Fine Art Investing- a New Asset Class

Outside the aesthetic return created by art, there are excellent reasons people are utilizing art as a new asset class. Art is attractive from a financial investment point of view over the long run as it is a store of value that generates moderate positive real return. Art has minimal correlation with stocks and bonds which offer diversification possibilities over time and across the business cycle.

More and more, there's a strong momentum recognizing art by investors as an investment asset class, not to mention almost anyone with an art budget. Society becomes more educated in their estate and financial planning and they begin to view art as a sophisticated investment. Many take on a deeper and measured approach to portfolio management and are willing to consider diverse strategies that encompass more realistic and possible investment classes, such as art and other collectible assets.

Notably, the current socio-economic context creates a demand for ‘real assets’ because many lost a lot of money in the financial crisis by investing in products they did not understand and are turning back to things that are closer to their heart and which, at the same time, offer protection and a return on investment.

With financial markets still in flux (as will usually be the case as there are no guarantees), some High Net Worth Individuals (HNWIs) indicated they are approaching their passion investments as ‘investor-collectors’, seeking out those items that are perceived to have a tangible long-term value. The two categories that are the most attractive to these ‘investor-collectors’ are art and other collectibles (coins, antiques, wines, etc.) (source-World Wealth Report 2017).

The fine art industries are complex and it is recommended to work with a professional to secure works based on knowledge and research. It allows those with great inside knowledge to make substantial benefits. Therefore, it is not surprising to notice that the art investment funds set up so far are generally organized for individuals who spent a significant amount of time in the art markets and are able to negotiate key agreements to lower transaction costs.

Conditions such as these, it is most likely that they could deliver announced targeted annual return by profiting from market inefficiencies in order to buy and sell advantageously, by finding compelling opportunities when objects are sold, such as: death, discretion, debt or divorce and by anticipating trends, with substantially less transaction costs.

Finally, besides a potential increase in value, art provides additional financial benefits:

-Art has no geographical risk and can be moved easily

-Art provides a hedge against inflation and currency devaluation

-There is little risk of losing your principal if you purchase wisely

-No minimum investment is required

-Art investments enjoy favorable tax treatment

-Reduction of risk because of its low correlation with other financial assets

-Possibility of earning extra revenue by lending out the work or of participating in events, such as exhibitions and meetings of experts

-Art can be insured against calamity risk

Art advisory services, the most common in the financial sector, tend to complement the traditional range of private banking services to provide ‘non- financial lifestyle services’ in order to offer a holistic approach to wealth management.

Generally, art advisory services include:

-Art research: authenticity, art historical analyses, information on art market, price research

-Art transactions: purchase and sale, representation of interests

-Art management: evaluation, insurance, storage, transportation, collection advisory and management

-Structured solutions: inheritance planning, art foundations and trusts, philanthropy

-Art lending: organize lending portions of private or corporate collections

Art lending, not very developed by the financial sector and mainly supported by specialised boutiques and art consulting, seek to turn art into a working asset. The main services include:

-Term loan: borrow against art

-Acquisition financing

-Revolving lines of credit

-Dealer inventory financing

-Bridging loans, advances and auction guarantees

-Arranging loans to museums and exhibitions

Final category, art investment services, is still in its early development (comparatively speaking). It finds its source in the growing recognition of fine art as a new alternative asset class and supports the evolution of art investment products, the role of art to positively diversify investment portfolios and the integration of art into wealth portfolio analysis. Initiatives mainly come from the academic world and from individuals or groups of individuals that combine a strong expertise in art and finance such as art brokers, art designers, and art appraisers. Main art investment services are:

-Art investment research

-Portfolio management

-Monitoring and selection of art funds

-Structuring of art investment funds, funds of art funds and art investment clubs

-Art securitization

It is interesting to note that today art markets have substantial press coverage and are covered by nearly all main financial newspapers such as The Economist, CNBC, Financial Times, New York Times, Bloomberg, and Wall Street Journal.

When we're looking at the historical evolution of fine art markets, we can observe that they have been in continuous evolution expanding to new countries and new customers worldwide. Today they have reached a global impact in the sense that nearly everywhere on earth people are buying and selling artwork every day and are moving around the world to find the desired piece for their collection, business, or investment.

According to the World Wealth Report, art markets are global, large and growing. It is estimated that the outstanding value of artwork is in excess of "US $3 trillion with annual sales of the art and antiques market in the range of US $50 billion, with its peak of US $65 billion in 2007". After the triangulation of data, we estimated that the art markets experienced a compounded annual market growth of between 8% and 9% for the period 1993-2009. The conjunction of economic, social and technological factors supports the view of a continuous growth of fine art markets. They note the key economic macro trends are as follows:

"1. There is a world wide increase in prosperity especially in emerging countries. Once a nation grows richer and its citizens reach a certain level of affluence, they start to buy art. This has been the general financial trend since the beginning of the industrial age. China is now third in term of sales of fine arts at auctions after the U.S. and the UK.

2. Art markets become more transparent due to research in finance and economics as well as data dissemination

3. As more and more countries are becoming wealthier, there are more artists and an increased interest in art from a larger community

4. The proportion of all luxury spending on art will continue to increase as investors look for assets that would retain their value in the longer term especially in a period of economic uncertainty".

We live in a time greatly characterized by the globalization of cultural activities, which creates an interest in art to unparalleled levels. So, social macro trends will highly support the expansion of the art markets. All societies and cultures seek to reinforce their national and/or individual identities through the acquisition of artwork of their own place and time and new museums will continue to be built: more than 100 museums over the last 25 years. Branding and art acquisition goes hand in hand, so it's evident art budgets are being applied from everything to businesses, personal identity, national identity, and education.

Deloitte with art and finance states technological evolutions strongly support the positioning of art as a new asset class. It increases transparency as new market opportunities and business models in an