You’ve seen Swizz Beats and Alicia Keyes’s “The Dean Collection” art collection. You stanned artist Nelson Makamo when he was featured on the Time Magazine cover in February 2019, and the fact that Oprah has his art in her home foyer. So, you’re thinking, “I want to get into investing in art!” Here’s the low-down on investing in art.
Different ways to invest in art
There are direct and indirect ways of investing in art, much like other asset classes like property and shares.
An indirect way of investing in art is through an Art Fund. In an art fund, a portfolio manager invests in art and you, as the investor, invest in the fund; in turn, you get to share in the fund’s performance, much like how unit trusts work.
Direct ways of investing in art include buying physical art like paintings and sculptures or investing in digital art or Non-Fungible Tokens (NFTs).
Investing in a single artwork means you’re taking on risks related to characteristics of the artwork, like that artist, the specific features of the art piece and the medium in general. Also, digital art has additional risks related to which blockchain the NFT is on.
Investing in an artwork differs from investing in an art fund, where you outsource risk management to a professional portfolio manager. The portfolio manager picks art pieces and operates the art portfolio to maximise the return on the portfolio.
Considerations when investing in art
When considering investing in art, I think it is safe to advise that you should buy artworks that you like. In fact, most art collectors have that strategy as a default. As an art investor, it is worth using this as a basis for two reasons.
The first reason is that the holding period for art should generally be long-term, like many other alternative and illiquid investments, so you should enjoy the artwork.
The second reason is that if you are stuck with the artwork for a more extended period, it will still give you some value, albeit intangible value.
Like any asset class, it is worthwhile to research the assets before you buy. For investors who are buying artwork directly, there are also professional art advisers who can advise you on purchasing art.
Investment diversification
It is also crucial to diversify your investment within the asset class. You should consider diversifying across the source of the artworks, so don’t buy only from one auction house or gallery; try to buy from various sources. Also, diversify across artists, maybe investing in emerging artists and more seasoned artists whose works have been exhibited widely. Another metric to diversity across is medium, so, not only paintings, consider investing in photography, sculptures or other mediums.
Art, being an alternative asset class, should be a diversifying investment relative to other asset classes in your investment portfolio like properties, shares and cash. A 2020 Knight Frank report indicated that collectables, of which art is one form, made up 5% of the net worth of ultra-high net worth individuals, that is, individuals with over $30m in assets. So if the value of your assets less your liabilities is, say, R200,000, then you could buy art to the value of R10,000, and you’d be investing like a boss.
So that’s about half of skinny on investing in art. Next up, I’ll cover maintaining and growing the value of your art and then how to realise value through the sale of an artwork.
Collecting art is a passion, and it is fun. While art is also an asset class, we invest in artworks because they enhance our lives. Are we improving our artworks in turn? We’ve all heard astounding stories about masterpieces eventually discovered in an attic. Of course, art requires physical care, but there’s more.
Maintaining and growing the value of your art
If you’re investing in art, then you want to ensure that you at least preserve the value of your investment and ideally want to maximise the return on your investment.
One of the critical actions to preserve value is collection management. Collection management is the practice of documenting and recording details related to the art pieces in your collection. Elements to note include the artist, the artwork title, when it was created and from whom it was acquired. It can help a lot to also save any documentation related to the artwork, such as the purchase invoice and certificate of authenticity.
Tracking the history of ownership of the artwork, or provenance, is also vital. Several collection management platforms exist to enable a collector to perform collection management efficiently, and Capital Art is one of them.
Non-Fungible Tokens (or NFTs) perform collection management and provenance tracking by definition, which is why they have become popular.
The value of your art investment can grow as the artists’ popularity increases and their works are exhibited in galleries, art fairs and museums.
That said, the value of your investment can also fall; this is why some consider art a speculative investment.
Exits when investing in art
As with any investment, it is essential to know how to exit your investment to realise a return, especially when the investment doesn’t pay any regular income.
Many collectors only sell in the event of one of the three Ds – divorce, [paying off] debt or death. Instead, an investor should regularly consider the value of their artworks and exit their investment when it makes sense. Exits occur when the investment is not performing or when enough of a return has been achieved.
Auctions play a significant role in enabling art investors to realise the value of their assets. When the auction house has a deep collector database, it is possible to try and maximise the demand for an artwork. A lot of demand for an artwork should assist in maximising the realised value for an artwork.
Art dealers also play a role in the secondary market. Art dealers are often involved in the case of very sought-after works, especially those of famous artists who are no longer alive. Some collectors form communities based on an interest in a particular artist and can then engage in peer-to-peer transactions. One of the challenges of direct sales (to the rest of the ecosystem) is that private-sale prices remain confidential. This means that those transactions do not assist other participants in the ecosystem with understanding where the clearing price is of the market for a particular artist or that specific artwork.
As with all investment, don’t forget to research how your investment will be taxed in the jurisdiction where you are tax resident. Art is quite unique because it does not generate direct income and, in many jurisdictions, capital gains on art are not taxed.
Summary
Investing in art has many benefits, and it is best to invest responsibly. If you’re just starting out, perhaps start by collecting art to preserve value before shifting to investing in art.
You might want to start off by checking out the Capital Art Beginner’s Ultimate Guide to collecting art for value.
This article first appeared in the Francly Speaking blog for Franc as a two-part article. Franc is a fintech company offering a simple and easy-to-use app that’ll have you investing like a pro in minutes.
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