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Investing In Fine Art Can Mean Pretty Profits

If you’d added a few paintings to your portfolio over the last few years, instead of all those bank stocks, your retirement nest egg might be looking a little different right now.

"Tete" carved by Italian sculptor and painter Amadeo Modigliani
Miguel Medina | AFP | Getty Images
"Tete" carved by Italian sculptor and painter Amadeo Modigliani

Indeed, for the ten-years ended July 2010, the price index of all fine art work sold more than once worldwide has produced a nearly 11 percent annualized return, outperforming the Standard & Poor’s 500 index of large cap stocks and most other asset classes, including bonds and commodities—though gold was the clear frontrunner during those years, according to artprice.com in France, which tracks the market.

Fine art includes paintings, sculpture, prints, video and photography.

Despite the economic slump, strong recent sales of Impressionist and modern art pieces in 2010 similarly pushed the Mei Moses “All Art Index” to a 13.4-percent gain for the first half of the year, compared to a 6.5 percent loss for the S&P 500 index, according to artasanasset.com, which maintains the index.

Over the longer term, the Mei Moses Fine Art Index of repeat art sales at the leading auction houses and the S&P 500 produced roughly equal compound annual returns over the last 50 years.

“We view art as a very interesting long-term asset class,” says Philip Hoffman, chief executive of the

Fine Art Fund Group

, an international investment partnership in London. “There are a lot of opportunities to make significant capital growth if you know how to buy and sell.”

Indeed, investment-grade art enjoys a low correlation with other asset classes, including stocks and bonds, strengthening its case as a candidate for portfolio diversification.

And some maintain they can act as an inflation hedge, since “real assets” (like gold) tend to rise in value while the value of money falls.

Why, then, doesn’t everyone sink their savings into canvas?

For one thing, art is a volatile asset. It’s hard to tell when demand for a certain genre will suddenly surge or dry up.

After a ten-year run, for example, in which Chinese contemporary art saw prices rise more than 500 percent and Indian contemporary art enjoyed a 700-percent gain, prices for works in both categories then fell by 30 percent in 2008 and 2009, according to Artprice.

Another reason to tread lightly? Art is far less liquid than other financial assets, making it harder to sell in a pinch.

Lastly, keep in mind that indexes which track repeat sales are somewhat skewed because they include only art pieces that already have an established following.

Risk Management

That said, if you’re tired of watching Wall Street throw cold water on your 401(k) and are ready to diversify into an asset you can enjoy, there are steps you can take to mitigate risk and boost your profit potential—and you don’t have to be a Rockefeller to do it.

According to Artprice, some 70 percent of all artwork sold at auction between January 2008 and June 2009 was priced at $5,000 or less.

During that same period, “affordable” art priced below $5,000 gained 60 percent in value, while higher end pieces gained a staggering 150 percent.

Before you even think about putting down money, however, it’s important to educate yourself on the forces effecting the art market overall, and the niche you’re hoping to pursue, says Paul Provost, senior vice president, director of trusts and estates at Christie’s auction house in New York.

“The art market is made up of a series of micro markets and each one moves in accordance with its own dynamic,” he says.

American furniture and decorative folk art, for example, have a different demand cycle than, say, classical antiquities, impressionist paintings or post war contemporary pieces.

“It’s the same with investing in the stock market,” says Provost. “You have to drill down to the issues surrounding large-cap, mid-cap and small-cap stocks along with the different sectors. You’re not just going to say, ‘I want to invest.’”

Sotheby's staff carry away the Edouard Manet painting entitled 'Portrait De Manet Par Lui-Meme, en Buste' (Manet A La Palette) ('Self-Portrait with a Palette') after it was auctioned at Sotheby's in London on June 22, 2010 where it fetched 20,000,000GBP.
Carl Court | AFP | Getty Images
Sotheby's staff carry away the Edouard Manet painting entitled 'Portrait De Manet Par Lui-Meme, en Buste' (Manet A La Palette) ('Self-Portrait with a Palette') after it was auctioned at Sotheby's in London on June 22, 2010 where it fetched 20,000,000GBP.

His suggestion? “Talk to seasoned collectors. Go to the auction houses and ask questions. Get involved with the museum and befriend the curator. An educated consumer is going to be best equipped to maneuver in this marketplace.”

Due diligence is all the more important given the number of unscrupulous art dealers who traffic in imitation art.

Provost says newcomers should stick with reputable brokers and auction houses that can help verify authenticity.

“The art market is not immune to the same scandals that have rocked the financial services or real estate market,” he says. “Investors need to be careful about what they’re doing, do their homework and understand who they’re working with.”

From a return on investment standpoint, he says, it’s also good advice to buy the best piece you can afford.

Artwork that emanates from more mature markets, such as Old Masters paintings, can cost anywhere from $10,000 to many millions depending on the artist.

Rare and important photographs, however, which have only been collected for the last 50 years, can still be had for as little as $2,000—though Christie’s sold one in 2009 for $1 million.

“With each new photography sale there’s often a new world record set so that’s an area that has tremendous collecting interest,” says Provost. “The great photographs now are expensive, but I’d recommend those are the ones to buy. The great ones generally increase in value the most. Mediocre objects tend not to increase in value at the same pace.”

If you’re not accustomed to putting all your eggs in one basket, you can also consider an art investment fund, but be prepared to shell out.

The Fine Art Fund Group, for example, founded in 2001 as a diversified portfolio of high-end artwork, is only open to investors worth at least $2.5 million.

Those who qualify can invest a minimum of $250,000 into the broader fund, $100,000 in the specialized funds or own part of a single painting.

David Burliuk Flowers painting
Source: Christies
David Burliuk Flowers painting

Other investment funds, like the new “Collection of Modern Art” fund launched in May by Castlestone Management, requires a smaller minimum investment of around $10,000.

The fund itself is based and regulated offshore in the British Virgin Islands. As such, it is open to investors only through financial advisors who can counsel clients on the risks and potential rewards involved.

With help from a 100-percent year-over-year sales volume increase for post-war art, the Collection of Modern Art Fund gained 10 percent for the first half of 2010.

How much of your portfolio should you allocate towards art?

“I advise my clients to put no more than 5 percent of their wealth into art,” says Hoffman, noting investors in this economy, where demand is lower, should employ a buy and hold strategy.

“Art is a long-term goal rather than a short-term investment,” he says.

Be sure, too, to buy what you like. That way, if your twentieth-century still-life painting fails to appreciate in value, you can still appreciate its contribution to your wall.

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