Eternal Values: Profitable Arts

Have you ever thought of artwork as not only a decoration or a way of filling empty space, but rather as an investment? Many investors consider art to be the second best investment next to real estate. But as with any business venture, one must consider how to find the best investment. Here are some questions to help you in your search for the next Rembrandt.

IS ART A GOOD  INVESTMENT?

The truth is that you can make money in art, but you cannot always count on it. The hottest thing can be considered valuable one day and junk the next. But whereas the stock market will point you to a series of logical business failures to explain that result, all the art world can say is that tastes change.  Tastes differ, as you know.

Unlike the stock market, which is based on logical, predictable decisions, the art market touches more upon current trends and fashions. Art can be a great investment, but it’s important to know what you’re dealing with. As we all know, trends can change from one day to the next.

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Nowadays numerous websites offer a quick orientation for the international art market.

Nobody wants to buy a pig in a poke. So, it’s not a wonder that art trade on the internet could not really become established to an appreciable extent. Most of the interested parties fear being victimized by swindlers as the contact with the possible supplier on the virtual media is still too anonymous. However, reliable information on art and particular artists, on exhibitions and the latest trends, offers in auctions and galleries, market developments and price trends are more and more searched on the web. There is a new reliable service sector on the internet which promises help in this jungle of art markets and is supposed to be time- and cost-saving alternative to the mostly search in journals, books or galleries.

The latest auction prices or resulting development of a particular art of piece are the most reliable numbers for the trends on the international art markets or works of a single artist. The most important available and detailed data banks in this segment which have been carefully kept for years now but are not for free, unfortunately, are at artprice.com and artnet.com

The website artinfo.com presents the online version of the Art Sales Index, the Gordon’s Print and Photography Prices Databases, as well as, the Lawrence’s Dealer Print Database. For those who is interested in regional art market developments, for example in trade with works of US-American art, is more than welcome to contact more specified suppliers at askart.com.

However, the information on the particular galleries turns out to be less transparent and detailed as it is with the international auction market. Of course, meanwhile, the most important galleries or art dealers are presented with their own webpage on the internet but only true art experts specifically know which artists they represent. The following pages can provide help for the first orientation or overview in this matter: absolutearts.com, artfacts.net or artincontext.org.

Sothebys

The world art market had already been losing momentum for a while after rising vertiginously since 2003. At its peak in 2007 it was worth some $65 billion, reckons Clare McAndrew, founder of Arts Economics, a research firm—double the figure five years earlier. Since then it may have come down to $50 billion. But the market generates interest far beyond its size because it brings together great wealth, enormous egos, greed, passion and controversy in a way matched by few other industries.

The current downturn in the art market is the worst since the Japanese stopped buying Impressionists at the end of 1989, a move that started the most serious contraction in the market since the second world war. This time experts reckon that prices are about 40% down on their peak on average, though some have been far more volatile. But Edward Dolman, Christie’s chief executive, says: “I’m pretty confident we’re at the bottom.”

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Facing the Financial crisis

The Problem:  Due to the globalization the dependencies of asset classifications grow in the recent year which is enforced by the disastrous irruption of the finance markets we currently handle with. That is why especially fund managers intensively seek for “new” investment possibilities which are independent from these tendencies- for example art.

Art does not find its way into the portfolios, except of those of big banks, enterprises or well situated art connoisseurs. But owing to the studies of Jianping Mei and Michael Moses of the New York University or of Rachel Campbell of the University of Maastricht, there are by this time a handful of managers who mirror art as an profitable investment. Because the studies showed that art assets do hardly “correlate” (Markowitz) to any other asst such as stocks or raw materials.

Rachel Campbell proved that the prices of contemporary art are not irritated even with strong downward movements at the capital markets. In total opposite, during all the disastrous times in terms of financial crises, art prices even performed positively with an average rise in value of one percent. Consequently, it is not surprising why experts recommend art to represent at least five percent of an investor’s portfolio.

Returns of Art

I ended last time with the fact that Germans are quite conservative in the monetary aspect. The main question that arouses:

Is art a reliable investment? In order to answer this question, especially with an eye on contemporary art, we rely on the announced study of the FAZ institute and the Art Estate AG named “Contemporary Art- an asset classification of portfolio diversification”.  The most important results of the study:

-          The prices of art constantly rise since the Second World War and attain return which are comparative to those of shares and other investment possibilities.

Especially contemporary art of Germany and the USA tables a high increase of prices, which most likely is to be continued in the following years.

But above all it is to note that the development of art prices is not linked to any stock exchange or other productive investments as of bonds or raw material. That is why art is totally suited for the diversification of asset portfolios; they stabilize performance of value and of the entire property and improve the returns at an equal risk level. This effect of diversification attracts especially the fund managers. Because they try to optimize the risk-return-profile in merging miscellaneous kinds of investments, according to the model of Nobel laureate H.M. Markowitz.

Art as accumulation of capital

For more and more people art is not just a passion, but, in fact, a quite good opportunity to invest their money.  Contemporary art is a great instrument of asset accumulation, even proven by a 2006 study of the FAZ institute.

The art auction prices in 2007 seemed to be unaware of any limits set until there.  It was especially the contemporary art which performed extraordinarily among the others.  In November 2007, Sotheby’s New York faced a record of 315 million US-$ in one auction and busted therewith every estimated prediction.  It was only bet by Christie’s one day before who toped this house record by feeble 10 million US-$. But this turns out to be far from any unexpected surprise, but rather confirms a trend in the contemporary art price tendency during the recent years.  Between 1985 and 2005, the crème-de-la-crème of this art sector were sold with an appreciation of approximately 8,8%  a year. Thus, art in its perfection was part of a value development which accomplished as high-profiting as shares and distinctly better than bonds.

Investors and financial consultants are aware of this development, due to a broader public courtesy of daily newspapers and economic magazines. Although their interest in pure numbers and graphics tendentially is bigger than it is in art itself. Records in selling like with the “Hanging Heart” by Jeff Koons (21 million US-$) or Mark Rothko’s “White Center” (53,6 million US-$) were headlines in the print media.

On behalf of the influential investors, the finance experts were looking how to become part of this profitable market and how they could enlarge their customer’s assets.  And even for the art collectors who‘s priority in art is their passion, the progress of value acts a role in their purchase decision, since an ensuing enhancement in virtue is an affirmation, that his or her taste mirrors the zeitgeist.

Knowing this, it is hard to believe that still, the vast majority of Germans, by the way in total contrast to the citizens of the USA, knows that art costs but not that it fetches.