The cultured class
15 May 2013
As far as asset classes go, art is one of the more fun to invest in. Even better, it has held its own of late in terms of performance. But does this make it a good fit for retired investors?
Many retirees are focused on the debate over the relative benefits of equities and bonds in portfolios. That debate can cloud the fact that there are a number of investment options outside the main asset classes. One of the more exotic is art. In an austere economic environment, and with retirees focused on income, investing in art might be considered a luxury and a last option.
Gaining access to appropriate art investments can be difficult, and as an asset class it can be illiquid (hard to quickly buy and sell), which means it will never form a major part of portfolios. Recent changes also make owning art less attractive for SMSFs (self managed super funds).
But it is worth a look: art, surprisingly, has performed as well as any other asset class over the past decade, and a recent slowing in the national market has made investments attractive.
“In all honesty, now is the time to buy,” says Giovanna Fragomelli, art specialist at Arthouse Auctions. “A lot of people are having to liquidate in the current climate, so if you do have the money then there are quite a lot of good pieces of art that are being sold at lower than market value.”
For retirees who are prepared to spend time visiting galleries and learning, it can be rewarding, both financially and psychologically. “If you want to get into it, go and visit galleries, go and attend auctions, go and see consultants,” says Raj Nanda, managing director of art investment firm Art Equity.
Why invest?
Art is usually defined as painting, sculpture, drawings, engravings, photography, or a reproduction. Investment bank Credit Suisse recently released a report, ‘Art Investing: A screaming success?’, which showed that since 1995, average annual returns from art have nearly doubled those from equities. The research, which compared the MSCI stock market index and the AMR Art 100 art index, found that art has not only brought greater returns, it has shown less volatility.
“Numerous studies from some of the large international banks, Credit Suisse and Deutsche Bank specifically, have shown that art has outperformed almost every other asset class,” Nanda says.
Another benefit of art is that it diversifies a portfolio. The value of art tends not to move in lockstep with assets such as stocks. So when stocks fall, art investments are likely to rise or at least hold their value, providing a portfolio buffer in tough times.
The cons
Despite these positives, not all art is a great investment, and even great art is not an ideal investment for everyone. Nanda says that investment-grade pieces generally cost more than $10,000, which can put art outside the reach of retirees with smaller portfolios.
“Underneath that benchmark, there are just too many artists and investing is too difficult,” he says. Nanda also suggests looking to buy only the best quality art from an artist, not lesser works.
Art can also be hard to buy and sell quickly, which means it should be considered a long-term asset. “The market can be extremely illiquid (apart from blue chip art),” Nanda says. “If you bought a piece of art today and wished to sell it tomorrow it would be very difficult, and selling through auction houses can incur significant transaction costs.”
Fragomelli agrees, citing several instances of people needing to sell pieces for quick cash and being forced to let go of them at a loss. Major auction houses can take up to 25 per cent of the selling price at auction, while ongoing costs like insurance, storage and maintenance can also eat away returns.
Investing super
Art has become a significantly less attractive asset for SMSFs after changes to superannuation rules in 2011. The rules mean art can’t be enjoyed; it must be stored professionally rather than hung on walls. Professional storage can slash any capital gains from an investment, especially for cheaper artworks.
The rules, however, do allow investors to rent their collections prior to retirement. This avoids the costs of storage and helps overcome the main drawback to investing in art: lack of income.
To generate income, many investors rent artworks to a third party through dealers or consultants. Firms like Nanda’s put clients’ artworks in public institutions or private offices, such as a boardroom or the hallway of a major bank. The company or bank rents the work and may have tax incentives for doing so. For example, Nanda recalls, the company recently put a series of investor’s artworks in the City Tattersalls Club in Sydney.
Before renting out your prized, and expensive, collection though, do your research. Fragomelli explains that investors can be hurt by high administration costs and shoddy business practices.
No quick fix
Ultimately, if you want to invest in art, you need to accept that there are no easy ways: it requires hard work, knowledge and patience.
“Visit artist’s websites, art gallery websites to see what they’re selling, and just do your research,” Nanda says. He recommends investors look to the MeiMoses Index to see how the art market is performing, or check auction records and art trends on websites like AASD.com.au or internationalartprice.com
Art, like every other asset class, has its pros and cons. It will never be
a core asset in a retirees’ portfolio. But for those seeking diversification and higher returns on a small portion of their funds, it can play a role.
Plus, they get the joy of a treasure hunt as they comb galleries for the next big artist.
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