High end paintings are becoming so expensive, that many investors/collectors cannot participate. Here is an old idea that gets around this problem – maybe for some, but not everyone’s cup of tea!
Art You Can Own but Not Have
Art funds, which trace to the early 1900s, turn paintings like Andre Derain’s ‘Madame Matisse au kimono’ into commodities. Photo: Getty Images
ByJane Hodges, Wall Street Journal, March 9, 2015.
Most art collectors own pieces they can hang on their walls to admire and show off. But for those who are also in it for the money, there’s another option: owning a share of an art fund.
Funds that pool investors’ money to buy fine art are a tiny sliver of the investment market, with an estimated $1.26 billion in assets under management in 2014, according to Deloitte LLP. But high-net-worth investors are expressing more interest in them, says Evan Beard, who leads Deloitte’s U.S. art and finance practice.
By investing in a fund, instead of buying art directly, investors gain access to pieces they can’t afford on their own. And the art market is hot right now, Mr. Beard says, with global sales having tripled between 2003 and 2013 by one estimate. Investors apparently have taken notice, with some 38% of wealth managers surveyed by Deloitte and research firm ArtTactic reporting demand for art-related services in 2014, up from 11% in 2011.
‘Skin of the Bear’ model
The Skin of the Bear fund, started in 1904, is considered by many to have been the first art fund, and it’s the model investors still seek, says Mr. Beard. Paris-based financier André Level rounded up about a dozen art collectors and pooled their money to buy what at that time was modern art—paintings by upstarts like Picasso and Matisse. The fund sold its assets 10 years after launching and quadrupled the investors’ money.
Of course, that kind of return—or any return at all—isn’t guaranteed for investors in art funds today.
By some measures, art has been competitive in recent years with more-mainstream investments. According to data provided by Deloitte, the World All Art Index, based on auction sales, had a compound annual return of 7% from 2003 to 2013, compared with 7.4% for the S&P 500. For postwar and contemporary art, returns for this period were 10.5%, and returns for Chinese art hit 14.9%.
But art funds are prohibited from discussing their activity publicly because of strict restrictions on solicitation, says Enrique Liberman, president of the Art Fund Association, so it’s impossible to say how they perform. Every one is different anyway, because every piece of art is unique. And the art market is notoriously fickle—even in a booming market, certain pieces don’t sell at a profit.
Lucinda Alden, an art collector and wealth adviser with Beverly Hills Wealth Management, says she would caution most investors against placing more than 5% of their assets in an art fund, because she doesn’t consider them transparent enough to evaluate as investments. Ms. Alden, whose clients typically have a net worth of more than $10 million, says only one client has asked about art funds.
For investors who want to venture beyond stocks and bonds to diversify their holdings, there are other alternative-sector choices with readily available metrics, such as commodity-price indexes and company earnings in the precious-metals sector, she notes.
For those who are interested, an art fund can be hard to find because of the restrictions on solicitation. Art funds aren’t listed on any exchange, and in most cases once they are in business they’re closed to new investors. Investors generally are drawn from informal networks of wealthy individuals.
—How Bill Gruits of Lexington Capital describes funds that lend money to wealthy individuals who use assets including art as collateral
Typically the funds are run by managers who are paid a percentage of the initial investment capital, Mr. Liberman says. Deloitte’s Mr. Beard says investors should check to see that art-fund managers have worked in the fine-art industry and have a history of art valuation, or at least access to such expertise.
Art funds usually operate for a predetermined number of years, and in some there’s no way for investors to cash out before that term is up. But since 2008, many funds have shifted their approach slightly and now allow investors to cash out of their positions before the fund closes down, Mr. Liberman says.
He adds that the process isn’t as simple as selling mutual-fund shares at that day’s price. Typically, he says, funds require several months’ notice of an investor’s intention to leave, and the price for the investor’s share of the fund is based on a net asset value that’s usually calculated only once a year.
There are roughly 45 art funds around the globe, according to Mr. Liberman. Many acquire art according to an aesthetic, regional or historic theme. For instance, London’s Fine Art Fund Group runs funds that invest in Chinese and Middle Eastern art, as well as broader funds.
A different kind of fund
There is another option, only indirectly related to the art market, for wealthy investors looking for some portfolio diversity. Some funds aim to profit by lending money to high-net-worth individuals who use assets including art as collateral.
Bill Gruits, a managing director at Lexington Capital Group, an investment bank based in Chicago, describes this arrangement as “high-end pawn.” His firm recently launched a fund that lends investors’ money to owners of fine art, jewelry and collectible cars, who present these objects as collateral for six to 18 months at a stretch.
“We have some old masters right now, locked in vaults in New York City,” Mr. Gruits says.
Ms. Hodges is a writer in Seattle. She can be reached at email@example.com.