Art as an alternative investment is gaining momentum with savvy investors. The phenomenon has resulted in part from the extraordinary prices that visual masterpieces are commanding at auction as well as the creation of new private-equity funds that invest in art.
The advent of these new investment funds can only help individuals looking to profit from this market on their own. "Art remains a complex market, and it's clearly a jungle for the unwary, but investors can begin to move into this market with confidence" as more research tools and indexes are developed, says Robin Duthy, managing editor of Art Market Research.
But as is the case with other types of investment, not all categories in the art market do well at the same time. Individual investors should hook up with "a team of advisers to help them find the artwork that will increase in value," says Duthy. Several private banks, including Citibank (C), JP Morgan (JPM), and UBS Global Asset Management, provide art advisory services to individual investors. To keep up with the demand for this expertise, other banks, such as ABN Amro (ABN), as well as many private galleries have started similar services.
What does an investor need to know today about the art market? BusinessWeek Associate Editor Toddi Gutner and London Correspondent Kerry Capell asked that question and others when they recently spoke with Duthy and Lord Mark Poltimore, chairman of 19th- and 20th-century European pictures at Sotheby's in London. Edited excerpts of their conversation follow:
Q: What price bracket within the art market generally shows the highest returns?
Duthy: Paintings valued at $100,000 and up. At this end of the market, the transaction costs will be lower and the rarity value higher.
Q: What are the hot spots in the art market?
Duthy: Contemporary art. The top 10% [by price] has shown a 10% annual return over the period of 1974-2004. We're also seeing a lot interest in European and American photography. The Art Market Index is up 9.6% over the same time frame.
Another area is prerevolutionary Russian art. This market is really booming. It's driven largely by the new generation of Russian oligarchs with billions to invest. These Russians have become serious collectors and are looking to invest in paintings that reflect their heritage.
But it's important to realize that artists who are hot now may not be hot in 10 to 20 years. For example, French contemporary artist Bernard Buffet, who was really popular in the 1950s, has lost a tremendous amount of value. The Art Market Index shows the value of his work has gone down 77% since 1991.
Poltimore: Tastes are changing among the art-buying public. For example, there isn't the same interest in Impressionists now. Many art buyers think it's a bit old-fashioned. Right now, it's all about contemporary art.
Q: What's driving these sectors?
Politmore: Investors looking for tips would be wise to look at countries that are rapidly acquiring wealth such as China, Russia, India, and Latin America. People in these countries will often pay prices well beyond the art's economic value simply because they can afford to do so.
Q: What are the basic guidelines an individual should follow when considering an investment in art?
Poltimore: The best art investments are driven by three things: an individual's passion, timing of purchases, and the quality of the works bought. In other words, people should buy what they know and love. They also need to buy and sell it at the right time and only buy very good quality pieces. The last two points are where the help of advisers is crucial.
Investors must also decide how much they're willing to pay and then stick to it. Talk to advisers, look at auction price records, and exhibitions to gauge what a painting might be worth. Finally, get verification before you buy.