Given that 66% of this Blog is about tangible assets, defined by some as ‘Alternative Investments’ – we thought we would take a look at another very interesting ‘Alternative Investment’:
The ‘Art’ market.
Last year, in 2012 Sothebys broke new records in selling Art (they sold $1.2bn last year) and so did Christies.
A ‘Rothko’ sold for over $75m and Edvard Munch’s ‘Scream’ sold for $120m. Indeed had you bought an important Warhol, Rothko, Lichtenstein or Picasso over the past 15 years, you probably are sitting on substantial unrealised gains. But, as is so often in life, ‘the devil lies in the detail’.
While the Art market has done well over the long term, last year was actually not a good year for the market as a whole.
According to the Mei Moses World All Art Index, Art prices fell last year by over 3% (world equity markets did substantially better rising nearly 10% on average).
So while the famous names like Warhol, Picasso and Rothko set new records last year, the broad index (consisting of 25’000 artworks sold at auction) did not fare so well. Many institutional investors also have another problem when viewing Art as an investment- the ‘yield’ issue. Art, like Gold and other ‘alternative’ asset classes (like Classic cars and vintage watches) does not yield anything. However with interest rates currently yielding almost zero across the developed world, there is little opportunity cost in Art not yielding anything. Another negative aspect about owning art has to be the cost of maintenance (imagine how much it costs to insure a $50m Warhol in your living room).
Despite Art yielding nothing and being costly to insure, Art as an asset class has some clear advantages.
For one Art has little correlation with equities, meaning that when equity prices move in one direction, Art does not necessarily follow (only 47% of the time is the correlation positive according to JP Morgan). In fact Art was even negatively correlated to Real Estate (REITS) and fixed income over the past 25 years (Kyle Sommer- JP Morgan). So Art can be useful from a diversification standpoint.
Secondly during periods of inflation, Art has held up better than other asset classes (like fixed income) according to Mr. Sommer. However perhaps the greatest advantage Art delivers is the joy the owner has in seeing it in their living room (or when they go visit their safe). This pleasure cannot be quantified. We at LME would compare it to stepping into a 275 GTB /4 Ferrari and hearing the V12 engine sound- or when we admire a 1960s Rolex GMT master Ref 1675 and discover the wonderful colours this watch radiates during the day.
While I clearly prefer vintage watches and classic cars to Art, I also think that Art can be useful in diversifying one’s wealth.
In that respect over long period’s of time Art surely has a place as an asset class, despite it not yielding anything in terms of monetary dividends during the holding period. The fact is – over long periods of time (20 years or more) Art has delivered solid returns and has matched the S&P 500 index over the past twenty-five years (Kelleher- Financial Times).
Does one buy Rothko, Warhol, Picasso or Damien Hirst?
That unfortunately I cannot answer- this is not our expertise. Our advice would simply be: Do your homework and buy what you like!
(Source: Art in the frame after a long-term outlook’ by Ellen Kelleher, Financial Times, Monday January 21st 2013).
