The India Art Summit just finished recently. A lot has been written in the press over the past few years on the values that different artworks and artists have commanded in India. So, does art investing make sense for you, should you rather invest in art over say gold or real estate? And, what kind of an asset is art? Read more…
Investment characteristics of art assets
Art is an asset class by itself, just like say commodities, equities or government bonds. But like antiques, wines, cars, it is not a mainstream asset class, but rather an alternative asset class providing an alternative to more common assets like equities.
However, unlike many asset classes, Art is something that you can touch, feel and enjoy right from the comfort of your living room at home. Here are some features of Art assets:
1) Uncorrelated Returns: Experience from the Western markets has shown that the Art market is generally uncorrelated to the performance of the stock market or the returns offered by investing in government bonds.
So, investing in Art can provide a good diversification strategy, once you have set up the foundation of your portfolio using traditional asset classes.
2) Lack of Liquidity: If you are in need of cash, it’s going to be hard to immediately convert a sculpture or painting that you own into cash. However, if you owned a mutual fund, you could sell it and get cash in hand within 24 – 48 hours.
Art is an illiquid investment, i.e., it cannot be readily converted into cash. Therefore, its best suited for high net worth individuals who have other sources of liquidity or easy access to cash when they need it.
3) Lack of Income: Usually the Art you own is not going to generate any regular periodic income for you, unlike say receiving dividends from stocks or interest from bonds.
Sure, you can get psychological income just from the joy of seeing a beautiful painting in your home or buying a prestigious work might boost your status and ego.
But, you will not create a recurring stream of income from this art. You can of course benefit from the appreciation of the value of your Art, but unless you actually cash out of it, this value only exists on paper.
4) Fakes and Regulatory Framework: The Art market is not immune from fraud, in fact every year one reads about fakes of even famous artistes. Just earlier this year, there was the case of an Indian artist’s work that turned out to be fake, yet was displayed by a well-reputed gallery.
There is no regulator for the Art market, unlike say the SEBI for the stock market or IRDA for insurance. So, the level of consumer and investor protection is lacking, and you are going on the faith you place on the seller of the work.
5) Transparency: Why does art get priced the way it does? Well, the short answer is its difficult to tell. Sure there are supply and demand issues involved and how popular a certain artist might be.
But, because the market is not very deep, i.e., there are not too many buyers and sellers, it is hard to get a good handle on price. As a result, the prices in the art market can be very volatile and unpredictable, exposing you to risk.
6) Handling Costs: When you buy stock or bonds, you are buying a financial asset and get only a certificate which is easy to store. You don’t need to insure this certificate or protect it against fire or flooding.
However, Art is a tangible asset. Not only does Art have storage costs associated with it, but you also need to insure it to continue to protect it every year that its value rises. So, the cost of ownership for a work of Art can be more than owning a simple financial asset like shares in a company.
So, should I be investing in Art?
Like all things in life, you need to focus on the basics first. You need to walk before you can run. Similarly, when it comes to investing, make sure that you get the basics in your portfolio right before you venture into Art investing.
When we refer to the basics, we mean two things:
a) Fulfill your “Foundation Goals” first: Before you get to “Lifestyle Goals” its important that you have adequately taken care of your basic goals such as your housing, protection (insurance) and family needs (education, marriage).
b) Build a strong foundation in your portfolio: Just like a house with a weak foundation is risky, so too is a portfolio that is built on shaky investments.
Your investment portfolio should be built on high quality mainstream assets and not alternative investments like say antiques, fine wines, or Art.
Once your foundation is in place through safe/stable investments that provide ample liquidity and is a source of recurring income and capital appreciation, only then should you consider alternative assets.
Even after you have taken care of the basics you should consider Art as an investment only if you like the work that you intend to buy. This way even if you are unable to sell the investment at a profit you will at least be able to derive “psychological income” from it.
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