This story appears in the December 9, 2012 issue of Forbes. Subscribe
For the full 2013 Investment Guide, click here.
Every few months, it seems, a new art investment fund--or an announcement of one--pops up somewhere.
In October, for example, Berenberg Art Capital Fund opened for business in Jersey, U.K. with a plan to buy 200 old master, impressionist, modern and contemporary artworks. The minimum investment is 100,000 euros, and Americans can't invest.
Another new art scheme, however, is aimed squarely at the U.S. market. St. Louis-based Liquid Rarity Exchange says it has patented a method for turning rare objects into publicly traded funds and is talking with New York investment houses about licensing that method to create a whole family of art and collectibles mutual funds, ETFs or indexes--a new "tangible asset class of securities."
Liquid Rarity is generating buzz in part because investors are desperate for alternative asset classes to balance their holdings of stocks and bonds. Yet for all the hype, art is not an asset class, and art investment funds have so far attracted little cash.
In 2011 art funds pulled in only around $200 million in new money, with most of this going to funds in China, and ended the year with only $960 million in assets, Deloitte's art and finance group reports. Artvest Partners, a New York firm that advises wealthy collectors, reckons the market is a bit bigger--more like $1.5 billion to $2 billion as of mid-2012.
Either way, art funds are not just insignificant compared with other financial markets but also a very small corner of the $67-billion-a-year fine art market. Worldwide fewer than 30 art funds are active today, and only a few have attracted more than $50 million in capital. Artvest principal Jeff Rabin estimates half of art funds that are announced never raise enough money to get off the ground.
Even the most successful art funds have yet to prove themselves. The London-based Fine Art Fund Group, which established the first art fund in 2004, controls the biggest chunk of the market, with more than $150 million of assets in five specialized funds that invest in old masters, impressionist, modern and contemporary art, each requiring a minimum $250, 000 investment. It claims an average annual internal rate of return of 20% on artworks sold so far. The Collectors Fund, a $20 million Kansas City?-based fund launched in 2007 to buy American masters, reports an average 28% annual return. Yet Rabin points out that more-difficult-to-sell works may not be disposed of until the end of a fund's life. "The actual returns when all is said and done are often very different, " he says.
But the real problem with art funds is this: While holding art doesn't produce annual returns, art funds incur considerable annual expenses, including storage, maintenance, insurance and transaction costs, charging a 2% annual management fee. (That's in addition to the 20% of profits fund managers get.)
"We don't think art is a good asset class, because you start off with negative returns," says Greg Davies, head of behavioral and quantitative investment philosophy for Barclays in London. "All that you are buying is the hope that someone will want to pay more for it later on, " he adds.
In the illiquid, opaque and faddish art market what someone will eventually pay for your painting, print or sculpture is entirely unpredictable, as is the rate at which any given type of art will appreciate or even decline. A rich collector can enjoy a Keith Haring painting on his wall indefinitely. Perhaps one day he or she will sell it for a profit. But the current closed-end art investment funds are generally designed to be completely liquidated after eight to ten years. "Profitability in the art world is 1,000% about timing, and you have no idea what will happen in the future. It's very random, " says Lisa Schiff, a New York art advisor.
Davies, with a Cambridge Ph.D. in behavioral decision theory, complains that promoters "are tapping people's emotional connection to art and their current anxiety about other financial assets" to create the false impression that art is a "robust" investment. "That's not to say you shouldn't buy these funds, " he says. "But if you do, you're buying someone's expertise to tap an illiquid market for you where valuation is very murky and difficult. You are not buying an asset class."
In fact, the rich seem to get that. Of the 2,000 affluent individuals that Barclays surveyed globally for a June report, "Wealth Insights: Profit or Pleasure?, " only 10% said they bought fine art purely as an investment. "Most are buying for their own enjoyment or for cultural or social reasons," concludes Davies.
Which brings us back to Liquid Rarity Exchange and its plans for art and rare tangibles funds. Managing partner Andy Saigh says the firm has solved the problem of art funds liquidating the wrong art at the wrong time. "We feel that rather than having private ten-year funds that have to sell their assets, it's possible to have public funds that are constantly evolving and being steered by managers along with market trends."
The idea is that a number of funds, each focusing on a different school of art or collectible (say, classic cars or ancient coins), would be launched simultaneously, providing retail investors sufficient diversification within a new "rarity" class. So far, however, no investment house has publicly said it's ready to back the scheme, and it's unclear what form, if any, it will ultimately take.
Meanwhile, in the U.K. the Financial Services Authority sees red flags in existing art funds, which it categorizes as unregulated collective investment schemes. In a recent study it concluded that the majority are not appropriate for retail investors.
You might also like:
