New investment platforms let the general public invest in valuable art, just like buying stock shares.
For nearly a century, art investment funds have existed. Masterworks, on the other hand, has given an ancient tradition a new spin by allowing users to buy shares of specific artworks in $20 increments. Investors can then sell their shares on a simple secondary market or wait for Masterworks to sell the item and earn pro-rata proceeds.
It’s important to understand how art investment funds have traditionally functioned and whether experts believe it’s a suitable investment for people considering buying art only for investment purposes.
Art “crowdsourcing” started with the French
The Skin of the Bear (La Peau de l’Ours) was an early art investment fund based in France at the turn of the twentieth century. The name stems from a French legend that includes the proverb “never sell the skin of the bear before you’ve actually killed it” — the French equivalent of “don’t count your eggs before they hatch” — and relates to the fact that investing in art can be risky.
The fund was administered as a syndicate in which a small number of partners each donated similar amounts to purchase a collection of paintings. It was partly meant to promote budding post-impressionist artists such as Picasso, Matisse, and Gauguin.
Andre Level, a businessman, art critic, and collector, oversaw the fund and coordinated the sale of the paintings. He received 20% of the sale price for his work after the paintings were sold. In addition to the money they received from the original sale, the artists received 20% of the fund’s income. The remaining would be divided equally among the investors.
The droit de suite, or artist’s resale right, is the concept of returning a portion of the sale price to the artist. Except for the United States, most parts of the Western world presently have versions of this statute.
This was the first art fund, and it was a huge success. It fueled demand for new artworks and encouraged inventive impressionist and modern painters, all while paying off its investors handsomely.
All funds are not created equal.
The British Rail Pension Fund made another well-known art investment. The goal of this fund, which was founded in 1974 to handle a small amount of the company’s employee retirement savings, was to buy pieces of art over a 25-year period before selling them. The fund produced an annual compound return of 11.3 percent, although actual earnings were significantly smaller due to rising inflation over much of that time.
Other well-known art funds fizzled out. In 1999, a fund administered by British art dealer Taylor Jardine Ltd. sold its stake at a loss, and a fund run by Banque Nationale de Paris did the same in 2003. The Barrington Fleming Art Fund was shut down by the British Department of Trade in 2001 after it was discovered to have been set up fraudulently. And Fernwood Art Investments, formed by former Merrill Lynch manager Bruce Taub, never got off the ground after Taub was convicted of embezzling funds from his investors in 2006.
Nonetheless, art funds such as Anthea and The Fine Art Group are still in business, and banks and auction houses have long promoted art investing as a good diversification strategy for the wealthy.
But what do economists have to say about art as a financial asset?
According to economic theory, investing in art should provide lesser returns than investing in stocks. That’s because it’s regarded as a hobby investment. Part of the return on investment in art, like investing in sports memorabilia, jewelry, or coins, should be the intrinsic enjoyment of the goods themselves. The monetary return plus the pleasure of ownership make up the total return.
Because stocks do not provide this enjoyment value for most individuals, the monetary returns on these financial instruments should, in theory, be bigger than the monetary returns on art.
Furthermore, these studies do not take into account transaction fees, which can be substantial in the case of art due to the high commissions imposed by auction houses or individual dealers for acting as middlemen. They also don’t account for sample selection; artworks that lose value are frequently unable to be sold at auction.
Both the Goetzmann and the Mei and Moses investigations, on the other hand, conclude that stock market success is unrelated to returns on art investments. As a result, investing in art as a strategy to diversify your portfolio could be beneficial.
Is art for everyone?
Masterworks, on the other hand, is not like the typical art funds mentioned earlier. Rather than investing in a fund that comprises numerous works, investors are purchasing shares of a single piece of art. The cost of entrance is substantially lower, and investors aren’t bound into the fund for a set length of time as long as there are eager purchasers for the artwork share. Investors might profit simply by selling shares that appreciate in value rather than waiting for the artwork to be sold.
Investors in Masterworks’ art shares, like those in traditional art funds, will profit if the price of their artwork rises and lose money if it falls. In the end, Masterworks appears to be both inventive and entertaining. The model is expected to appeal to a younger generation of investors, many of whom may have begun investing in tiny sums via applications like Robinhood.
The site is simple to use and could provide some entertainment — I was even tempted to invest in certain stocks.
Should you, however, expect to make a fortune by investing in art? Most likely not.
Furthermore, it does not always aid emerging artists, unlike Skin of the Bear. Banksy, Andy Warhol, and Claude Monet, to mention a few, are among the artists whose work is featured in Masterworks.
Masterworks, on the other hand, has the potential to bring art investing to a wider audience. However, buyer beware: art is a high-risk investment.
