Art For Your Balance Sheet, Not Your Walls

Can art have a better ROI than your mutual funds?

Feb 24, 2022

Feb 2, 2022

In my first blog I established the golden rule of art collecting, “buy art because you love it, don’t buy art counting on appreciation”. However, this week we are going to sidestep this baseline philosophy and look at art as an investment. We will explore art for your portfolio, like your mutual funds. If you didn’t know this option was available to you, you are not alone? Neither did I until I listened to a Freakonomics podcast on art pricing that Valerie Parks sent to me after my blog on the same topic. It turns out there are a few investment options where artwork is the underlying investment and investors benefit from the appreciation just like you would on a share of Amazon stock. The Freakonomics podcast featured a company named Masterworks (www.masterworks.io) which creates a company (LLC) for each piece of art purchased and they offer fractional share ownership to investors. I was intrigued by the concept, and I want to share what I discovered.

Abstraktes Bild by Gerhart Richter

Let me start at the end, because of my research I am now the proud owner of about a 0.002% interest in a painting by Gerhart Richter named Abstraktes Bild. How did that happen? I hadn’t planned on investing when I started, so let me lead you through my thought process.

Over the last few years, I have heard some chatter about collectors beginning to invest in art “funds”, but I never undertook actions to learn more. I just assumed it was for high-net-worth investors who could commit significant sums of money. I see myself as an average Joe (Jeff) and I didn’t think I could participate in the world of art investment funds. What I found however was that it could apply to me. Masterworks advertises that they democratize the ownership of art. They say that Masterworks creates an opportunity for collectors and investors to buy fractional shares of “masterworks” and participate in their appreciation. They have created a way for the average Jeff to participate and I was curious to learn more.

My thoughts going into this adventure

I came into this process with certain observations and beliefs before I ever heard of Masterworks. First, the number of billionaires has significantly increased in the last several years and I believe that trend will continue with all the new billionaires being created by private equity, technology and technology enabled companies, block chain, and SPACs. Second, as the number of billionaires increases, so does the demand for the items that ultra-high-net-worth individuals buy, luxury residences, yachts, private planes, sport teams, high end automobiles and art. The new ultra-wealthy are a small fraction of even the top 1% and they are buying items not even available to many of those technically included in the 1%. If spec homes are selling for north of $100m in parts of the country, I think it stands to reason that a master works of art will enjoy similar increases. Prices in the $10M, $50M, $100M and $250 million range are all possible and will become more routine. We have already seen paintings sell at auctions for nine-digit prices and there is no reason to believe this trend won’t continue and accelerate. I believe that some of the ultra-wealthy purchase expensive items to credentialism their wealth and masterworks of art have fulfilled that role for centuries. A few $100 million dollar paintings in your Palm Beach winter residence shows the world just how truly rich you are. Lastly, I think this phenomenon has driven the upward trend in art auctions prices for coveted artists in the last several years and will continue to do so in the future.

On my first visit to the Masterwork’s website, I found they offer fractional share ownership in a primary and a secondary market. The first time I visited the site there were four painting listed in the primary market where investors can buy fractional ownership. They paintings offered on my first visit:

FUND AMOUNT

· Christopher Wool $7,770,000 Untitled, 1990

· Ed Ruscha $4,052,000 Varieties of Internal Torment, 1998

· Gerhard Richter $8,984,000 Abstraktes, 1985

· Banksy $16,159,000 Sunflower From Petrol Station, 2005

A little more background I discovered. Masterworks was founded in 2017 but it didn’t make its first investment in art until 2019 after their research was completed. The fund is focused on the higher end of the art market and only purchases work priced at $1,000,000 or more. Each piece is owned by a separate investment fund which is individually registered with the SEC through a section D filing. The pieces are purchased by the fund and then offered to the investors. Once an artwork is purchased it is stored in a climate controlled state-of-the-art storage facility. The management fee charged to the fund is 1 ½ % per year and the fund managers get 20% of the profits when the art is sold. The fund’s thesis is to hold the artwork for 3-10 years. To date they have purchased 110 works of art and only sold two pieces in less than three years. The minimum investment is $15,000 or 750 shares at $20 each. Their ad says that over 327.000 people have invested more than $1.7 trillion.

The fund is focused on modern and contemporary art from the post-world-war-II-era to the current time. When they started their research in 2017, they built a database with 7,000 artist and through their ongoing research they have narrowed their list of potential investable artists to just 55. Their data shows these artists have an average price appreciation rate of 14% per year, on average.

I thought it would be interesting for you to see a few points and details Masterwork’s makes in their investment disclosures, in their own words.

The Art Market

The global art market is comprised of a network of auction houses, dealers, galleries, advisors, agents, individual collectors, museums, public institutions, and various experts and service providers engaged in the purchase and sale of unique and collectible works of art. We estimate that the total value of artwork held by private collectors is approximately $1.7 trillion, based on data included in the Deloitte Art and Finance Report 2019. Over the past decade, total annual art sales have ranged from $50.1 billion to $68.2 billion and have grown at a 5.1% compound annual growth rate from 1995 through 2020.

