By Michael Lewis Jun 26th 2013 5:00AM
Like most alternative assets, fine art has had its ups and downs. But over the last 10 years, the major art index has outperformed the S&P 500 — sometimes spectacularly so. In 2008, a year in which the S&P 500 took a 40 percent haircut, the art market dropped a mere 4.5 percent, according to the Mei Moses World All Art Index, the preeminent long-term value index of fine art.
While the index has underperformed in recent years when compared with the major equity indexes, the compound annual growth rate of the Mei Moses World All Art Index over the last decade is 7.4 percent. That’s 0.4 percent higher than the S&P 500 through the end of 2012.
For most people, this wouldn’t have mattered 30, 20, or even 10 years ago, as the art world has historically been open only to the ultra-wealthy and well-connected. But in recent years, the barriers have come down, and while art is by no means a low-cost investment vehicle, more people than ever are getting into the collecting game.
So is art a good complement — or even an alternative — to your stock portfolio?
Getting Started as an Art Investor
Anyone looking to invest in art has two options: outright ownership or investment through a managed fund. If you have the eye and pocketbook to go it alone, you can find works of various prices, styles, and media on websites such as Artnet.com. “Winter Cabin,” for example, a painting by contemporary artist Aron Wiesenfeld, goes for $20,000. If you have more capital to deploy, take a look at Howard Terpning’s “Lot 120: Scout Report,” yours for $977,000.
If picking the next Damien Hirst sounds too much like a crapshoot, there’s another option: putting your money into a fund that pools clients’ capital to invest in art. Understand that even though it is a managed fund, this is not the same as buying shares of a Vanguard index. Art is fundamentally illiquid and risky. Plus, this hands-off approach isn’t cheap.
For example, Kansas City-based The Collectors Fund has a $250,000 minimum investment requirement. The fund’s managers claim it has earned 20 percent annually since inception, though much of that is yet to be determined, as art turnover can take many years — or even until the fund closes.
Another possibility, though still in development, is the Liquid Rarity Exchange. This company, based in St. Louis, aims to fully securitize highly valuable, non-replicable assets. The company is working with the NYSE to offer stocks and funds that represent an ever-shifting art market and its players.
Of course, buying into an art fund won’t put an Old Master over your fireplace, which is why dabbling in the arts with your money on the line requires a different sort of frame of mind.
Buying Art Versus Investing in Art
Even though art comes with a price tag (and an entire industry devoted to determining values for collectors and investors), it is, in the end, a subjective pursuit. So it’s crucial to understand that these investments often come with more opacity and require a different kind of due diligence.
World-renowned street artist and activist Banksy has pieces that range from $5,000 to $250,000. One of his lesser known, lower-priced works, “Sepia Morons,” is for sale right now at just more than $7,600. That may sound like a bargain for a big-name artist. But it’s only a “bargain” if collectors continue to support Banksy’s work and influence as time goes on. Its future value is anything but certain.
If you sense that its value is dropping, it’s not so easy to unload a painting or sculpture as it is to liquidate your position in a stock. So buying “Sepia Morons” should be, first and foremost, an act of love for the piece itself or perhaps its creator. A prospective art investor should think of this avenue as an investment in the arts and humanities — a celebration of talent and vision. Monetary gains are a bonus.
As art advisor Lisa Schiff told Forbes, investing in art is “1,000 percent about timing, and you have no idea what will happen in the future.”
The availability of fine art to the masses is still a fresh concept, and many elements remain to be seen. The big auction houses may hold art as a means of making money, and there’s a chance you can, too. Just don’t think your key to retirement lies in a Jackson Pollock (unless you find it at a yard sale).
So if you’ve got the art bug, shop some pieces online and take a stab at determining their values among collectors. At the very least, you’ll learn something and have a great conversation starter for your next cocktail party. And you never know what you might find, or what it might be worth in 10 years. Just be sure it’s something you’re proud to hang over the mantel in the meantime.
Michael Lewis is a Motley Fool contributing writer.