Trends Market USA

Swag: smart move or bubble ready to burst?

Silver, wine, art and gold is the latest investment class for super-rich investors. But be wary of all that glisters…

Market makers: a still from Aernout Mik’s work Middlemen, 2001

In the search for a term that would neatly wrap up new get-rich strategies for the investment world, financial advisers have hit on yet another acronym for the 1% investor.

First there were the Brics; Brazil, Russia, India and China, the developing countries that experts estimate will overtake the G7 group by 2027. Then there were the Civets; Colombia, Indonesia, Viet nam, Egypt, Turkey and South Africa, the next tigerlike economies in the race for foreign investment. Now we have “Swag”, financial adviser- speak for silver, wine, art and gold. The term, according to advocates, is intended to describe a new asset class for “international high-net-worth individuals” who have done conspicuously well during the great recession. The catchy handle has caught fire recently, as reports of the rich swapping stock for Swag have become as common as Mitt Romney’s gaffes about Cadillacs and $10,000 bets.

Coined in September 2011 by the analyst Joe Roseman of Investment Week, the term Swag was defined as a group of “hard assets” that have “all appreciated quite sharply” over the past decade, despite “two global recessions, a severe global banking crisis, a credit crunch, and (generally speaking) highly volatile and mostly negative equity market performance”. For Roseman, the “investment performance” of silver, wine, art and gold can be chalked up to a basic set of investment- grade characteristics: “1) They are all physical assets; 2) They all have longevity; 3) There is no incumbent debt associated with the asset; 4) They are transportable and relatively easy to store/hold; 5) There is scarcity—a finite supply; 6) There is no income stream—so no income tax liability; 7) Asset performance seems relatively uncorrelated to equity markets; 8) A sovereign default would not alter any of the above traits.” From this doublechecked shopping list, Roseman arrives at an idea that appears, on its face, as risky as it does boosterish. “Everyone needs some S-W-A-G,” he concludes. At least a few opponents might answer him thus: like an H-O-L-E in the head.

The issue about what constitutes a “hard asset” is a contentious one with Swag, and becomes especially controversial where the “A” in the acronym is concerned. As prices for blue-chip art cycle up and down (there’s been much more up than down lately), key experts blast away at the notion that art objects share the basic characteristics of traditional investments like stocks and real estate. Take Felix Salmon, for example. A financial blogger for Reuters who writes frequently about the art market (his wife is an artist), Salmon has repeatedly denied the basic operating premise that Roseman and others today push in the global art market. Where Tobias Meyer of Sotheby’s exuberantly proclaims that “the best art is the most expensive art because the market is so smart”, Salmon shakes his head and responds firmly: art is not an asset class.

In an article dated 12 January, titled “Art Is Not An Investment, Part 872”, a rather testy Salmon took on the idea of Swag as illustrated by the contention by Patrick Mathurin of the Financial Times that “the art market had defied the economic gloom to return 11% to investors in 2011, outpacing stock market return for a second consecutive year.” Salmon answered: “No, Patrick, it didn’t. Art doesn’t have returns; it just sits there, being expensively insured. It pays no dividends, and it can’t be marked to market, since the only way to find out the market price for an artwork is to sell it.” After going on to point out that only a “tiny sliver of the art world deals in works that really do have resale value”, Salmon continued: “I’m all in favour of buying art and wine, but they’re not investments. There’s never a shortage of wine shills and art shills who will talk about them as asset classes when they go up in value. All those people should be ignored.”

Enter Michael Plummer and Jeff Rabin of Artvest Partners, the prominent New York-based art advisory firm. Their bullish maxim—“art is an asset class”—appears to place them solidly in the Joe Roseman camp. The partners say that art does constitute a tangible asset and that “global wealth creation and the expansion of the art market go hand in hand”. Artvest offers separately managed art investment accounts, art investment funds, art financing and estate planning for investors with expensive collections. Plummer and Rabin see a booming market that is clearly expanding far beyond the boundaries of traditional connoisseurship. Nonetheless, they do not concur with Roseman’s Rambo-like belief that “no asset class is too risky”.

“The art market is the most illiquid, opaque market in the world,” Rabin warned recently at a panel on art funds organised by the Art Investment Council (a not-for-profit organisation devoted to “a greater understanding of art as an asset class”, founded by Artvest’s partners). Elsewhere, Rabin and Plummer have called the art market “unregulated, noncommoditised and emotional”, and liken entering the market without an adviser to a driving instructor “letting a child drive the family car”. The image they invoke is of a clusterjam of roads full of reckless operators and dangerous hazards. That view is borne out by the investment adviser Charles Sizemore, who characterises art investing as “a thinly traded market dominated by a relatively small number of expert opinion-makers” requiring “a net worth of $100m”. So much for the modest investor— racked up against Richard Prince telephone poles and double-parked Damien Hirsts.

Another sceptic, Artinfo’s Shane Ferro, puts the idea of who might invest in art even more starkly: “The 99%—or even the 99.9%—shouldn’t think of art as an investment. To make money on art, you have to have lots of money (preferably billions), lots of time (like, decades) and, above all, an interest in art that borders on obsession.” Art, it seems, is about as risk-free as polar-bear dentistry. Still, the dollars, rupees, roubles and yen roll in like casino winnings. This new money has produced a boom in everything from Swiss watches to Chinese conceptualism. The golden rule propelling these purchases by nouveau riche collectors proves more Darwinian than reciprocal: as long as expensive works of art and wine find buyers, the sky is the limit. Or so it would seem.

On this point, Felix Salmon is once again direct. “The modern and contemporary art market is a speculative market. It is driven by fashion, where prices can be run up quickly and then driven off a cliff. It’s gambling, really.” When asked whether Swag and other phenomena that suggest collectors now buy art largely for its apprec iating value indicate the presence of a bubble, Salmon replies: “The question itself provides the answer. Back during the dot-com bubble, it was called the ‘greater fool’ theory of investing. Intrinsic value doesn’t matter; all that matters is that someone will pay more for your worthless asset in the future than you’re paying for it today. This is a strategy that works. Until it doesn’t.”

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