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How to profit from investing in art

 

SYDNEY—Art lovers are often savvy investors, without even realizing it.

As an asset class, art is a proven long-term store of wealth. With stock-market volatility and sovereign-debt woes driving investors toward hard assets, art is an increasingly popular way to add depth to a traditional investment portfolio.

Art offers low correlation to the price movements of other assets, and it’s effective as a unique hedging strategy.

Works of art can also attract an income stream. Experts point to annual rates of return of between 8 percent and 20 percent for the best-performing sectors.

Plus it looks nice on the wall.

But these so-called emotional assets, or “passion investments,” aren’t for everyone. Here’s a basic rundown on what to look for—and what to avoid—for newly etched art investors.

 

Getting started

MOST first-time art investors start with between $2,000 to $10,000, said Qeturah Rasyth, president of QMR Fine Art Consulting, a Pittsburgh firm that specializes in 19th-century American masters. “When starting out, tailor it to your budget,” Rasyth said. “Get the best work of art from the best artist, at that price.”

Emerging artists allow new investors to dip into the market but carry more risk.

“You can start applying some investment logic and investment rationale, in investment-grade work, at around the A$10,000 [$10,900] mark,” said Alistair Bailey of Art Equity, an art investment and advisory firm based in Sydney.

“It becomes highly speculative below that, at sub-A$10,000.” He added that one common mistake art investors make is to “chase a signature.”

Said Bailey: “Not all paintings by an artist are going to be good. The big thing for investors to get their head around is that element of subjectivity and what makes this a good painting versus that one.”

 

Be an educated buyer

EDUCATION is the best way to understand the subjective aspects of art investing. Get a feel for the market and what appeals to you.

“It pays to spend time wandering the galleries. Work out your budget, then spend time familiarizing yourself with what you like. Look to get the best possible work you can by that artist, in that medium, for the money that you’re paying,” Bailey said.

“With fine art, if you’re not passionate about it, it’s probably not worth doing. It heightens your level of risk. You’re not necessarily taking on board as much as you would otherwise,” he added.

Looking ahead, contemporary art is the sector that will drive returns, according to Bailey, while China and India are increasingly attracting investors. Read more about China’s art-market boom.

Bailey also named Danish artist Morten Lassen and Australia’s Ben Quilty and Jasper Knight as ones to watch. Art dealers and advisers are good places to seek help. Global auction houses Christie’s and Sotheby’s offer courses in art education.

Savvy investors will then track trends across sectors, such as Old Masters or modern contemporary.

“Just as within stocks you have industry sectors, so do through the art market you have sectors, and each performs differently at different times,” said Randall Willette, managing director of Fine Art Wealth Management, an art-investment consultancy based in London.

“That’s where the correlation benefits [come in], how those sectors move independently of one another move into play,” Willette noted. Watch: Asian art breaks price records.

 

Expected returns

RATES of return vary across sectors.

The Mei Moses All Art index is one benchmark that tracks the long-term performance of fine art. The index achieved annual returns of 16.6 percent in 2010, while the Standard & Poor’s 500 Total Return Index, which includes reinvested dividends, returned 15.1 percent. QMR’s Rasyth said individuals should expect an initial capital gain of 25 percent. “With investment art, you should always make money when you make the purchase,” Rasyth said. “Otherwise it’s not a strong investment at the time.” From there, works generally appreciate 10 percent to 20 percent a year, she said. “That’s not true for emerging artwork, but for Hudson River [School] you can definitely expect that,” Rasyth said.

A top Hudson River School work sells for an average of $400,000, according to Rasyth. Look for works by Albert Bierstadt and Martin Johnson Heade. A midtier work from this period will go for around $50,000, and artists with works at that level include Thomas Doughty and William Casilear. And keep an eye on Andy Warhol.

“The traditional barometer of market confidence has been Warhol. When Warhol is traveling well, the market confidence is generally up,” Art Equity’s Bailey said.

Broadly speaking, clients can expect returns of between 8 percent and 10 percent over a seven- to 10-year period, said Bailey. But an illiquid market can trip up investors, he said. “Those that come into it simply with the view of making money are the ones that tend to get burnt, because they try and trade it too quickly,” Bailey said.

 

Consider an art fund

PLAYING the art market doesn’t always require shopping for works. Investors can gain exposure to art through the equity market via shares of the auction house Sotheby’s (BID). Then there are art funds, which offer a kind of middle ground between art ownership and stock-market dabbling.

Typically, art-fund managers purchase works and dispose of them five to 10 years later. Investors may borrow the works for personal use.

Yet, the success of these funds so far has been patchy at best.

“To date, they haven’t worked well,” Bailey said, “It’s something that has potential and merit. They haven’t had enough time to go through a natural maturation phase.” The Fine Art Fund Group is the most prominent. The base investment for its $100-million fund is $250,000, and it boasts an average annualized return on assets sold of more than 25 percent. Fine Art Wealth Management reported on more than 40 of these investment vehicles across 13 countries to provide a snapshot of the industry. It found the key challenge for art funds is raising capital, but the pipeline of new offerings is growing.

Willette, the firm’s managing director, said one advantage of art funds is their ability to follow market trends in particular sectors.

There’s “real momentum building around these investments, not just in the US and Europe, but all over the world,” he said. “We have also seen [emotional asset] investors wanting to go it alone will simply pool their financial resources with friends and family, to create the equivalent of an investment club,” Willette said.

The Art Fund Association (www.artfundassociation.com) is a fairly new trade group set up in the US to serve the art-fund industry. It’s a good jumping-off point for investors seeking to find out more about these specialized emotional asset funds.

 

Art for income’s sake

ART buyers may want to put their investment to work. Art Equity has been an architect of corporate art rental in Australia, for example. The firm rents artworks owned by its clients to corporations, creating an income stream for the owner.

“They generally go out on fixed-term contracts and generate incomes of 5-percent to 7-percent net per annum,” Art Equity’s Bailey said.

Rental fees depend on the work and price point, but the potential alone can strengthen the asset’s investment appeal. Yet for art consultant Rasyth, leasing out an investment is more trouble than it’s worth. “I would never advise someone to rent an artwork out,” she said. “You stand the risk of damage and other things.”

Bailey said renting art to generate income is a perk of ownership—“an extra string to the bow” in the hunt for long-term capital appreciation. He added: “Those who are attracted to the income are better off looking at something else [more liquid].”


In Photo: One way to profit from art is to rent out artworks to companies. But if you own Van Gogh’s Starry Night, perhaps it would be best not to let it out of your sight.


 

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