Speculative art: Like all passion investments, art occupies a grey area between investment and lifestyle asset, so what role can it play in a family office’s portfolio?



This summer big brand artists continued to set records at the major auction houses. But like all passion investments, art occupies a grey area between investment and lifestyle asset, so what role can it play in a family office’s portfolio? London’s Mayfair is a long way from New York’s street graffiti scene of the late 1970s, but tonight Jean-Michel Basquiat is the star of a 64-strong lot at Christie’s glamorous evening sale. The piece by the Brooklyn-born street artist turned neo-expressionist superstar is from 1982, his self-declared seminal year, and the hammer drops at £18.8 million (€21.8 million) – several million above estimate.

The June sale comes on the back of the auction house’s record-setting week in New York the previous month, where nearly $640 million (€481 million) was sold at its post-war and contemporary sales, and 37 artist records were set – including on big name brands such as Jackson Pollock ($58.4 million) and Roy Lichtenstein ($56.1 million).

The resurgence of the art market since 2008 has been quick. Just last year The Card Players (1892/3) by Paul Cezanne – depicting French peasants playing cards round a table – became the most expensive painting ever sold when bought by the Qatari royal family for a reported $259 million. According to the Knight Frank Luxury Index, prices at the high end of the market rose 92% in nominal terms to the five years ending in the third quarter of last year – based on hammer prices for 400 artists ranging from the Old Masters to contemporary art. Over the same period the value of equities fell 6%. (One of Damien Hirst’s spin paintings, pictured right.)

Philip Hoffman, chief executive of London-based art investment group The Fine Art Fund, says the market stalled for about nine months during the global financial downturn in 2008 but “came back with a vengeance” – something he says has not been ignored by some investors, who are allocating up to 5% of their portfolios to art.

Indeed, the Art & Finance Report 2013, produced by Deloitte and art market research firm ArtTactic, states economic uncertainty is driving investors into the art market, with 53% of wealth managers listing the economic environment as the main motivating factor for their clients to invest in tangibles like fine art, while 43% said clients were motivated by a desire to diversify their assets.

But the tangible value of art is only brushes of paint on a canvas or the bits of multimedia pieced together to create an installation. As avid art collector David Lewis, of the Lewis Family Office, says, art doesn’t produce income or yield and you can’t look up its value on the back page of the Wall St Journal or Financial Times each day. It’s speculative, he says, and has no place in a family office – at least from an investment point of view. (A southeby’s auction, pictured left.)

His family’s 400-plus artworks, which are predominantly Old Masters, were acquired over four decades and form the Schorr Collection, now overseen by his son Howard, the director of collections. “There is no definitive way of measuring whether a piece of art is good or bad value at a certain time,” he says. “It’s very much a matter of someone’s opinion, and fashion and taste wavers all the time.”

Lewis says the cycle of what is in vogue and out of vogue is unpredictable, explaining that an artist may warrant a chapter in an art history book but their market value will wax and wane according to tastes of the time. At the moment, he says, German Expressionism – unpopular following the Second World War – and Pablo Picasso’s late work are in favour, while Italian Baroque is out.

Lewis says the value of art, like any inanimate object that has no annual income, is an accident of supply and demand at the time it is sold. “It’s just not an investment, what it can be is a speculation that other people may come to share your taste.”

So what prompts collectors to part with millions for a piece? At Christie’s Post-War sale four bidders fought to get the Basquiat into their collection – not bad for a piece with an eight-figure price tag. A prodigy of Andy Warhol, the late artist is the current darling of the art market, but his style could, in some viewers, elicit the clichéd remark “my five-year old child could do that”. The intangible value of art is completely subjective.

The rest of the Christie’s auction is a mixed bag: a painting by Peter Doig, another current favourite in the contemporary market, is the other big seller on the night, fetching £7.3 million. But big name lots such as Warhol and Damien Hirst generate less excitement from the well-heeled bidders – and several go unsold. In total the auction makes £70.2 million (€82.5 million) with 80% of lots selling. Rival auction house Sotheby’s makes £75.8 million at its equivalent London auction the next evening – with Francis Bacon’s ghoulish images being the stars of that show. (Francis Bacon’s Three studies of Isabel Rawsthorne, 1966,was the top lot at Sotheby’s London summer sale.)

Explaining the Christie’s results, Hoffman says Hirst – who famously auctioned more than £100 million of his works the day Lehman Brothers collapsed – has oversupplied the market, with a factory and assistants to churn out works. “At some point in the future we think Damien Hirst is going to do very well, but right now there’s too much available and people got hyped up about the speculative value of Damien Hirst and paid too much money.” As for the unsold Warhol, a Colored Campbell’s Soup Can (1965) no less, Hoffman says the asking price was probably too high.

Indeed whole categories of the market – broadly divided into Old Masters, Impressionist and Modern, Post-War and Contemporary – can, to some degree, come in and out of fashion. Georgina Hepburne-Scott heads the art management division at multi family office Stonehage and says the Contemporary market is particularly exuberant at the moment, but that there are some prices within it that may be difficult to sustain at current levels. In contrast, the Old Masters category, traditionally considered a reliable performer, is by comparison less fashionable today. (Zinc Chloride, produced in the workshop of Damien Hirst but not by the man himself, pictured left.)

