Income+
Art as a fine investment
Tan Jee Yee 
Many have noted that fine art continues to rise in value and is a hedge against inflation. Is it truly a fine investment, though? – Pexels
advertisement[x]

“That has to be the most anyone had to pay for a naked lady,” said a friend. This was roughly three years ago, as he was reading through a news piece about the auction of Nu Couché, a painting by Italian painter and sculptor Amedio Modigliani.

I’m not an art enthusiast, though I always believed that any art would be beautiful and arresting to the right people. Looking at the photograph of Nu Couché, shot from a distance, the painting does exude a sense of raw beauty. But I certainly wouldn’t place its worth at US$170.4 mil (RM663.6 mil), which was the price it sold for. But well, what do I know?

Nu Couché was the second most expensive painting ever sold at an auction, and one of the 10 artworks to ever surpass the US$100 mil figure – a list that includes the likes of Pablo Picasso and Alberto Giacometti. That pales in comparison to Salvator Mundi, the long-lost Leonardo da Vinci painting of Jesus Christ, which sold for US$450.3 mil last year, shattering all records.

With these figures alone, it’s hard not to fantasise about stumbling upon a painting at a flea market, only to have it be auctioned off for hundreds of thousands, if not millions. With this mindset, another form of art collector is born – those that calculate their purchases for the purpose of profit.

Could fine art be a fine investment? It would seem so. Yet there is an art to art investment that may put investors off.

And for the aspiring art investor who does not belong to the top 1%, could art even be a viable investment? That, ultimately, is a question we seek to answer.

 

Not abstract in value

Mohd Sedek Jantan, head of investment & business development at Standard Financial Adviser Sdn Bhd, says there’s a distinction between buying fine art as collectible, and buying art specifically as an investment instrument. Indeed, if one chooses art as a form of alternative investment, they need to be able to pick an art piece or artist that may provide them with the best returns.

Sedek believes fine art is a good investment, if it is done right

Sedek considers fine art a good investment, if done right. “Fine art can be considered as an investment asset in well-diversified investment portfolios,” he says.

“Investment in fine art will be a good investment if the investor is well-equipped with (art) investment knowledge; not only of the return of investment, but also the art price volatility and market liquidity.”

To start with, original artworks retain its value better than other asset classes. “This provides a hedge against inflation and currency devaluation. Still, holding art pieces is illiquid,” Sedek says. Essentially, art pieces hold out well over the years, but they are not easy to turn to cash when the time comes.

According to 2017 report by Saatchi Art, one of the world’s largest international online art galleries, art has retained or increased in value above commodities, bonds and equities. The report looked at asset classes in the period from 1973 to 2012, to see their performance when inflation is high and rising. During that period, art saw an 18% increase, far higher than the 5% of bonds and the 13% of commodities.

The appreciation of art prices can be almost monumental. For instance, in 1984, contemporary artist Jean-Michel Basquiat’s work Untitled sold for US$19,000 at an auction. By April 2017, when it was auctioned off again, it fetched US$110.5 mil – a record for an American artwork sold at auction.

 

Getting in the know

Owning something that only rises in value is doubtlessly an investor’s wet dream, yet investing in fine art is hardly simple. That is inherently its biggest hurdle – if you’re not ready to educate yourself nor have the luck to build trustworthy contacts to guide you through its intricacies, then investing in fine art may not be worthwhile.

Sedek says that investing in art requires one to be a sophisticated investor, which he defines as individuals whose total net personal assets exceed RM3 mil or its equivalent in foreign currencies. They will also have to have enough knowledge and experience in business matters in order to evaluate the risks and returns of an investment.

The thing about art is that it’s subjective, and thus very difficult to place a value on. Some may argue that it has no intrinsic value. For those with little to no knowledge of the art world and what constitutes as valuable, diving in may prove daunting.

“The main concern for an art investor is to find an art adviser to help provide insight on the quality and value of the art being purchased,” Sedek says.

“Hence, the next question is: how do you value the art? Other financial assets like cars and the stock market have prices that are determined by the market, an index or some other variables. There is no standard art valuation methodology,” he says, adding the valuation methodology should be transparent and accessible to the investor.

A more reliable investment is to purchase something belonging to a renowned artist. It guarantees high prices, at the very least: according to art market website Artnet, 25 artists are solely responsible for almost half of all post-war and contemporary art auction sales.

In the first half of 2017, work by this small group sold for a combined US$1.2 bil – 44.6% of the US$2.7 bil total generated by all contemporary public auction sales worldwide.

The list of the most profitable 25 artists includes Andy Warhol, Roy Lichtenstein and Cy Twombly, as well as living artists like Peter Doig, Christopher Wool, Mark Grotjahn and Gerhard Richter.

Experts call it a “Winner Takes All” market, where a small proportion of artists is responsible for a very large market share, and a large proportion has a very small market share.

As such, owning something from these individuals will guarantee good returns. The problem, of course, is that the prices of these artworks are undoubtedly mind-blowing. 

Saatchi Art is one of the online galleries allowing aspiring investors to browse art without feeling too intimidated – Saatchi Art


Making money

So yes: buying into art investment requires the capital to do so, and also the knowledge and trustworthy contacts to ensure you’re investing in the right pieces. As such, Sedek advises aspiring art investors to be careful.

“For those wanting to invest in art, it is very important for you to take a step back and take in a holistic view of your investment assets, future cash flows and other tangible assets,” he says. “The investor should also have interest in art.”

