ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Fine Art Finance

Updated on July 28, 2013
Chart of Zao Wou-Ki auction prices
Chart of Zao Wou-Ki auction prices | Source

Fine Art is an Asset Class

When people ask me ‘what do you do’…. I tell them Art and Finance. The most common reaction is - Wow, those are two different things! Well, actually art has been tied to finance as far back as the seventeenth century. Ever since there has been a market for art the two fields have been closely linked.

Aside from the artists themselves - a most interesting feature of art is that which makes it a commodity - its potential for buying and selling – and the return in real appreciable value over time. But this appreciation is more than financial – art can interrupt and change a person’s attitude. Even though works of art are just as viable as any other financial asset they are also enriching to the human psyche – and it is both of these aspects of art that keeps auction viable while moving our society to a different consciousness.

Until late in the 20th century, art had been exclusively for the amusement of only wealthy patrons. However, more recently the business of art has sparked the interest of the mainstream financial community. The fact that art is being considered an investment asset class, traded equally for its financial potential as for its aesthetic importance, is becoming accepted on the world stage. Art indexes are being developed to not only follow the sales of specific works of art but also to compare price movements in art with various indexes like the S & P – the Dow – the Nasdaq.

For example, Skates Art Investment Review points to Zao Wou-Ki’s artworks, an abstract painter who recently passed away. The strategy is based upon the performance of his work at auction over the last several years, bringing a doubling and tripling of prices from their estimates. Additionally, the work is scarcely seen on the market....

See Chart by Skates Art Investment Review

Being a supply – demand driven market, art prices are much like the prices in financial markets which result from pure economics and emotional decisions. Most who evaluate the value of art in the marketplace use dynamics such as cost/value, NPV against cash flows or calculating IRR to determine whether the returns on certain art investments will be worthwhile. What is fascinating to note, is that just after the great recession in 2008 there was an immediate drop reported by Artprice’s Art Market Confidence Index… but by the fall of 2009 global art sales had spiked to more $75 billion across all segments of the market; and this only accounts for those sales that were reported. By the fall of 2012 we see banner auction sales with Christies selling close to a half a billion dollars worth of contemporary art alone. It seems clear that art is not only big business, but that when other financial markets are down or sluggish investors seek refuge in art as a more viable and stable investment environment.

Art is also not a mass-produced item… nor is it mass-marketed. The value is often tied to a scarcity by increasing its desirability. Additionally, people tend to buy more art as their income increases – in economic terms this is called a high income elasticity of demand. But what is most important to keep in mind when looking to implement art as an asset class is that which makes it distinctive and to thoroughly assess the risks

Original art is unique. There is no close substitute – so its value is subjective.

There are very few buyers of art. Art is not a liquid asset – the major risk factor.

Risk tolerance and rate of return are always investment considerations. With art there are many aggregate submarkets – some of them hidden, and each of them possessing different risk factors. However, it is possible through careful consideration, expert help and analysis of the trading patterns for different artists to ascertain ways to hedge the risks as is the practice in other investment strategies such as with stocks and bonds. For example, art demonstrates a low correlation to more liquid assets, making it extremely suitable for portfolio diversification. And like stocks and bonds, returns can increase dramatically especially where there is a high risk tolerance in the investor. Wealthy people who are asset rich and cash poor may offer to stake their art as collateral against a loan, or speculate on future cash flows in art credit default swaps (ACDS).

However, where art as an asset class is most effective is in estate planning strategies - charitable donation being only one of these strategies, and not the most effective one either. Other tax strategies could include (1) securing a loan with the art as collateral from which to make a contribution to any kind of nonprofit organization – the investor retains ownership and usually possession of the art without reducing their liquidity in other assets.1 The investor also receives a more complete tax deduction than donating the art itself – and the interest on the loan can be mitigated against the investor’s current revenue streams. (2) Art can also be included in a charitable remainder trust. In this strategy an annual distribution can be made to beneficiaries and upon their death the remainder of the trust is paid to an exempt organization. The trust is exempt from income tax, so the trustee can buy and sell the assets without having to pay capital gains, and the grantor of the trust is entitled to an income tax deduction based on the present value of the remainder trust.2 Of course, whether this is appropriate for an individual investor remains a decision that needs to be discussed with an accountant or tax professional.

Now this only scratches the surface on art as an asset class......

What is important to realize about the art industry in general is that it lacks transparency, and there are very high transaction costs. But the art market is an intoxicating place where the cultural good is traded upon, and where the need for experts to decipher the fragmented nature of the art business is increasing and blossoming into new pursuits.

It has been predicted that within the next few short years, notable works of art will be selling for hundreds of millions USD – this is more than possible - it certainly will happen. Still, it remains important to recognize that works of art are cultural treasures which need to be preserved for future generations, and that the only good reason to buy art is if you love it….

Reference for this essay: 1,2: Claire McAndrew, Fine Art and High Finance; Skates Art Investment review; Artprice Art Market Index; Lain Robertson/Derrick Chong, The Art Business

The opinions contained in this essay do not, nor are intended to, provide any financial, investment, insurance, legal, accounting, or tax advice. Rather, it is intended to be used as an informational resource only. Art should be considered an asset only by investors who fully understand and can afford the risks.

Published July, 2013 - www.artequitymanagement.com - All rights reserved

Comments

    0 of 8192 characters used
    Post Comment

    • BonnieHall profile imageAUTHOR

      Bonnie Hall 

      4 years ago from California

      Thank you Dolores... very thoughtful observation on what can happen with stolen art. The other disturbing aspect is when the commission to steal winds the artwork up in the hands of a private collector who either resides in an non-reporting country or keeps it hidden for generations. If the art survives the theft many times it is recovered since the art business is where the largest profit can be realized, or some unsuspecting buyer stumbles in.... it's an important topic to raise awareness about for the general public....

    • Dolores Monet profile image

      Dolores Monet 

      4 years ago from East Coast, United States

      Such an interesting explanation of the art market. It seems a shame, however, that the increasing value of art has made art crimes more commonplace and that often times thieves who have no knowledge of art or the care of older art wind up destroying our cultural heritage.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)