Category Investments

Art as a store of value in times of crisis

28 July 2020 Stonehage Fleming
Maria de Peverelli, Executive Chairman at Stonehage Fleming Art Management

Maria de Peverelli, Executive Chairman at Stonehage Fleming Art Management

Steve Kettle, Partner - Client Management at Stonehage Fleming Investment Management UK

Steve Kettle, Partner - Client Management at Stonehage Fleming Investment Management UK

During times of crisis, the appeal of collectible assets like art can intensify. Nervous of the present risks in investment markets, investors will look to include assets with a more consistent store of value in their portfolios.

Historically, average valuations across the art market have tended to move upwards over the long term. In the short term, however, it all depends on demand. This is influenced by economic prosperity and the fortunes of those with the means to become significant owners.

“Each crisis is different and therefore the impact on art prices varies. Works of the highest quality unsurprisingly always perform best but works of lesser quality or fashionable contemporary works that perhaps enjoyed a market in better times, will now struggle,” says Steve Kettle, Partner - Client Management, Stonehage Fleming Investment Management UK.

“The current crisis is accompanied by low interest rates which could assist the art market in the shorter term but the crisis comes after an extended period (two decades) of price rises for art and, COVID19 aside, the art market was looking for an excuse to reassess prices, especially for the contemporary market,” says Kettle.

“As always, weak markets are unattractive to sellers of quality works and access to the very best works can, ironically, become more difficult at such times. The owners also prize their store of value at such times.”

As with all assets, risk management to preserve and grow the value of an art portfolio is vital.

Economic, political and legislative changes can all have a significant impact on the value of and sale opportunities for an art collection. They can also affect the costs and logistics of moving works from one country to another, sometimes required at short notice.

Maria de Peverelli, Executive Chairman, Stonehage Fleming Art Management explains: “Changes imposed by the Fifth Money Laundering Directive, for example, will impact and bring increased scrutiny on collectors’ activities. Brexit could also have an impact on the art market.”

“Collectors should also be aware of the inheritance or succession laws in different jurisdictions. They may restrict their freedom to bequeath their collection to a museum or establish their own foundation,” she says.

In a world of ever-increasing fraud, authenticity poses a risk to the value of an art collection. “Understanding what you’re actually buying, inheriting or receiving as a gift is just as crucial as knowing the parties in a transaction.”

The same is true when a work has been transferred several times between trusts, companies or other entities controlled within a high net worth family. Technically, each of these entities is a legal body in its own right, possibly with liabilities and obligations to other parties and beneficiaries. The basis of each transaction needs to be properly documented and authorised by the trustees or directors.

“When it comes to transactions, the art market is largely self-regulated. Those rules that do exist vary from country to country, auction house to auction house, dealer to dealer and adviser to adviser. The lack of any recognised international standards for proving ownership, provenance, attribution, condition or even the parameters for technical analysis, all enhance the risk of acquiring a work which is not what it purports to be, or one with a tainted provenance,” de Peverelli says.

Does the documentation confirm what you are being told about an artwork’s export from the country of origin? Are there any gaps in its provenance? Do they indicate the possibility that it was looted during the Nazi period or similar? Equally, antiquities may have been excavated illicitly.

“Collectors should be mindful that their name and reputation could be tarnished by association,” de Peverelli warns. And this swings both ways. While a lack of information about previous ownership can taint an artwork, a renowned, documented provenance can dramatically increase its value.

Unlike many other assets, art can have financial, cultural and emotional value. It is important therefore to consider the potential loss of all three when assessing risk. This is where the purpose of a collection comes into play.

Purpose will mean different things to different people: what is an investment for one is a passion for another. If a collection’s main purpose is non-financial - philanthropic or in the interests of public education, for example - financial loss may not be the prime consideration.

“By working through a strategic risk management framework, the wide range of potential risks can be more easily managed. Defining a purpose for the collection is a vital first step,” de Peverelli concludes.

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