The concept of art as an investment, with a strong potential for future returns, became established mainly in the years following the Second World War. In that period, the art objects’ purchases and sales increased considerably and reaching high results. Indeed, Auctioneers saw an ever-increasing artworks turnover with gigantic prices. In some cases, the rate of return on auteur paintings in the 1950s and 1960s was much higher than that on investments in stocks and shares. In the following decade, the Impressionist market prospered considerably, reaching exceptional valuations.
In the face of this growing interest in the art market, it became necessary to have a greater and deeper knowledge of it in order to allow better success for the exponents of the sector. To this end, some American banks began to seek expert advice for investments in works of art.
Art a different asset type
Although there was this willingness to conceive the painting market as the stock market, there were a number of concrete obstacles due to the profound differences between the two sectors and the assets’ typology. Firstly, paintings do not give rise to annuities, i.e. income earned period after period. They are fixed assets, the expected investment income derives from the difference between the purchase and sale price. This condition, which makes predominant the uncertainty about the future value of the work purchased, implies a high risk.
1- Risk associated and price correlation
Numerous risk does exist that are proper to the asset’s typology. Several variables need to be taken into consideration while acquiring a piece.
Provenance: the attribution of the paintings in terms of provenance is crucial as it has a direct impact on the value of the piece, a change in the piece’s attribution is part of the inherent risk in a transaction. For instance, an acquisition by a museum has a direct positive impact on the piece’s value. Or in contemporary art, the notoriety of an artist, whose works were sold by auction houses, could often be reduced or disappear completely after a couple of decades. Indeed, Thompson (2009) stated that Christie's and Sotheby's catalogues contain less than half as many modern and contemporary artists as 25 years ago.
Forgery: Indeed, the possibility of being in possession of a work that turns out to be false is an important variable to take into consideration while acquiring a piece... In part, investigation techniques are being perfected but, at the same time, forgers are also making use of better technology to avoid being caught.
Damages, conservation and thievery: Another aspect to be assessed is the risk of damage, theft or loss of the collector's piece. In recent times, as painting prices have risen, the number of reported thefts has tripled. In addition to high transaction, transport, insurance and possible restoration costs are also extremely high in terms of investment and need to be taken into account.
Therefore, taking into account the numerous risks mentioned, can investing in art still be considered a good investment?
2- Art as an alternative investment
It certainly will be if investors are also art lovers and therefore always have a high level of aesthetic satisfaction. Furthermore, pure speculators are also highly attracted by the results of these profitable resales (e.g. purchase price multiplied by ten, twenty, fifty times).
Participants in the art market need intuitive tools capable of analysing sales data, keeping them updated with artwork price curves and long-term trends. Until the 2000s, it was possible to follow the price trends of paintings presented at auctions by consulting catalogues (in which, for example, the minimum and maximum estimated price was also indicated) and yearbooks, which were sometimes expensive to acquire. Once the auction is over, it was possible to view the public price lists of the lots. Thanks to technological progress and the widespread use of the Internet, the 2000s marked a turning point, expanding accessibility and information methods available to customers. The most important auction houses equipped themselves with internet sites where any curious person, from the collector to the pure speculator, could find information and images of the works, archives of past sales, catalogue notes, starting estimates and much more. At the same time, sites specialized in collecting auction data were established, able to analyze in a compact way a complex and heterogeneous market such as the art one. Among the most famous websites we find ArtPrice, a company founded in 1987, which follows the trends of the fine arts, antiques and design markets. During its years of activity it has managed to collect important data, becoming the main exponent of information about the art market. The database allows the creation of 30 million price indexes, auction results per artist, rates of return and unsold items, turnovers and volume of transactions, microeconomic and macroeconomic analysis of the international market, reports and much more.
Since 1975, the British company Art Market Research (AMR) has been creating indices by measuring price movements in art and related markets worldwide. On the official website subscribers can select a market segment or an individual artist, an art category from photography, jewelry, paintings, prints, ceramics, furniture, sculpture, collectibles and other markets. By applying additional filters such as currency, year and month selection for the index calculation, you can obtain graphs and statistical analysis that are easy to interpret. In addition to this, in recent years annual Art & Finance Reports were published by ArtTactic and Deloitte. These reports are entirely dedicated to the international art market as alternative investment and are attracting a lot of attention with their clear analysis and intuitive charts.
3- Mei Mosses Art Index
In 1989 another online resource was born for the public of collectors, dealers and art lovers: Artnet. Today its website provides a very rich database with over 10 million results. Subscribers to the services can access different indices built on art market categories such as Contemporary, Modern or Impressionist art. In addition, users are given the opportunity to compare the performance over time of over 330,000 artists.
It emerges that the description of the art market trend is mainly through price indices of the works sold. One of the most famous art market indices is the Mei Moses Art Index, purchased by the British auction house Sotheby's in 2016. It tracks its movements over time in a manner similar to that of the financial markets. The construction of the index is based on the double-selling method, which means that the prices of the same work are taken into account in subsequent sales. The work of research and creation of the database began in 2001 thanks to the two economists Michael Moses and Jianping Mei. Taking into account the difficulties in finding information in the art market (private, gallery or direct sales by artists), they limited the analysis to a smaller group of sales, i.e. those published in the sales results of the most famous auction houses. For each painting sold in a public auction they would go back to the catalogue and record the auction price. Other criteria were imposed in order to become part of their database: the paintings did not have to show artistic obsolescence, they had to have a rather high initial evaluation and to have exceeded the reserve price in the second sale (to note a reserve price is a hidden minimum price that the seller is willing to accept for an item. In a reserve price auction the seller is only obligated to sell the item once the bid amount meets or exceeds it). Only those sold at least twice at auction were examined. Some paintings were resold several times over the years, sometimes at 7 resales for certain pieces. Each of the sales was considered a single point in the database. If the work was sold overseas, the sale price was converted into US dollars using a long-term exchange rate provided by Global Financial Data. In order to study the fluctuations in the value of the artwork, it was necessary to find a method for estimating the price index. The choice fell on the use of the so-called Repeat-Sales Regression (RSR). This type of regression had previously been applied to the art market by Robert c. Anderson (1974), Goetzmann (1993) and Pesando (1993). Mei and Moses initially decided to focus on the American market, mainly New York. The analysis focused on sales between 1950 and 2001, recorded in the catalogues of the main Sotheby's and Christie's salerooms. These sales included American Paintings, Old Masters, Impressionist and Modern Paintings. These categories expanded over time and, for each of them, a price index was calculated as well as the overall trend: the Mei Moses All Art Index.
The calculation of these indices made it possible to compare, using long-term co-movement charts, the trends of different sectors of the art market and assess the correlation between art and government bonds, corporate bonds, Dow Jones and S&P 500. Thanks to these studies, the two researchers came up with some conclusions: in a visual manner, the art market’s decrease due to recessions tends to be short-term and generally do not occur until the second year of degrowth which are usually followed by robust recoveries.
Art prices have a high degree of volatility and are therefore unpredictable, even in the midst of a recession they don't behave the same way as other assets. In fact, in historical periods of crisis dating back to 1960-61, 1980 and 1981-82 there were no declines in the general art price index, exceptions that can occur. However, art can provide a favorable opportunity for investors looking for business in the long term. The low correlation recorded in numerous stock market movements in times of crisis or recession makes art a positive element for portfolio diversification.
Evaluating the profitability of an investment in art is still a complex field of research to be explored. Many companies have taken up the challenge and are increasing their offers of advice and estimates of future returns. All that remains is to wait and see what new data analysis tools will come online thanks to the use of technology!