Saturday, May 06, 2006

Alternative asset classes - art

I like art (well some of it anyway). The asthetic attraction combined with the potential for investment returns is appealing. How does it stack up in reality?

The Mei Moses All Art Index has shown a return of just under 10% pa over the last 50 years. This is about half a percent less than the S&P 500 index (and considerably better than bank deposits and bonds over the same period). I suspect that transaction costs (buyers premium and insurance costs) mean that the return on art as an investment is overstated but could not find figures to back that belief up.

Nearer to home, the stories of investments in Chinese artists over the last few years make for very exciting reading with prices often being said to have gone up by multiples in a few short years. The case for investing in Chinese artists is a very logical one. Rapid economic growth has resulted in the emergence of not just a massive middle class but a very significant number of wealthy people looking for places to invest. At the same time, the supply of works by recognised artists is finite. The result - rapid escalation of prices.

Art is a very different medium from investment than shares or property. The market is a highly specialised and, compared to equity markets, suffers from a huge lack of both transparency and liquidity. Other negative factors include huge transaction costs, lack of income and holding costs. The fact that art prices are often driven by emotional factors - making future price prediction difficult - makes rational analysis difficult, if not impossible. Lastly, fakes abound in the art world and are sometimes good enough to fool the experts.

As a matter of simple economics, leading artists are outside my price range (well outside). With only a limited knowledge of the market, buying less recognised (and affordable) artists represents something of a leap of faith rather than a carefuly assessed investment decision. The track record on art funds is patchy to say the least - a situation not helped by the associated expenses.

My lack of expertise combined with the factors mentioned above leads me to conclude that art is not a suitable investment in my particular circumstances. That said, I like art (in particular oil paintings) and would like to add to the handfull of paintings in our apartment. In doing so I will limit myself to affordable works purchased for one reason only - they appeal to me as works of art. I will treat the purchase price as an expense rather than an investment. If the paintings happen to appreciate in value that is an added bonus but that potential is not a motivation for acquisition.

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