The trend to collect investment-grade art as a store of value has been growing steadily over the last three years and has now reached critical mass.
Editor's note: As part of a continued series of articles looking at the investment market in art, Katheryn Campbell, of Alpha Art Advisory, sets out what is meant by "investment-grade art", a term that has been thrown around but is sometimes not always precisely defined.
Everyone knows what an investment-grade bond is, but what is investment-grade art?
In today's post-crisis economy with paper assets fluctuating frantically, fine art is being sought out as a store of value with potential to appreciate over time. Intelligent investors started buying high quality art as an alternative investment when they first suspected trouble in the real estate market. The trend to collect investment-grade art as a store of value has been growing steadily over the last three years and has now reached critical mass.
Clearly, there is an obvious chasm between financial and art markets, one many bankers are not comfortable crossing. However, the super-rich possess and collect investment-grade art and the savvy wealth manager should know about this bankable segment of the art market.
Auction houses, art dealers and experienced collectors are fully aware of investment-grade art’s potential to draw exponentially higher rewards than “non-investment-grade art”. This is referred to as the Masterpiece effect and why dealers advise buying the best quality art one can afford. Auction houses and dealers also know investment-grade art can be used for leveraging, inheritance transference and tax deduction when donated to charities and as a philanthropic tool.
Logically, the heart of the market for investment-grade art happens in the world’s financial and art hubs: London and New York - the highest concentration of the world’s wealthiest people, collected around the world’s busiest auction houses and banks.
So what exactly, is investment grade art? There are five basic components.
First of all, investment-grade art must be proven original and therefore must be authenticated by a specialised expert. The art must be proven real in document form and the document must be verifiable.
Second, the provenance or history of exhibition and ownership must be sound. Thus, a clear title must accompany the provenance. The stronger the provenance, the greater the value of the piece.
Third, marketability is essential for art to be deemed investment-grade. The key to liquidity of any work of art is an active market. Therefore, the artwork must appeal to an international market of buyers and should not be dependent upon any single demographic for sales. Therefore, the artist must be internationally recognisable and preferably hold significant status when compared to other artists in general.
Antiquities, sadly, cannot be considered investment-grade art as issues of national heritage, archeological plundering and other such complications can cause serious sales, possession and ownership issues that may hinder the sale of a piece.
As illiquidity is the biggest problem the art seller can face, investment-grade art, being the most liquid of all the art market, is art with an exit strategy.
Fourth, the artist must have an established track record at auction. Auction estimates and sales prices are recorded into art market data banks. There is transparency in the art market through this data, one with which the art analyst can generate bespoke reports comparing one or more artists to art sectors (such as Modern or Impressionism) and the art market in general. For this reason contemporary art does not qualify as investment grade art as it does not have a sufficient track record at auction. Too, investment-grade art is in limited supply and thus rare, if the artist is still living they could conceivably create a duplicate or future artwork that could alter their receptivity, impacting the value of existing works.
Finally and importantly, investment-grade art possesses its own profound allure. There should be a consensus among art taste-makers (critics, dealers, curators, etc) as to the relative superiority of the work. This means investment-grade art must also pass through filters of content. One wouldn’t want to own a painting of a vase of flowers by Francis Bacon but one would of Van Gogh. Content is important as not every painting by a master artist is investment-grade. This is where many collector-investors miss the mark. It is not just about the brand but rather the specific piece. Unfortunately, content and quality are not quantifiable and art historical expertise is necessary.
This philosophy behind investment-grade art is not buying art as an outright investment but rather if one chooses to buy art one can do so intelligently as well as passionately. By possessing an investment-grade art collection, one will also own an investment vehicle rather than carry a sunk cost that looks good.
The entire purpose of delineating investment-grade art is to bring a level of clarity to the wealth manager by equipping them with a check list of sorts they can use to flag investment-grade art. Clearly, not all art is created equal; not all art appreciates in value at the same rate or at all. By qualifying a select subset of the art market with authentication, superior pedigree, an established track record, and international marketablity that is in high demand, issues of illiquidity are mitigated and potential to appreciate maximised.
Furthermore, the term “blue chip art” is misleading. It implies the most prolific artists offer the best “dividends”, that the desire to own them is constant for consistent, relatively high returns at low risk. This thinking does not apply to art. Some artists created thousands of works, some dozens. Stocks trade in multiples, art is heterogeneous - each work (and each sale) is unique. Rarity, quality and demand are the passengers in the supply-driven art market. The term “investment-grade art” respects the collector’s intelligence and the art market’s stratification.
So how much investment-grade art is out there? It is difficult to say exactly, but a very loose estimation based on auction numbers and auction to private sales ratio implies approximately $5-$10 billion worth of investment-grade art sold in 2009 alone.
Some financial journalists argue that art is not investment-worthy; the risks and costs are too high. Some of these concerns are valid. The collector-investor should know the costs of collecting art are numerous and can be considerable. Additionally, art’s comparatively high illiquidity and thinly-traded market are genuine concerns for the general art market. For this reason art should be considered a very long-term investment of five to ten years at least. However, focusing on investment-grade art is focusing on the most highly liquid of all art. The likelihood of recouping costs, increasing gains and in most cases reaping handsome profits is expanded.
We can buy art wisely. With proper advisement, the collector-investor can strategically buy and sell art and look at their art collection as one of passion, and taste, as well as a sound investment.