"Silver, Wine, Art and Gold" is a proper asset class

Joe Roseman, former head of economics at Moore Capital and author of Swag: Alternative Assets for the Coming Decade

In a recent edition of The Art Newspaper [see], you ran an article entitled “Swag: smart move or bubble ready to burst?”

Since the article was about the concept of Swag [silver, wine, art and gold] as an asset class, and since I was responsible for both coining the acronym and subsequently writing a book about it (Swag: Alternative Assets for the Coming Decade), I want to present a more accurate evaluation.

The piece argued that Swag assets are “for the 1% investor” and “international high-net-worth individuals”. My book goes to some lengths to argue why this is not the case. Of course, if a portfolio is to be comprised of Picassos, Rodins and Chagalls, then yes, such a portfolio would indeed be targeted at the 1% investor. However, a number of art funds have emerged over the past decade aiming at a much smaller portfolio investor. Assets like wine, gold and silver can all be included in a portfolio without the prior need for billionaire status. It is simply wrong to argue that Swag is just a rich man’s folly.

The piece based many negative arguments against art as an asset class on the views of Felix Salmon, a financial blogger for Reuters. According to Salmon, “art is not an asset because it does not have returns; it just sits there… paying no dividends”. Salmon’s concept of an asset is both naïve and lacking economic sense. Gold and silver have no periodic cashflows, but they are indisputably assets. For many years, Microsoft declined to pay a dividend to investors. Was it not an asset during that time? House insurance has no cashflow, yet there are many instances where it subsequently proves to be a great asset to hold. Understanding Swag as an asset class requires an understanding of the economics of money printing and a true understanding of the word “asset”. It is absurd to argue that an asset requires a periodic cashflow (like a dividend) to be valid as an asset.

The piece argued that only a small part of the art world can be viewed as investible. That may be true, but that applies to any investment arena. Many equities are simply not good investments. Many government bonds prove to be anything but safe and investible. Due diligence is a necessity when it comes to any asset class. Art is no different. The idea that assets like Enron or WorldCom were easier to evaluate than something like gold is demonstrably misguided.

What do the academic studies suggest? Here is a snapshot:

Of the 20 academic studies reviewed, art returns beat inflation (in most cases materially) in every single instance.

According to a study by Kraeussl and Lee (Art as an Investment: the Top 500 Artists, 2010), art provides an excellent component to any portfolio. In fact, Kraeussl found that regardless of how risk-averse an investor was, art was always a component of an optimised portfolio. The weighting given to art varied between 4% and 23%. This conclusion was also drawn in studies by R.A.J. Campbell of the University of Maastricht. Rather than being reckless, it appears the evidence suggests that art provides robustness to a portfolio.

Kraeussl found that art had a significant positive skew of returns along with a high reading in the [statistical] Jarque-Bera test, suggesting that although art volatility is high, the volatility tends to come in the form of sharp upward movements.

According to a 2005 study by Campbell, art acts as a significant hedge against equities and commodities during periods when the latter assets are most negative.

Is it so absurd to view art as an asset class? In the 1970s, British Rail allocated 3% of its pension fund to art and achieved an annualised return of more than 11%. This was a pioneering investment approach. It served them very well.

To understand why Swag assets perform, one needs to understand the underpinning economic rationale and the machinations of portfolio diversification theory. And it is here that I am reminded of my favourite Tommy Cooper joke. Tommy went into his attic and found a old violin and an oil painting. He took them to an expert who told him he had a Stradivarius and a Rembrandt. Unfortunately, Stradivarius was a terrible painter and Rembrandt made a rotten violin. Art critics and financial bloggers may well be good at critiquing and blogging, but maybe not so hot at evaluating art as an asset class.

- Joe Roseman, former head of economics at Moore Capital and author of Swag: Alternative Assets for the Coming Decade

Appeared in The Art Newspaper Archive, 239 October 2012