Investing in Art: How to Profit From Your Passion

For those who like to combine their passions with their investing, "real" assets might just involve surrealist paintings.

Stock market volatility and predictions for higher inflation risk have led investors to focus on better insulating their portfolios. And one way to take out some inflation insurance is with investments that are generally considered to be "real" assets. This can include commodities such as precious metals, but also art and collectibles.

Art investing is subject to price-swing risk and does involve transaction and insurance costs, so appreciation may take longer than with traditional stock investing. But it's also a purchase that has a place outside of portfolios, since it can be enjoyed in the home and loaned out to exhibits for the broader good.

Equally important, art changes the "look" of a portfolio in other ways. "Art has a low or negative correlation with many other asset classes and can play a positive role in portfolio diversification," say art investment analysts at Deloitte. "Some academic studies claim that art or collectibles should represent around 5 percent of a well-diversified portfolio." This consultancy is making a significant push in art financing and art investing analysis, in Europe especially, because it sees a growing asset class in art.

Returns are Rebounding

Art prices are rebounding from a weak period that coincided with the financial crisis and recession. For 2010, the Mei Moses All Art Index was up 16.6 percent on an annual basis, a rebound from the 23.5 percent plunge of 2009. By comparison, the S&P 500 returned 15 percent last year. The Mei Moses index, created in 2000 by New York University professors Jianping Mei and Michael Moses, tracks a proprietary database of some 27,000 repeat sales at worldwide auctions of investment-grade art. The average purchase price across the entire index is $120,410, with a high of $31.4 million. The index is issued by Beautiful Asset Advisors, LLC, which also tracks artist performance, sale estimates, and other analysis, and can be found at artasanasset.com.

The 2009 drop was the largest decline in the All Art Index since 1991, when it fell 38.7 percent. Drops in 2008 and 2009 occurred after five years of positive annual growth averaging almost 20 percent.

According to the site, the most recent 10- and five-year compound annual returns (CAR) for art, at 4.86 percent and 3.59 percent, exceed the S&P returns of 1.35 percent and 2.28 percent, respectively.

The longer-term picture is mixed. Stocks outperformed art over the last 25 years, with a CAR of 9.91 percent compared with 6.43 percent. However, for the last 50 years, the returns were very close, with art achieving a CAR of 9.23 percent, compared with 9.73 percent for equities.

The index also tracks types of sales. In the third quarter of 2011, the Impressionist and Modern sub-index was up 17 percent compared with where it stood at the end of 2010. That compares with an 8.5 percent drop for the S&P 500 and a 10.5 percent decline for the U.K. FTSE All Shares in a comparable period.

In determining investment costs, art buyers must also consider insurance and collection management needs. Management is an ongoing process, extending from proper installation and the right insurance coverage to planning for subsequent stewardship. A conservator, appraiser and attorney may all play a role, art and collectibles insurer AXA Art advises on its website. The firm offers a guide to collection management, in addition to other art collecting and investing literature.

Auction Results are Mixed

Auction house majors Sotheby's and Christie's saw mixed results during major New York events held in early November, but sales were much improved compared with sales during in the throes of the financial crisis.

Christie's sale for Impressionist and Modern Art failed to attract bidders on important pieces by Degas and Picasso, among others. The overall sale, which was expected to bring in between $212 million and $304 million, brought in just $140.8 million -- the lowest result in two years, according to a report from Bloomberg News. The article blamed lofty pre-sale predictions more than a direct financial-market impact.

But that's in large part testimony to trends and popularity. The most expensive sale of that evening was a Surrealist 1941 painting by Max Ernst that fetched $16.3 million, more than double its presale high estimate of $6 million. Surrealist canvases, which have been popular recently with collectors, accounted for four of the top 10 items sold.

Christie's New York Post-War and Contemporary sale, held earlier this month, produced stronger results. Thirty-three works sold for more than $1 million, and 16 world auction records were established for artists including Roy Lichtenstein, Paul McCarthy, Charles Ray and Louise Bourgeois, among others. In total, sell-through percentages revealed 90 percent sold by lot and 87 percent by value, according to Christie's data.

For its part, Sotheby's notes its New York Fall 2011 sales of Impressionist & Modern and Contemporary Art totaled $600 million, nearing pre-sale estimates for $633 million and its best result since May 2008, led by works from Clyfford Still, Gustav Klimt, Gerhard Richter, Pablo Picasso, Francis Bacon and Gustave Caillebotte.

"I think the art market will always keep some of its mystery, and the premium segment specifically will always be dominated by emotions and egos," says Sergey Skaterschikov, CEO and founder of Skate's Art Investment Review, in a Q&A on his website. Skate's provides a monthly art market trend report and other investment research at skatesartinvestment.com.

But, "as collecting becomes more widespread and technology allows for cost-efficient and reliable background and counter-party checks to support the art trade, I expect to see more widely agreed-upon universal procedures for how art is traded around the world and how individual collectors avoid fraud and misinformation," he says.

Lower-Cost Options Available.

"With the growth in knowledge and the increase in transparency due to the publication of indices, sales information, and prices achieved at auctions, a much larger community has started to be interested in collectible assets," Deloitte says. "No minimum investment is required. The large transactions that are reported in the press only represent a small fraction of the market."

Even for smaller-scale investors, "buy-and-hold" applies. It takes a minimum of around $10,000 to be considered an art investor versus a recreational buyer, according to several art-collecting blogs. So before getting started, neophyte collectors should ask themselves if they can afford to have this much tied up for some time.

The trend of traditional individual ownership looks to continue for some, but for others may shift toward fund ownership with a range of price entry points. In this case, the more intimate enjoyment is replaced with owning a piece of an otherwise out-of-reach piece.

"The very rapid price rises that characterized the market at the end of the 1980s and the early 21st century were the result of speculation. The market has become much more selective, with an emphasis on quality," say analysts at London-based The Fine Art Fund Group. This 10-year-old art investment house, with $100 million under management and 25.5 percent annual returns on sold assets, offers a fine art fund and an array of geographic specialty funds focusing on Chinese, Indian, and Middle Eastern art. The minimum investment ranges from $100,000 to $250,000.

"I think it is not a question of 'if', but rather 'when' we will see art being securitized in earnest. I would expect to see significant existing art collections made available to various groups of investors in a form of fund ownership units at some point in the not-too-distant future," says Skate's Skaterschikov.

This story comes from U.S. News & World Report.

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