The Investec Wealth Forum - How good is art as an investment? 

How good is art as an investment? 

1 August 2017

The art auction market is thriving but does art deliver solid returns?


More and more investors are looking at the art market (and other collectibles) as an alternative to traditional investment assets. At the same time, numerous academic studies have tried to ascertain the returns for art over the years. Perhaps though, a key part of the investment return is that part that cannot be measured – in this case, the enjoyment one gets from collecting and owning art.

2016 was a busy year for the art market. China continued to show its growing importance in the market, while the decision by UK voters to leave the European Union sent shock waves through its art market.

Figures from for the six months of 2016 showed that China grew fine art sales by 18%, to US$2.3bn, to give it a market share of over 35%, ahead of the US’s 27% (see figure 1).

However, political uncertainty weighed down the markets in the US and the UK (the third largest market, with market share of 21%). In the latter’s case however, there appeared to be a rebound in the market, as the fall in sterling following the Brexit vote encouraged renewed foreign interest from foreign buyers. At the time of writing, had not provided numbers for 2016 as a whole.

Some of the headline-grabbing sales in the last quarter of 2016 included Willem de Kooning’s “Untitled XXV” by Christie’s in New York for US$66.3m and Edvard Munch’s “Girls on the Bridge”, which fetched US$54.5m at a Sotheby’s auction.

Art auction market thriving

The 21st century has certainly been a good one for the art auction market – by some estimates the market doubled in sales volume between 2002 and 2013 – due to rises in global wealth and very low interest rates. This was despite the knock to the market following the global financial crisis in 2008. Aside from new collectors, a number of specialist art investment funds have entered the market. In 2013, the global art market was estimated to be as large as the venture capital market in terms of assets under management.

Jaw-dropping numbers aside, it’s hard to say whether these numbers translated into big returns for the fine art market as a whole, for a number of reasons.

Firstly, measuring performance is hindered by the fact that pieces of art are not “fungible”. Unlike shares, bonds and commodities for instance, each work of art is a unique entity that cannot be replaced by another. By way of explanation, when buying shares in a company or even apples (of specific type and quality of course), one does not specify a particular share or apple. This is not the case with art, where the price pertains to a specific Matisse, Rothko, Stern or Picasso.

A second problem arising out of the fungibility issue relates to what is referred to as “selection bias”. In the art market context, selection bias refers to the fact that what we call the market in art really refers to the sales of a small sample of expensive, high profile works rather than the overall market. Numbers quoted by  big auction houses like Christie’s and Sotheby’s relate to super-valuable works, rather than to the different tiers below them. Mid-market collectors will face different pressures and be more susceptible perhaps to tougher economic conditions than, say, collectors at the high end.

Moreover, works that are in demand tend to go on auction more frequently as owners look to realise big profits on them. By contrast, less valuable works tend to stay out of the market. Moreover, auction houses will generally only place items on sale that they believe will generate profits. The overall effect of this selection bias is the potential overstating of returns as well as the understating of risk, according to Stanford University’s Arthur Korteweg et. al.

A third issue – which may not necessarily be a problem for investors – is that for many art buyers, there is an intangible value attached to owning a work of art or a specific themed collection. This concept applies to all sorts of collectible assets such as classic cars, coins, wine or stamps, as well as fine art. A collector may derive great joy from owning a particular work or group of works according to a theme or artist that cannot be captured in a simple return on investment. Intangibles could include the joy of acquiring knowledge and insight into a movement or artists that accompanies the acquisition of works over time, or it could be the joy of showing and discussing works with friends and colleagues. Further joy could come from lending collections to galleries and museums and thus sharing the joy with the general public, or from bequeathing works or collections to public galleries and museums.

These intangible benefits are not necessarily unique to private collectors. Corporate collectors can use their collections as a way of building staff morale or of building a corporate image. Art collecting can be allied with corporate social investment goals, for example by supporting up-and-coming artists from disadvantaged communities.

art as an investment graph 1

Art as an investment

Despite these challenges, researchers have managed to analyse returns in the collectibles market over a long period of time. Elroy Dimson of London Business School and Christophe Spanjaers of HEC Paris calculated returns on the UK art, stamp and violin markets from 1900 to 2012. These showed that UK art generated a real, annualised return of 2.4% (6.4% in nominal terms); stamps a real, annualised return of 2.8% (6.9% nominal); and violins 2.5% (6.5% nominal).

These returns lag the real, annualised return of 5.2% for equities, but beat returns on bonds (1.5%) and gold (1.1%) over the period, implying that art (and collectibles) is an asset class not to be sniffed at. However, there are a number of issues that need to be considered.

One is the issue of costs. As noted above, art is not a fungible asset, and as such this creates layers of costs, both disclosed and hidden. Galleries and auction houses can add substantial costs onto buying and selling of works that are well in excess of those charged by brokers of shares or commodities, often more than 25% of the price. Having said this, the effect of such costs diminishes with time, so investors in art pieces can be rewarded for a buy and hold strategy (as Warren Buffett once replied when asked his optimal holding period for an asset: “Forever!”).

Other costs include storage, transport (if the owner lends the works to external galleries) and insurance. Hidden costs include liquidity costs related to the difficulty in selling a work quickly once the intention to sell has been announced. Equally, straitened economic circumstances (perhaps sparked by economic conditions like the 2008 financial crisis) may lead to forced sales, leading to works being sold well below their “normal” value.

These issues, alongside other issues like changes in tastes or bubbles, need to be considered by potential art investors. For example, a particular art movement may be in vogue among collectors – even for an extended period – but this is no guarantee of future demand.

The answer to this is perhaps the same as for any investment: diversify across a range of art movements and even across different collectibles. This may or may not deliver the required outcome; one may as well invest across more established assets like equities or bonds. In any event, many collectors derive more joy out of specialising in one particular field.

This brings us back to the intangible aspect of investing in art and collectibles, that “emotional dividend” that is earned in lieu of an actual dividend. Those of us who remember the roaring lion of the old MGM movies may also remember the Latin saying underneath: Ars gratia artis – Art for art’s sake. For many collectors, even the most astute financially, this sums up their passion.


art as an investment Comparison of returns, 1900 to 2012

Further reading

“Investing in Emotional Assets” by Dimson and Spanjaers, Financial Analyst Journal 2014
“Does it Pay to Invest in Art? A Selection-corrected Returns Perspective” by Kraussl, Korteweg and Verwijmeren
“Defying all forecasts: China upped 18%, dominated the global Art Market in the first half of 2016”, article on, July 2016
“The Art Crowd’s Reason to Thank Brexit”, Bloomberg article, January 2017
“Research: Is Art a Good Investment?” by Kraussl, Korteweg and Verwijmerenhttps

This article appeared in Investec Wealth & Investment’s quarterly client publication, ONE magazine edition 1 2017.

By Patrick Lawlor, Editor, Investec Wealth & Investment

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