In 2020, the art market experienced a significant transformation in the wake of COVID-19, a global pandemic that impacted economies across the world. …

While global auction sales by Christie’s, Sotheby’s and Phillips totaled $5.9 billion in the first half of 2021, a 105% increase from the comparable period in 2020, the Impressionist, Modern, Post-War, and Contemporary segments of the auction market comprised nearly 65% of public auction sales for the period. In 2020, the Post-War and Contemporary segment of the art market also continued to gain market share, accounting for 55% of the value of public auction sales, up from 53% in 2019. Based on The Art Market Report 2021, published jointly by Art Basel and UBS, global art sales totaled $50.1 billion in 2020. While global art sales were down 22% in 2020 as compared to 2019, the year-over-year decline was less severe than in 2009, when, largely as a result of the financial crises, sales fell by 36% compared to 2008, and global art sales in 2020 remained well above the 2009 level of $39.5 billion.

In general, the global art market is influenced by the overall strength and stability of the global economy, geopolitical conditions, capital markets and world events, all of which may affect the willingness of potential buyers and sellers to purchase and sell art. While the global art market is large, its exact size is unknown and statistical data is inconsistent. Much of the uncertainty stems from differing estimates of the size of the private dealer and gallery market, which is based on survey data, but disparities also exist in reported auction sales.

Observations on the Historical Progression of Art Prices

The following are general observations based on a repeat-sales index of historical art market prices computed based on a value weighted-basis and focused on the Post-War & Contemporary Art category, as developed by Masterworks:

●The Post-War & Contemporary Art category showed price appreciation at an estimated annualized rate of 13.6% from the year ended December 31, 1995 to June 30, 2021, versus 9.5% for the S&P 500 Index (includes dividends reinvested) for the same period.

●Correlation factor of (.10) between Post-War & Contemporary Art and the S&P 500 Index based on annual price performance from the year ended December 31, 1995 to June 30, 2021.

●Resilience of art market transaction volume through periods of financial stress (e.g., 2001-2, 2008-9, 2020).

●We believe these above characteristics present the investment case for art as a possible risk diversifier.

Secondary market

Interestingly, the company also has a way for investors to buy and sell share on the “secondary market”. This program allows investors to sell their shares and buyers to get into the action, with as little as a $20. First, there are plenty of warning about how illiquid shares in a piece of art can be since the art is expected to be held for 3-8 years. The offering of shares on the “secondary market” offers investors an opportunity to sell part, or all, of their investment to others. This may be necessitated by any number of reasons where cash is required prior to the artwork being sold, including the 3 “d” s which have provided opportunities in the art market for years (debt, death, divorce). The representative I spoke with said their “secondary market” is not a regulated or monitored market, it’s more like a “Buy/Sell” bulletin board for the convenience of the investors. When I visited there were nine pieces where investments were offered. Here are five and a visit to the website will show the current shares available with pictures of the corresponding art.

· Banksy, Monkey Poison $30.57/share

· Cecily Brown, Girl Trouble $27.92/share

· Yayoi Kusama, Infinity Nets T.I.T $24.88/share

· Sam Gilliam, Reaching $23.30/share

· Alex Katz, Grey Ribbon $23.00/share

Despite my skepticism about this kind of investment, my research and basic beliefs led me to have a call with a Masterwork’s representative. He was very knowledgeable and shared everything I needed to know about the risks and opportunities. My old auditor instincts required me to make sure I was not going to end up in a Bernie Madoff situation. After a little back and forth, they provided the information I needed to satisfy my due diligence.

In the end my enthusiasm overtook my skepticism and that shift, coupled with my love of Richter and Ruscha, led me to conclude to make a small investment for “research purposes”". While I will not get rich or risk being elevated to a higher tax bracket, my small investment provides a great opportunity to learn from the “inside” and possibly to make a little profit. In the future, I can see myself buying some shares on the secondary market for pieces I love. It may even be a nice gift for young people where I want to instill a love of art and investing.

My research led me to see who else ran art investment funds and my Google search showed these funds have similar propositions:

· Anthea Art Investments

· InArt Fund

· Artemundi Global fund

· Arthena

· Saatchi Art

There may be more, this is what my simple search uncovered.

I believe that in the future we will hear more about these type of funds, and I hope you will remember this introduction. Obviously, there is risk associated with an investment like this and it is not for everyone.

I will say this type of art buying is not nearly as fulfilling as buying a piece of art I can live with, but it does offer a legitimate way to combine my two loves of art collecting and investing.

One Postscript, I did receive the announcement at the bottom of this blog yesterday, and I hope its a precursor for more to come!

I hope you enjoyed this brief sidestep in my art blog and next week we will again be back firmly planted into the art world when I share a podcast interview with the wonderful New York Gallerist, Christine Barry. Christine will cover some new ground and answer several questions, including: