Contemporary art delivers returns to rival bonds

Luke Sparkes
29 Nov 2019

Contemporary art, often seen by its critics as a passing fad, has delivered investors solid financial returns of more than 7 per cent a year over more than three decades, according to newly-published research.

Fine art as a whole, including Old Masters and Impressionists as well as more recent works, has yielded 5.3 per cent a year, coming close to matching the performance of mainstream bonds, says a Citigroup report.

The study, published on Friday, examined the record of investing in art from 1985 to 2018, as measured by indices from Masterworks, an art investment company that took data from public auction sales.

The art market’s performance over those years was close to that of two core financial asset classes — developed country investment grade bonds (at 6.5 per cent) and global high-yield bonds (at 8.1 per cent).

Contemporary art did considerably better than the whole market, gaining 7.5 per cent, according to the report.

By comparison, developed market equities delivered 9.8 per cent a year over the period and property 8.2 per cent.

The Citi authors warned that investing in art can be risky, however, with the volatility of annual returns since 1985 hitting 14.9 per cent for art overall and 25.8 per cent for contemporary art. By comparison, volatility for developed country investment grade fixed income was only 5.2 per cent and for high-yield paper 15.9 per cent.

When compared with financial assets, art is as illiquid as property, since finding buyers takes time and transaction costs are high. Investors cannot easily invest in the market as a whole, only in individual works.

Nonetheless, art has one big advantage as an investment: it is a useful means of diversification. Art prices between 1985 and 2018 did not move much in line with other asset classes except for one, cash. Even with gold, another asset where prices tend to follow their own course, the correlation with art prices is only moderate. The authors concluded that adding art to a portfolio “helped improve diversification over time”.

In the three years to 2018, art prices flagged somewhat, rising by just 2 per cent a year between November 2015 and the end of last year, while developed market equities and bonds gained 7 per cent a year.

Lower rates, Stronger art market - Until recently

The Citi authors said that after this lull, global art prices could be set for a revival, fuelled by low interest rates and by growing transparency in a largely opaque and unregulated market.

Central bank policies may keep real interest rates low and “perhaps drive them lower still”, which may in turn boost art prices, said the authors, pointing to previous rises at times when borrowing costs were low.

Interest in top-class art has rarely been greater, with spectacular sales making headlines. In 2017, “Salvator Mundi”, a picture of Christ attributed to Leonardo da Vinci, sold for a $450m — a world record for an art work. The collection of Peggy and David Rockefeller was auctioned in 2018 at Christie’s for a total of $835m — a record for a single collection. In May this year, Jeff Koons’s “Rabbit” sold for $91m, a record for a living artist, beating the $90.3m achieved in 2018 for a David Hockney swimming pool scene.

In the longer term, new technologies including blockchain promise to help automate key processes in the market, such as authentication. This could allow groups of investors to own works and collections, with individuals holding shares in major paintings. With more transparency and liquidity, and lower transaction costs, such developments “would make the art market more attractive for collectors and investors alike,” the report said.

 

Long-term asset class returns

 

<table ” data-o-component=”o-table” data-o-table-sortable=”false” data-o-table-responsive=”overflow”>

AssetEstimated annualised returns 1985-2018 (%)Global Developed Market Equity9.8Global Emerging Market Equity10.8Global Developed Investment Grade Fixed Income6.5Global High Yield Fixed Income8.1Global Emerging Fixed Income8.7Cash3.3Hedge funds8.9Private equity13.9Real estate8.2Commodities3.0Total art5.3Contemporary art7.5Impressionist art5.0

Source: Citi, Masterworks. Art represented by the Masterworks Total Art and Contemporary Art Indices. Indices revised as of November 2019

The authors cautioned, however, that they were not offering “tactical recommendations as to when to buy and sell art”.

Art “remains an opaque, inefficient, and unregulated market”, they said, but “significant changes in transparency are on the horizon.” Global investors, online auctions and blockchain-based authentication and provenance records are all a growing part of the picture. “We believe art could gain increasing recognition as an investment class over time,” they said.

 

This article was first published on the Financial Times.

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