Is art a hedge against inflation?
A recent glut of auction records suggest the rich are once again investing in art
By Charlotte Burns. Market, Issue 216, September 2010
Published online: 03 September 2010
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.”
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