Art as an Investment

Modern portfolio theory shows that the addition of art to a balanced portfolio can significantly improve its efficient frontier curve.

ART AS A REAL ASSET
Art, like gold, is an unleveraged, irreplaceable real asset, which many investors turn to as a safe haven in times of economic uncertainty. The two real asset classes, art and gold have historically shown similar characteristics and performance, especially over the last decade. Research by Mei Moses shows that art delivered an average annual return of 7.7% between 1875 and 2000, compared to a return of just 6.6% from equities.*

ART AND MONEY SUPPLY
Art, like gold, provides a historically proven vehicle for hedging against inflation. Many commentators and economists claim that inflation will inevitably result from the dramatic increases in money supply caused by the monetary policies being pursued by central banks in the wake of the credit crunch. Logically, the monetary authorities cannot create this amount of money within the global economy and not have its value depreciate. When the value of money declines, the value of real assets—unleveraged, irreplaceable assets such as art—should rise.

BUY AND HOLD
The history of art investing reveals only one proven strategy for art investing: "buy and hold". Parisian financier André Level began one of the earliest 'art funds' in 1904, investing in pieces by Picasso and Matisse. He quadrupled his investors' money by the time he liquidated the fund in 1914 as war threatened.**

The British Rail Pension Fund achieved an impressive 11.4% annualized return on its large investment in art from the mid 1970s to 1999, with mainly modern art delivering most of those returns. Although art investment funds appear to be a fairly recent development, in fact, the history goes over a century.***

ART AS A DIVERSIFIER
Investing in art gives an investor the opportunity to diversify their portfolios away from traditional financial assets. Adding art to a well-diversified portfolio can improve its efficient frontier—that is, the lowest possible level of risk for the highest possible level of return—providing superior risk-adjusted returns. Research shows an 18.47% allocation to art increases the annual returns to 9% from 8.6% while decreasing risk by 1%.****

ART AND THE ECONOMY
Research by Mei Moses, clearly shows that art tracks stock market movements, but lags them by between 6-18 months. Stock markets tend to predict or move ahead of economic cycles, while the art market tends to lag them. With stock markets around the world up by 40-60% since their lows of 2008, and the art market showing signs of bottoming—now could be exactly the right time to invest in Collection of Modern Art. *****

Source:
* Mei Moses 2002 and Castlestone Management.
** The New Yorker, 2005
*** The Economist, August 23, 2003 and Castlestone Management
**** Bloomberg and Castlestone Management, data: 1985-2008
***** 'An Investor's Guide to Art Market ain and Opportunity', New York Times, 2008 and Castlestone Management

Note: Past performance cannot be relied upon as a guide for future results