Key considerations when investing in art
Tony Barrett, Wealth Manager at FNB.
The recent volatility of the stock market due to worries about the slowdown in the Chinese economy, and fears of interest rate hikes by the US Federal Reserve, have prompted greater review of investment portfolios. With the world’s second biggest economy under severe pressure, investors are weighing their options on which stocks to sell and asset classes to invest in for diversification.
With art increasingly becoming a new asset class for the well-diversified portfolio, can it offer the returns investors are seeking during this time of uncertainty in the equities market?
Tony Barrett, Wealth Manager at FNB says, “Investing in art can yield returns for investors but needs careful consideration. Art does not generate income and should not be viewed as an asset class an investor can depend on for retirement funding. It is generally associated with ultra high net worth individuals who invest in it mostly from a lifestyle perspective.”
The Graduate School of Stanford Business published insights in 2013 which reveal that of the 20 538 paintings repeatedly sold between 1972 and 2010, the Sharpe Ratio for art is 0.04, rather than the 0.24 previously found. The Sharpe Ratio on U.S. equities over the same time period is 0.30. The Sharpe Ratio is the risk-free rate of return - such as that of the 10-year U.S. Treasury bond - subtracted from the average rate of return for a portfolio or asset class, divided by the standard deviation of the return on the portfolio or class. It is a tool that compares asset classes on a risk-adjusted basis, and is often used by researchers to develop ideas for the best portfolios.
Barrett attributes supply and demand as a key determinant for the performance of fine art. “Trends in the art market, genre of the piece, time the piece is sold and popularity of the artist all influence the value of the art piece. Fine art tends to go to auction more frequently and sell at higher prices – offering good returns for the investor. The best time to cash in on an art piece is often at the height of the artist’s career; otherwise it might remain a painting on the wall reserved for sentimental value.”
Like any other investment, art presents a certain level of risk. Barrett says, “The value of the asset might fluctuate or stagnate depending on market conditions. The basic investment principles of reducing exposure to market vagaries also apply in art investing. If your art collection makes up 90% of your assets, it is advisable to sell a portion of it. If one has 5% of their overall assets exposed to art, the risk is minimal and holding on to the art piece may not be too risky.”
“Similarly to the four main asset classes – property, cash, bonds and equities – it is important to get professional advice when buying or selling art. It is also worth considering who will appreciate the value of the piece, both in currency and sentimental form, when bequeathing your prized possession,” concludes Barrett.
