How to invest in artwork

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Millions of dollars have been invested in art over the course of the last 10 months. Indeed, 579 works globally have sold for more than US$1 million this year. But art, like all assets, carries risk, even at the very top end of the market.

Why invest in fine art?

What we call ‘passion’ investments have increasingly formed a percentage of ultra-high net worth individuals’ investor portfolios. This is primarily because fine art carries a similar DNA to gold and silver.

The physicality and longevity of the asset are immediately attractive, particularly in a highly volatile market. Its performance is relatively uncorrelated to equity markets providing further insulation against volatility. There is no incumbent debt associated with the asset and it is generally an asset that is relatively easy to transport and store (assuming you haven’t purchased Jeff Koon’s very large sculpture Balloon Dog). A finite supply creates scarcity, which in turn helps drive prices.

Most importantly, a sovereign default in Europe would have no impact on these underlying traits.

Fine art purchased wisely continues to demonstrate its capacity as a strong long-term alternative and store of wealth, and it is a great way of providing added diversification to a broader portfolio. Of course the trick is buying wisely – the investment will always lie in the quality. So how do we get started?

Rules for investing in art

Entering any market for the first time can be a daunting prospect, particularly when that market operates and reacts to a different set of market forces and has a reputation for being somewhat opaque.

Rule # 1: We come back to those traditional bedfellows of sound portfolio management – research, market intelligence and expertise. It is worth taking the time to educate yourself and familiarise yourself with the market. Attend gallery openings and fine art auctions, read publications to get a feel for how the market is reacting and behaving.

Rule # 2: Establish what your budget and risk profile are going to be and make sure the two are aligned. The opportunity to purchase a key work by a blue-chip artist with a budget of $25,000 simply doesn’t exist in Australia. The key is to acquire the best possible work for your budget. A budget of $25,000 will get a major work by a very good mid-career artist, but the risk is heightened. Adam Cullen is a good example of an artist in this category.

Rule # 3: Understand the risks. Making an acquisition made in the primary market carries a unique risk that would seem to conflict with every ounce of an investor’s psyche – particularly when investing in an emerging artist’s work. Coming to terms with the fact that if you try to on-sell the work within a month or a year or even a couple of years, you will probably not get what you paid for the work initially. The less established the artist, the higher the risk. The key is that you are investing for the long-term and prior to investing, you should understand the risks and how to manage them. In many respects it is no different from looking at a small-cap speculative stock – the lower the entry point, the higher the risk, but if acquired wisely, there is the potential to realise a higher return.

Rule # 4: Avoid the three deadly sins of art investment: Taking auction data at face value, underestimating liquidity and chasing the masterpiece.

Rule # 5: Remember artists don’t create investments – they create ‘art’. Appreciate the skill.

Rule # 6: Check the artist’s CV and profile, curatorial acclaim, whether corporate and major collections have acquired their work, and their consistency of selling out exhibitions.

What to buy this season

So as we head into the last round of auctions in Australia, which works am I interested in? The two Tim Storrier works to be auctioned by Menzies (Lots 24 & 55) are of interest and I think estimates of $60,000 to $80,000 are still a little on the soft side. Both Deutscher and Hackett and Sotheby’s Australia have an editioned work Wet Afternoon by Ethel Spowers going up on estimates of $20,000 to $30,000. Christies sold a work from this edition in London during March this year with an all-in price of AU$88,000. If they are in good condition, a purchase at the bottom end of the estimates could be worth a look.

I’ll also be keeping an eye on the Quilty, Amor and Lister (Menzies) and the David Noonan and Andrew Browne at Sotheby’s Australia because these are artists that have been movers in the auction and private treaty markets over the past couple of years. These works are likely to sell for 10-15% more than top-end estimates.

In my previous column, I mentioned the Del Kathryn Barton Lithographs When I was another Tree I, II & III. Editions of these are back up at Deutscher and Hackett, but this time with estimates of $6,000 to $9,000. Time will tell whether or not they’ll nudge the high-teens as last time.

Alistair Bailey is an executive director at Art Equity.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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