and Chinese ceramics sectors, where attributions can be erroneous, and expertise is required to distinguish between genuine works and fakes like those of Modigliani.
- Strategic opportunities exist in emerging markets like South America and South Asia, which offer lower price points for blue-chip artists, and in the allocation of $500 million to $1 billion managed by funds investing in works between $250,000 and $10 million.
- Institutional and private lending to museums is expected to provide insurance coverage, increase item glamour and value, and facilitate the movement of art from private hands back into circulation.