Markert Analysis

Fine art- A ‘Fine’ asset class

Bijay Anand In recent years much of the returns gained by high net worth individuals have been due to the strategic diversification of their investments into a broad range of asset classes.Most recently, this trend has extended to investing in art, as investors shift their concern from weathering the financial crisis to anticipating the inflationary effects of rising government spending and debt. Art, like gold, is classed as a “real asset” and has proven in the past as a natural hedge against inflation1.

Art as an investment is a genuine contender as part of any sophisticated asset planning and cannot be overlooked for one unique reason: an ever-increasing demand coupled with an absolutely limited supply. Good art will always be good art and the high prices for masterpieces by the established and historically important artists will remain high regardless of the financial crisis that develop.

Even though art can be seen as a commodity, just like other valued items traded through financial markets, there is still resistance and reservation on its ability to deliver. In fact, in a survey conducted by Barclays for its June 2012 report highlighted that only 10 percentof buyers bought fine art purely as an investment, the other 90 percent bought it purely for their own enjoyment or for cultural or social reasons2.This trepidation stems from the fear that art as an investment is highly illiquid, and the market itself is opaque and convoluted. Also, the eventual price for any given painting, print or sculpture is entirely unpredictable, as is the rate at which any given type of art will appreciate or even decline. However this anxiety is outdated and is used conveniently by the critics to slate the art world.

On the contrary investing in art is similar to any other asset class and requires the same two fundamental steps while investing- approachanddue-diligence. Like most investment class,returns on investment in art is divided into two distinct categories- low risk and stable return and high risk and high return. In the first category the investors obtain their investment objective through medium to long term capital commitment where monetary appreciation is achieved through careful management of a select portfolio of art across the most established sectors such as Modern andOld Masters. These sectors are identified for having significant size and maturity of collector base; independent market behavior (including price performance and volatility); and a long transaction history allowing greater predictability. Hence providing steady and stable rate of return with low risk.

In the second category,capital appreciation is achieved through active management of a broadly diversified portfolio of art across the sectors such as Contemporary and Modern (less established). The size and maturity along with limited transaction history makes these sectors highly unpredictable ensuring greater fluctuation. This makes investment in these sectors risky but also allowinvestors an opportunity to achieve a greater rate of return. Thus it is paramount for investors to decide which approach suits their profile best.

Along with approach investing in artrequires extensive insight into the market in order toachieve great returns. The process of determining where assets should be allocated should include a thorough assessment of art market conditions, global economic conditions, the availability of attractive investment opportunities, and suitability of investments to the risk/return profile of the investor3.

Given the current thaw in the global economy, now is a prudent time to enter the art investment market. One must bear in mind, however, that this current upswing represents part of an ongoing cycle, and that similar cycles are perennial in the entire spectrum of investment opportunities.The number of art advisory firms promising to help new art market entrants is growing. Many financial institutions are building up large databases covering various segments of the art market. Wealth management firms are also turning to art experts to build art portfolios for their wealthy clients.The search for alternatives to the classic forms of investment will ensure that art as an asset class will enjoy an unimagined upswing.



Source:

1,3Online article: Art as an Asset Class.

2online article: Could Fine Art And Collectibles Become A New Asset Class?.

Siddanth Shetty

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