Investing in art – emotional and financial dividends

Melanie Stern is Section Editor of Families in Business magazine.

The Fisher, Oetker, Lauder, Sabanci and Johnson families are all collectors of classical and contemporary art, a market that increasingly offers more than just intellectual returns, explains Melanie Stern

It is probably one of the most popular collectibles among the wealthy but now commonly classed as an alternative investment outperforming many equities. Art as an investment offers increasingly attractive financial as well as emotional returns.

"Art is currently performing well as an asset class, and though we do not recommend that clients buy art purely for investment, substantial profits are possible," Mary Hoeveler, head of international art advisory for Citigroup Private Bank, tells Families in Business. "A downturn in equities often strengthens interest in tangible assets, and art benefits as investors look for alternatives. The market will continue to flourish as it is fuelled by the new wealth and confidence of strengthening world economies and stock markets."

There are many other investment vehicles that give higher or more predictable returns than art but serious art buying is for those who are collectors by temperament and who derive real pleasure from it, Hoeveler believes. "Not surprisingly, by having a true and abiding interest collectors are more inclined to study the market and become educated buyers – these collectors  end up being the best investors and the least likely to make expensive mistakes."

Quality, quality, quality
For those unsure of breaking into the art market, take the marker of achievable quality and investment value from the involvement of corporate and private banks. Banks such as Citigroup offer dedicated art expert teams advising their private wealth and family business clients.

If there was nothing to be gained from such a market – however nebulous the concept appears – these institutions, which include auction houses such as Christie's and Sotheby's, would not dedicate resources to it.

There are a number of aspects to be considered in the evaluation of art as an investment. Condition, provenance, market exposure, rarity and historical significance are all essential but hard to quantify factors, as are attribution and the popularity of certain types of art at any given time. The key watchword, though, is always quality – the one way to benchmark future dividends and value. "Just as in the property market the saying is 'location, location, location', in art it is 'quality, quality, quality'," says Mark Poltimore, Sotheby's head of fine art. "It's an intricate market so value is hard to quantify, and pictures are the ultimate luxury so they're the first thing to be disposed of in tough times. Now that people are examining commodities and alternative investments as a way of spreading their risk, we're seeing many buyers coming to the art market that were previously unknown to us." Aiding the valuation process, there is an increasing supply of on-line historical and price data to assist experts evaluating work – but it remains largely dependent on an individual's knowledge.

One should be aware of the hidden costs following a purchase. These include transaction expenses, which can be as high as 25% of the value of the work; storage, shipping; framing; conservation, and installation. It is also worth noting that insurance premiums will be high for most works of art.

Citigroup offers an art finance service, launched when it noted its private clients listing private collections on company balance sheets alongside traditional assets. This allows collections to be leveraged against loans for a range of client needs. Recent examples include a family business financing the building of a museum for its collection, and a family business owner paying company bonuses from a loan – but it can also be used to buy more art or to pay for the costs associated with art collecting.

Invest in art professionals
A number of banks and wealthy individuals are teaming up to achieve critical financial mass, in order to invest in the very best artworks. Phillip Hoffman leads the Fine Art Fund, a Delaware-based initiative currently working to raise US$350 million to invest in the top 2% of the global market, including old masters, impressionists, modern and contemporary art, with a view to achieve compound annual growth of 10–15%. The fund has learned from lessons provided by the British Rail Pension Fund, which in the 1970s made a high-profile $200 million (only around 2% of its total funds) investment in a range of artworks. On its collection of ceramics and coins the return fell at around 4% per year, but for impressionist paintings and old masters – still considered the safest bets – it made some 20%. "It is difficult to raise these kind of funds because art is so unquantifiable, and relying as it does on individual's decisions on what is quality and what isn't, institutions in particular are very nervous about it," Poltimore adds. "It isn't like stock and shares. We recently auctioned two Picassos from 1967; one was slightly pink in colour, the other green. The pink one made £2.2 million but the green one didn't sell.

"However, the blue chip stock of art remains impressionism – everyone feels comfortable buying a Monet or a Renoir, though quality is still paramount. Buying inferior quality, as the Japanese did in the 1980s when they flooded the market for anything by Renoir because they knew the brand, was lack of direction, people buying names and not quality."

Russia and parts of Europe have nascent art funds currently seeking investors. Poltimore warns that these are best avoided based on bad experiences with similar ventures in these regions, plagued by corruption and unreliable 'expert' advisers.

Classic versus contemporary
While older paintings are psychologically a safer bet, market experts say that contemporary art has the best investment potential. The market is currently brimful with infamous brands to make the new investor feel more confident about spending. As well as including the key young British artists  – Damien Hirst, Bridget Riley, Tracey Emin, The Chapman Brothers and 2004 Turner Prize winner Grayson Perry, this section of the market covers agenda-pushing artists from decades earlier, including Francis Bacon, David Hockney and Jean Dubuffet.

High demand, scarce supply
"There are so many people collecting art now that first-rate material is becoming scarce. We are seeing remarkable prices for very fine works of art fresh to the market and in good condition," Citi's Hoeveler explains. "It's a hungry market, and the prohibitive costs of first-tier artists has led collectors to rediscover less well-known artists.

"While 'secondary market' (classic art) works have a documented track record and can be a safer buy, purchasing 'primary market' (contemporary art) works is riskier but  the potential return much greater."

And as long as collectors continue to love art, the market will continue to offer a strong alternative investment option for business families and other investors. "Many collectors revel in discovering new talent – it's the thrill that keeps them hooked," Hoeveler concludes.