In New York, contemporary sales are up 19.9% on the previous year. But art market analysis firm ArtTactic points out auction houses are increasingly reliant on the ultra-high end of the market and record prices to achieve these results. In London the summer contemporary sales are down 31% on the previous year, attributed to the challenge auction houses have securing top quality work and the market’s resistance to works in the £1 million to £3 million price range – partly due to buyers seeking value in lower price segments.

Head of Stonehage investment partners’ institutional unit Steven Kettle, himself a collector, says the time scales for fashions vary, so while a whole category of art might be “out of fashion” for a number of decades, the market for individual artists is more fickle. “So even within the contemporary market, one year everyone wants a [Gerhard] Richter, the next everyone wants a Basquiat.” Hepburne-Scott adds, “Some artists we see now in the contemporary sales will be forgotten names in a decade’s time.” (Picasso’s Sylvette sculpture, pictured right.)

At Stonehage art and investment do not mix. Kettle explains art is considered a lifestyle asset, in the same category as a house in France, for example. Like Lewis, he considers most art buying as speculation and not investment. “Art doesn’t really lend itself to the investment matrix, it doesn’t really produce a yield, it’s not a transparent or regulated market, it’s a highly illiquid asset and transaction costs are extremely high.”

Kettle suggests it is easier to put together a traditional investment portfolio than an art collection given the specialist art knowledge required. “If you start out wanting to put together a collection as an investment you will always underperform return wise over a long period, when you compare it to someone who puts together a collection out of passion,” Kettle says. “I’m not saying art doesn’t turn out to be a good investment, I’m just saying if you start out wanting art to be an investment asset that you will, in most cases, be quite disappointed.”

But what of art funds? Despite the expertise and time they can dedicate to the market Kettle is sceptical and says the majority don’t survive due to a lack of capital. He says very few art
funds raise capital above a hundred million, which is very modest compared to traditional investment vehicles. (Basquiat’s Untitled on sale at Christie’s, pictured right.)

According to the Art & Finance Report, the global art fund market was worth a conservative estimate of $1.62 billion in 2012, compared to $960 million the previous year. But it is established funds – such as The Fine Art Fund that attract the majority of this money.

Hoffman says the fund, which he established in 1989, has sold more than $80 million worth of art, and of that 97% of works have gone up in value and only 3% have gone down. Investors can choose from a two-year or five-year fund, with $1 million the minimum investment. Hoffman says 75% of clients are in the fund purely for financial returns.

“We bought Peter Doig in 2005 for $880,000, we sold it in 2006 for $2.1 million, and now that market has gone sky high to five or six million. Now I wouldn’t be buying Peter Doig as an investment. You might go to Lucien Freud or [L. S.] Lowry, although Lowry has spiked.” Hoffman believes there are around 20 artists who could be described as speculative investments, but thousands more in the high-end of the market that don’t fall into that category.

Hoffman estimates 30 to 40% of the world’s wealthy now want to invest in art, compared with 5% 30 years ago. “I think art is an alternative asset, it’s a very interesting long-term investment and I think if you have experts and you know what you’re doing the downside risk is pretty small compared with other asset classes, and the nice thing is it is a real asset.”

Risk isn’t just embedded in the ups and downs of the market. Viola Raikhel-Bolot (pictured, below right), co-founder and managing director of independent art advisory firm 1858 Limited, explains there is a lot of fraud, forgery, and works being sold at over inflationary prices. Services offered by the firm include buying and selling, authentication, collections management, philanthropy advice, art finance and tax and estate planning.

Raikhel-Bolot says she enjoys working with family offices because they have an understanding of the due diligence required by the firm to confirm the authenticity, provenance and market value of works. “If you have a family office set up, whether it’s for your family or a number of families, you’re already approaching your wealth and assets as a business, so there is that inbuilt understanding that it requires a degree of thoughtfulness.”

Raikhel-Bolot’s advice for anyone new to the market is to look at art, saying the more exposure you have to it the more confident you will be determining what you do and do not like. “There’s this archaic belief that if you don’t know enough you can’t engage in a conversation about the artwork, which really isn’t fair or right, because as far as I’m concerned art is one of the most emotive things humans can create. I always tell clients that if you don’t like it, that’s the right opinion.”

It is the emotive side of art that Guy Spier, chief executive of the Spier Family Office, believes could be harnessed in a family office. He describes art investment as an oxymoron and says he does not consider it as having any value on his balance sheet. “If I got to a place in my family where I was thinking of multi generations, maybe I would buy a work of art or invest in a home with artworks to create family memory and family heirlooms that are a way to unite the family around something,” he says.

At the Schorr Collection, Howard Lewis says the family finds pleasure from loaning pieces – currently around half the collection – to various institutions, ranging from large museums to a boarding school in England’s West Midlands. Howard says the administrative side of running the collection requires a considerable time investment, but brings great satisfaction.

His father, David, says while he wouldn’t advise anyone to buy art where making money was the primary consideration, the emotional, intellectual and aesthetic returns of a collection mean it can have a big role in a family office. “There are other reasons to collect than investment. In fact, in money terms, when things go down you may say ‘I’ve had such pleasure from these things for the past 30 years that I don’t mind.’”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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