Are Art Funds the Right Way To Invest In Art?

A man stands beside Pablo Picasso's "Nude, Green Leaves and Bust", 1932, on display April 29, 2010 at Christie's in New York.
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A man stands beside Pablo Picasso's "Nude, Green Leaves and Bust", 1932, on display April 29, 2010 at Christie's in New York.

Bloomberg reports

on The Art Collection Fund, a proposed Luxembourg-based fund with plans to invest in fine art. Its backers are projecting returns of 12% with an investment strategy that consists of approximately 65% modern and contemporary art and 35% tribal art.

An added bonus? This is one of the few investment funds where you’ll be able to enjoy your investment at home too. According to the website, the fund’s “Art @ home” program will allow investors to borrow works from the fund for a period of up to twelve months, provided that they pay the costs of transportation and insurance.

“This unique experience provides investors with spiritual enjoyment and a real aesthetic enrichment,” the site says. Top that, Soros.

A disclaimer notes that “The Fund has not yet been incorporated . . .

An application to obtain approval of the Fund and to obtain the registration of the Fund on the Official List has even not yet been filed with the Luxembourg supervisory authority.”

Nevertheless, the planned launch of the fund is well-timed, at least from a capital-raising perspective. The Wall Street Journal reportstoday that Christies and Sotheby’s, the world’s two leading auction houses, had sales increases of 14% last year, and experts attribute a big part of that rise to investors seeking diversification through tangible assets.

The question is whether funds like The Art Collection Fund are the best way to bet on continued strength in the art market. Richard Polsky, a private dealer and author of I Sold Andy Warhol (Too Soon),is skeptical.

“I give it a thumbs down,” he says. “It never has worked. There’s a history of this stuff. The closest it ever came to working was the British Rail Pension Fund. They did everything right: bought the right material and timed it right. And still, they would have been better in the S&P 500.”

In 1974, that fund invested about 2.5% of its assets in fine art, and retained Sotheby’s to help with the selection. They bought 2,500 pieces and sold off everything they had acquired between 1987 and 1999. The portfolio ended up with an annualized return of 11.3%, but the bulk of that gain came from just twenty-five impressionist pieces.

And that fund is the exception.

Stanislas Gokelaere, the fund’s founder and a former investment banker who describes himself as a “dedicated collector”, says that many past funds have failed to gain traction because their backers lacked expertise in the field.

“They did pretty bad because they had the wrong team,” he says, adding many past funds have found themselves unable to raise the money to get off the ground. But he says the lost decade of the 2000s has many investors ready to reconsider art as a component of a portfolio.

“They come to us because all the financial assets in which they’ve invested have produced a zero percent return over the past ten years,” he says.

But even if the art market does continue its run, high costs could be a drag on the fund’s performance. The fund plans to charge 2% of assets and 20% of gains, the traditional fee formula for hedge funds.

However auction commissions and insurance costs are likely to represent a significant burden on returns, and those costs aren’t included in the management fee. Mr. Gokelaere argues that the fund will be able to negotiate steep discounts on auction house commissions because it will be selling a high quality collection in bulk six years from inception.

Then there’s timing. Mr. Polsky worries that “the boat has sailed” on high returns in the contemporary art market. Historically, the worst times to invest in art have been during the periods where investors were chasing art as an investment. Witness, for instance, the art market crash of 1990, which followed a period of rapid price increases fueled by Japanese speculators. According to the Mei Moses World All Art Index, it took until 2003 for the market to reach its 1989 highs again. The Art Collection Fund has a stated mission of selling off its assets in six years—which could be problematic if the current bull run doesn’t continue.

Also of concern to diversification-seeking investors might be the funds’s emphasis on modern and especially contemporary art. Those markets have been on a tear of late and many industry experts, including Leslie Hindman of Chicago-based Leslie Hindman Auctioneers, feel that traditional antiques and old master paintings are more undervalued right now. This fund gives you no exposure to those categories primarily because, according to Mr. Gokelaere, the fund’s advisors are specialists in 20th century and tribal art.

My take? If The Art Collection Fund is correct and demand for contemporary art remains strong even if the broader financial markets weaken, shares of Sotheby’s (NYSE: BID) should perform well, with more liquidity, lower costs, and a lot less opacity. And with a 0.90% yield, you can buy a couple posters to throw up on the wall too.

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