Collecting art as an investment can seem like a lofty goal for those who don’t have a background in the art world. As much as you enjoy and appreciate art, you’re probably not in a financial place where buying a Picasso is an option. But that doesn’t mean you can’t invest in art at all. New platforms are cropping up to allow you to invest in shares of art much like you would invest in shares of a publicly traded company.
But if you consider yourself a novice investor, is buying shares of art a good move for you? Let’s look at how it works.
Why invest in art?
Art is an asset just like any other. And it’s one that tends to do well over time.
Deloitte’s 2019 Art & Finance Report points to Artnet’s Index for Top 100 Artists, which saw an 8 per cent compound annual growth rate between 2000 and 2018. That’s a better than the S&P 500 performed during the same period (3 per cent).
The sales numbers alone are enough to blow your art-loving mind. Sales for post-war and contemporary art totaled $US3.88 ($6) billion last year, while total sales for modern and impressionist art at auction came to $US3.28 ($5) billion.
“Most people have read about how expensive a lot of this artwork is today, but they just never thought they’d ever have the opportunity to own it,” said Scott Lynn, the founder of Masterworks.io, an art investment platform.
But art is far from a get-rich-quick scheme. Like any other investment, the longer you hold it, the greater the probability that you’ll see gains. Until recently, that meant having enough cash to buy a piece of art outright and giving it time to appreciate. Fifty-three per cent of women and 65 per cent of men consider the “value potential” (return on investment) when buying art, according to the 2019 Online Art Trade Report from Hiscox.
Enter fractional ownership, which attempts to democratize art investment by cutting a piece of art into tiny pieces. (Except not really, because that would ruin the value of the art.)
“The target market is clearly those with more money than time on their hands, yet with a passion for culture and expanding their horizons,” said Robert Berry, a gallerist and consultant in New York City.
How fractional ownership works
There are a few different ways you can own shares of art.
One way is to buy into artwork that’s been purchased by a firm. That firm files with the US Securities and Exchange Commission (SEC) to be able to sell shares of the piece of art. It can set its own requirements for the price per share and the minimum investment. The firm lays out its timeline for holding the art, management fees for investors, and the tax treatment for investors (so you can report your gain or loss on your taxes). Masterworks, Otis and Artopolie are companies that offer shares through this model.
Another method is through blockchain-based technology. With this model, investors can buy and sell shares of art with Bitcoin or other cryptocurrency. Look Lateral, Artbloc and Maecenas are a few options.
There’s also a third option that’s a mashup of fractional ownership and art patronage. Feral Horses is one platform that does this: Shareholders can own as little as 0.01 of a piece of contemporary art.
But this model isn’t without its risks, some of which comes down to taste. “The chances of a work of art every doubling in value is about 10 per cent,” Berry said of artists whose work sells for under $US20,000 ($29,491). “There is also a 10 per cent chance that the artwork you just acquired will be worth nothing after a few years as tastes in art change, and an artist can forever fall out of fashion.”
What to consider before investing in art shares
How did you choose the investments in your current portfolio? You’ll want to use that same critical judgement before you invest in shares of art. “None of these [platforms] offer a proven track record like a typical hedge fund or mutual fund,” said Berry.
Before you set your sights on trying it, you’ll want to know how much money you’ll need in order to invest through various platforms, as that requirement could knock certain players out of contention for you. Lynn said the average Masterworks investor has never collected art before, and is willing to invest $US6,000 ($8,847)-$US7,000 ($10,322) to get started on the platform. Other platforms may allow you to get started for as low as $US50 ($74).
Next, you have to think about how long you’re willing to invest for, as every platform will have a different timeline—and some will have timelines that vary per piece of art.
“These are three-to-seven-year investment horizons,” Lynn said of the pieces that Masterworks controls. “If someone needs liquidity at any point in time in their investment portfolio, then this probably isn’t the right asset class.”
So if you’re still working toward building your emergency fund or maxing out your retirement savings, art shares may not be the best fit for you. Meanwhile, if you’re considering plunking down a sizable chunk of money on art in this way, talk it through with a financial planner as you would with any other big financial decision.
Finally, if you think you’re ready to buy some shares, you’ll need to pick an artist and a piece of art via the platform of your choice. “I would proceed with caution until these new companies build momentum and credibility,” Berry said. “Companies that diversify across a broad range of modern, contemporary and price points would be preferred to make sure one hiccup in an artist’s career doesn’t change the total investment value too much.”
Something like a Monet is going to be much more predictable than a living artist who only has a few years of auction sales to their portfolio. You have to decide how much risk you’re willing to take on. Do you want to take a chance on a living artist, whose performance at auction could fluctuate? Or would you rather choose a tried-and-true master with consistent appeal? Your approach to investing in art could impact your rate of return.
Berry offered another tip: Find out how the platform you’re interested in decides to sell its art. “Knowing when to sell a work of art is how many people have created their art world empires,” he said. “At the end of the day, it all comes down to who is making the decisions of what to buy and when to sell.”