The latter part is the same advice given to those seeking other collectibles as investment: even if it falls out as an investment, the particular piece of art will still hold value emotionally and personally.

Sedek says aspiring art investors need to take note that in Malaysia, no investment bank or asset management company holds art as an asset. At the same time, no specific art company is selling fine art for investment purposes.

So where does one go about purchasing fine art? “The only way in Malaysia to buy fine art is through art collectors or art galleries. Investors can approach reputable art collectors or the artists themselves. It pays to learn about the artists’ life and times – from there, the investor can get more information about the story behind each of the art piece,” Sedek says.

Knowing the artist is perhaps the most important aspect. Sedek says artists who have won prestigious awards or fellowships, have held academic positions, or have artworks bought by corporate companies, will add value to the purchased artwork in the long run.

As a means of wetting one’s toe before the dive, Sedek says investors can also take part in art auctions to build a network of advisers and fellow investors, as well as to understand how the art market looks like. “For those who just want to dip their toes rather dive into the art market, they can spend RM20,000 of less for fine art,” he says.

Ultimately, Sedek stresses the importance of gaining sufficient knowledge before entering the art investment world. “Get to know what you invest. As the world is ‘investment’ and not ‘gamble’, you should have sufficient knowledge about what you’re investing in,” he says.

“Get familiar with names like Sotheby’s and Christie’s (renowned art auction houses), or Yee I-Lann or Zakii Anwar (notable Malaysian artists).”

He adds that fine art is only suitable as a long-term investment strategy, something that goes for more than 10 years.

While art may be about expression, freedom, abstract and fluidity, investing in fine art requires more thought, calculation and rationalisation.

What about the middle-class investor?

It’s no secret that art investment is for the wealthy. Mohd Sedek Jantan, head of investment & business development at Standard Financial Adviser Sdn Bhd, says purchasing art from established artists requires substantial initial investment.

“One fine art from an established artist in Malaysia can cost you more than a million ringgit,” he says.

It pays to purchase a piece from a well-known, and time-tested artist. But does this mean that fine art investment is completely out of range for middle-class investors?

Not entirely, though it means that the investor would have to try a different route. Sedek says that middle-income investors may opt for artworks by emerging artists, which are more affordable.

The caveat, of course, is that its future value as an art piece is uncertain and unpredictable. The investor would need to double down on their research to ensure that they’ve purchased artwork from a promising artist with a promising future, and even so, nothing is cast in stone. Sometimes it’s just luck, though research certainly helps.

Knowing where to look for emerging artists and their work is the trickier part. This requires understanding and exploring the local art scene, but if traversing through galleries and browsing artwork intimidates you, online alternatives may be more appealing.

This entails browsing through websites like Saatchi Art, Minted.com and Paddle8, which are online galleries. The fact that they are international means that you can also be exposed to emerging artists from other countries, but that may entail even more research on your part.

Sedek adds that aspiring investors may also invest in companies involved in art markets. These include Artprice SA, Sotheby’s Holding Inc, or Artnet AG, which are traded on a stock exchange.

 

Valuable copies

On one unplanned romp down an art gallery a year ago, I stumbled upon a fascinating painting. It was an untitled piece, and I suppose it’s what people would call an abstract art – it was a dance of fiery colours of no discernible shape. It was captivating.

It also cost RM20,000, and for someone who couldn’t even afford a large-sized Star Wars movie poster, the artwork was way beyond my reach. Approaching towards the end of the gallery, however, I found that you could purchase a reproduction copy of the piece, for RM1,500 or so.

I later learned that these are called giclées, which are machine-made print reproductions printed on fine paper or canvas, with colour and clarity to rival the original. RM1,500 may still be a stretch for me, but for what it’s worth, a giclée puts “fine art” within reach for many art enthusiasts, as well as aspiring art investors.

What’s important to note about fine art is that rarity of the work of art is what gives it value, so the original artwork will always be worth more than a reproduction. It also means that a reproduction may lose value the more it is printed and distributed. The giclée seller may provide a certificate of authenticity, but in terms of value, it will obviously never match the original.

But it doesn’t mean that giclées can’t be an investment. Certificate aside, a giclée with a fresh signature from the artist could bump the future value of the piece, just not nearly as much as an original artwork. Like the artwork itself, if the giclée is considered limited and unique, its value can equally increase over time.

Renowned artwork being so expensive, could it be possible for multiple investors to pool their resources and purchase one artwork as an investment?

This means of ownership certainly exists. “It is a collective investment to buy artworks by deceased, non-producing or ‘blue-chip’ artists, with the artwork rented with certain contracted rental returns,” Sedek says.

This could potentially lower the barrier of fine art investment, though seeking out fellow investors to do so would be a challenge. The fact that the art investment world is unregulated certainly brings up concerns of scams.

The expanded concept of this would be art investment funds. Structured like hedge funds and marketed exclusively to the very rich, these funds pool investor capital to buy and sell fine art. It is typically managed by a professional manager or advisory firm, seeking to deliver returns through the appreciation and sale of the artwork.

According to a CNBC article, art funds appeal to those with a net-worth surge and are looking to diversify their portfolios. The price tag is hefty – in London’s The Fine Art Fund Group, reportedly having more than US$500 mil in assets under contract, requires a minimum investment of US$500,000 to US$1 mil.

Not beginner friendly at all, but for the high net-worth investor, it certainly presents an option worth exploring.



This article first appeared in Focus Malaysia Issue 273.