In periods of market stagnation and downturn, investors are on the lookout for alternative investment strategies. A little-known investment vehicle is the global art market. Although art pieces and art funds have been an investment route for the wealthy, crowdfunding resources have removed the high financial barriers that excluded everyday investors. Investment platforms such as Masterworks and Yieldstreet decentralized ownership in art through fractional ownership. Investing in this asset class comes with benefits and drawbacks.
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Risk Mitigation And Portfolio Diversification
In an inflationary cycle with an uncertain market, alternative asset investments that hedge inflation and adverse market conditions become more attractive. Historically, art as an asset class has shown resiliency during such times. When looking back at the 2008 financial crisis, a report conducted by Deloitte entitled “Art and Finance Report 2020” found that the global art market experienced only a short-term decline before recovering quickly.
The private market investment platform Yieldstreet, citing data from Sotheby’s Mei Moses Indices states that “during the last major global financial crisis, auction prices fell by roughly 27.2% between 2007 and 2009. However, for comparison, during this same time period, the S&P 500 fell 57% from its peak in October 2007 and hit a 12-year low in early March 2009. By 2011, total art sales had rebounded and matched 2007 levels. By comparison, the S&P 500 took an additional two years, reaching pre-crisis trading levels in 2013.”
The data and historical record suggest that the global art market is able to stay somewhat insulated from extreme and prolonged periods of decreased value.
Data courtesy of Internal Masterworks analysis. Bloomberg. 12/31/2021. Index data updated as of 12/31/2021. S&P 500 is represented by SPXT Index. There are significant differences between the asset classes presented, for additional information, see Important Disclosures Repeat-Sale Pair Index of Post-War and Contemporary Art (as defined by the applicable auction house) using Standard & Poor’s CoreLogic Case-Shiller Home Price Indices Methodology
Benefits
With the advent of crowdfunded art fund investment platforms such as Masterworks in 2017, investing in this typically exclusive market became possible for everyday investors through fractional ownership. Rather than an individual having to purchase a piece or collection of art personally, investors purchase shares of a portfolio that is managed by fund managers.
In the past when an investor looked to purchase an art piece, they’d have to depend on their own research and expertise. Relying on experienced, knowledgeable fund managers, investors face a reduced risk of acquiring an inauthentic or overvalued piece. To assure the preservation of the investment, fund managers take measures such as storing the pieces under ultraviolet (UV) lighting and maintaining specific humidity and temperature conditions.
According to the Artprice100 Index, since 2000, the art market has outperformed the S&P 500, returning over 360%.
Data courtesy of Yieldstreet
According to the Masterworks Art Indicies, “contemporary art prices have outpaced the S&P 500 by 131% from 1995-2021. We estimate, based on a Deloitte report, the total value of privately held art to be $1.7 trillion.”
Data courtesy of Internal Masterworks analysis. Bloomberg. 12/31/2021. Index updated as of 12/31/2021. S&P 500 is represented by SPXT Index. There are significant differences between the asset classes presented, for additional information, see Important Disclosures Repeat-Sale Pair Index of Post-War and Contemporary Art (as defined by the applicable auction house) using Standard & Poor’s CoreLogic Case-Shiller Home Price Indices Methodology
Drawbacks
Investing in art comes with trade-offs. Investment minimums can be a barrier. While the cost of investing in the art market through crowdfunding platforms such as Masterworks and Yieldstreet is considerably less than purchasing works individually, the baseline investment is typically around $10,000. It is also hard to know which art pieces will take off in value.
Liquidity is a factor. Fractional artwork investment is a longer-term investment, typically having a holding period between three and 10 years. Art collections are not get-rich-quick schemes. To achieve an optimal return, fund managers play the long game. New technology and investing opportunities have increased the liquidity of the art market. According to Yieldstreet’s data, “In the last 10 years, turnover has doubled. In the last 20 years, it has multiplied 31x.”
Fees affect your return on investment. Fractional investment platforms collect an annual fee of between 1% and 2% in addition to a future-profit fee, effectively acting as a private capital gains tax. Works of art that are held for longer than a one-year period may qualify for long-term capital gains treatment. Prior to investment, nail down the fees and consult a tax professional about possible tax benefits.
Avenues For Investment
Masterworks is the market leader when it comes to fractional art portfolio investment. The platform tends to focus on individual pieces and follows a formula that has worked to its success. Fund managers review thousands of paintings, purchasing less than 5% of what they’re offered. After the acquisition of a specific piece, the company files an offering circular with the U.S. Securities and Exchange Commission (SEC). Investors are offered liquidity options with their investment and can trade shares or hold the investment until the painting has been sold.
Since the launch of the platform in 2017, the group has offered 200 opportunities. While the broad track record of the firm is unavailable to the general public, the platform boasts works from Jean-Michel Basquiat (18.09% median artist appreciation rate), Andy Warhol (10.57% median artist appreciation rate) and Mark Rothko (13.64% median artist appreciation rate).
Yieldstreet is another private investment firm that provides access to the global art market. With more than six years of art investment experience, the platform has achieved over $400 million in amount funded to date and provided an internal rate of return (IRR) of 12.1% across its six art portfolio offerings.
Yieldstreet’s Diversified Art Debt Portfolio II is an asset-backed loan with over 159 pieces of artwork by 104 different artists. Investment in this fund offers the potential for stable income in the form of distributed monthly interest payments to investors.
Outside of artwork, the platform offers private market opportunities across multiple asset classes. Since its 2015 inception, the firm has had over $3 billion invested on the platform and provided over $2.2 billion in total interest and principal returns to investors.
Benzinga Offers Guidance For Investing In Art
Investing in the global art market class offers unique diversification and adverse-market-hedging opportunity. This market is risky, so do your due diligence. Follow Benzinga for more marketplace analysis and insight.
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This article The Resiliency Of Art Funds During Periods Of Economic Downturn originally appeared on Benzinga.com
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