Thefts United Kingdom

Is art a hedge against inflation?

A recent glut of auction records suggest the rich are once again investing in art

Damien Hirst epitomised the boom: Artprice database says $100 invested in Hirst in 1998 would now fetch $452. The trick is in the timing: "Hirst was an excellent hedge -- if one bought in the 1990s," says art advisor Todd Levin

london. A recent swathe of auction records has led, as in 2004, to speculation that the rich may once again be treating art as an investment vehicle. Major records include Giacometti’s L’Homme Qui Marche I, 1960, which sold for £65m at Sotheby’s London in February, Picasso’s Nu au Plateau de Sculpteur, 1932—the world’s most expensive work of art—sold in May, for $106.4m at Christie’s New York, and Rubens’ Portrait of a Commander, around 1612-14, sold for £9m at Christie’s London last July.

This was backed up by a report by Capgemini SA and Merrill Lynch & Co published in June, which found that the number of global millionaires grew 17% last year, and, with financial markets in flux, art had emerged as the most popular category of “passion investment”. Trade sources agree. As New York old master dealer Richard Feigen, told The Art Newspaper earlier in the year: “The art world is inundated with money—there’s so much liquidity out there because people are afraid of currency. They’ve been told that art is a place to park cash.”

Art appeals because it is tangible, can be traded in any currency, and comes with kudos—collectors cannot hang stocks and shares on a wall to show their friends. Art may be particularly attractive now because of the uncertainties of the stock markets, big currency fluctuations and the looming spectre of inflation in some major countries, and deflation in others. Giovanna Segre, lecturer in the economics of culture at Turin University, observed in an article on this subject for our sister paper Il Giornale dell’Arte, the anti-cyclical nature of the art market could be coming into play. The art market “offered annual returns of more than 7% between 2001 and 2004, when the stock-market exchange index was in the doldrums”, she wrote.

“Is art a hedge against inflation? Based on the past two decades, absolutely 100% yes,” said advisor Todd Levin of the Levin Art Group. But, he adds: “For the average collector, it depends on whether one is inside the system or not. If one understands how the system works, then yes, it can be a great hedge. If not, then the answer is—at best—maybe.” Those in the know can do very well indeed: Segre points to Francesco Forte and Michela Mantovani’s publication, Economics and Politics of Cultural Heritage, which calculated that “between 1977 and 1996 the real annual return (ie net of inflation) on four major streams in 20th-century art—expressionism, surrealism, art informel and pop—was 5.98%, 5.9%, 8.9% and 11.75% respectively”. She adds: “The last two figures, however, reflect the low valuations of art informel and pop works at the beginning of the period studied. By 1989 and 1990, such works were fetching very high prices, and anyone who had bought one in either of those years would have been seriously out of pocket by 1996.”

There are plenty of other pitfalls for the potential investor. The art world is relatively illiquid, and prices depend on several factors—lack of supply, changes in taste, new research, when a work was bought, how often it has appeared at market, condition, provenance, and, as Michael Plummer of Artvest Partners, says: “The most unpredictable factor of all—collector behaviour.” Small groups of collectors can easily influence “the market” (which is in reality a series of specialist mini-markets that perform very differently).

Potential investors need to do their homework, and take a sanguine approach to risk, to make serious returns. Or, they could instead stick to traditional methods. As George Gordon, Sotheby’s co-chair of old master paintings, says: “People who have bought the best they could buy, and because they liked it—that usually works.”

More from The Art Newspaper

Comments

27 Oct 10
15:2 CET

RON, DENVER

A hedge against inflation? How about a hedge against boredom. Art should not be treated as the spiritual side of business as usual. Speculators - speculate away, good luck selling that stupid D.Hirst in 10 years. The press talks about artists as if they're minting money. The $price$ of a thing often exists in a different universe, much diff. from it's value.

24 Sep 10
16:17 CET

CALVIN, TORONTO

Some people need to chill out.

23 Sep 10
16:15 CET

FINE ART SHIPPING, ILOILO CITY

Really great to read blog, I have fun reading your stuff.

19 Sep 10
15:58 CET

ANN SCOTT, BOSTON

Wow this is such a disgusting article on so many levels. No wonder art is thought of as a commodity complete w percentages and pie charts! Will is right SOME art makes a crapload of money. But the artist doesn't reap any reward from greed driven resale. The person who bags the bucks is usually someone who is already rich, probably from screwing people as we just saw happen in recent years...so crude. What we desperately need are more Herb and Dorothy Vogels...now that's real collecting and real class!

13 Sep 10
17:6 CET

ARTEMUNDI GLOBAL FUND, MIAMI

As with every investment opportunity, buying smart is key. There is no fail proof plan for investing in any asset, art included. That being said, investing in well established artists with strong track records is a smart way to diversify an investment portfolio as these artists have secured their credibility in the market and are uncorrelated to traditional investments. Art gives you a safe and enjoyable avenue to invest in amongst very volatile markets. To make art a successful investment, you need the eye and the expertise to go after the right works that will appreciate in value. Artemundi Global Fund provides the investment vehicle as well as over 5 generations of art investing expertise. Plus, this investment can bring you pleasure while hanging on your wall. For more please visit ArtemundiGlobalFund.com Excellent article Art Newspaper!

13 Sep 10
15:58 CET

TODDIE, KANSAS CITY, MO

Huge Ponzi scheme, like all the others in the recent past, coming to an end soon. People will be burning Picassos for fuel not too long from now. Elizabeth Thomas told me so.

10 Sep 10
15:23 CET

TAHER, CROTON ON HUDSON, NY

What we are seeing here is an old “dead cat bounce” market. Art buyers will soon learn a lesson that the stock market has known for years. http://en.wikipedia.org/wiki/Dead_cat_bounce

10 Sep 10
15:23 CET

ANANYA MUKHERJEE, NEW DELHI

Thanks for pointing this out, Will. In fact, what you are saying holds true not just for the American/European art market but also for the Asian art market- where modern and contemporary art have lesser historical distance between each other. That said, it is also worthwhile to look into art objects and not just paintings, which in the Asian context, is still a fairly big money maker.

8 Sep 10
15:11 CET

WILL BRAND, NEW YORK, NY

This article largely misses the point of hedging. The value of art as a hedge in a balanced portfolio lies not in contemporary art's ability to achieve huge returns, but rather in the ability of more established markets like Old Masters and Impressionists to achieve relatively risk-free returns while being uncorrelated or negatively correlated with the other parts of an investor's portfolio (namely equity). The rates of return given throughout this article, though more immediately comprehensible and interesting to the average reader, I'm sure, have very little to do with the idea of art as a hedge. Rather, correlations as in "Collectible Investments for the High Net Worth Investor" p. 138 (to take the easiest example publicly available on Google Books) or in many other places in the economic literature on the topic are of much greater interest to collectors looking to balance their portfolio. Rename this article 'SOME ART MAKES A CRAPLOAD OF MONEY' and it's perfectly fine.

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