The art of alternative investments

Market volatility tends to turn attention to alternative investments, such as collectibles. But art as an asset class isn’t for everyone.

There are few art lovers who would like their works of art to undergo the recent Banksy treatment. One of the elusive street artist’s famous paintings – Girl With Balloon – self-destructed after selling for more than $1.86 million at a Sotheby’s auction in London. At the time, Banksy revealed he’d built a secret shredder into the frame years ago in the event the painting was auctioned. Despite this, the stunt is believed to have dramatically increased the painting’s value.

It’s unlikely the event will lead to people shredding their paintings in an attempt to add value, but it does focus attention on art and its role in an investment portfolio.

Art as an alternative in times of volatility

Artworks are considered alternative investments, which investors may gravitate towards when markets are volatile. As with any portfolio, investors need to be well diversified to ride the volatility of market highs and lows, and along with the traditional shares, property and cash, art is another asset class to consider.

However, it’s not for the faint-hearted. People may remember the outrage over the National Gallery of Australia buying expressionist artist Jackson Pollock’s Blue Poles in 1973 for $1.3 million. At the time, the price was considered scandalous, however, its estimate value is around $350 million, signifying in hindsight that it was a worthwhile investment.

Valuing the global art market is a tricky exercise. In its 2017 TEFAF Global Art Market Report, the new author created waves by reducing its value by one-third – a result of the methodology she chose to value it. The author, Rachel Pownall, valued the market at $US45 billion in 2016, down from $US63.8 billion in 2015. However, saying that, if the new methodology is applied to 2015, the market shows it rose in the year to 2016 by 1.7 per cent.

The report created a lot of controversy in the art world. Another finding, reported by the art website artsy.net, was that private transactions through dealers accounted for 62.5 per cent of global sales, which equates to a 20 per cent increase on 2015. The 2015 TEFAF Report found that the art market comprised about half private sales and half auction sales.

In its latest report, TEFAF found Asia now accounts for a 40.5 per cent share of world auction sales, an increase from its 31 per cent share in 2015.

An eye for art

One of the issues associated with collecting art for investment purposes is that it is very subjective. You may love a painting, but if you decide to sell and get a valuation that is less than you feel is justified, it can be a problem.

Art investments are also not liquid. If you need to cash out of a piece of art quickly, you may not be able to time it right to get the price you want. One option if you do need cash is to lend against your art collection to unlock its value. Deloitte’s Art & Finance Report 2017, estimated that the global value of art-secured loans in 2017 was $US17 billion to $US20 billion.

The Deloitte report found that there are many reasons why collectors are using their art as collateral to raise finance, but it’s largely attributed to borrowers who have a need for immediate liquidity and borrowers who are strategically releasing capital from their art for some other investment purpose.

So how do you go about collecting art? The traditional way is to see something you like, buy it, put it on the wall and hope it increases in value. And while many artists’ works have increased in value over time, choosing who is going to take off is very difficult. This is where it’s important to talk to gallery owners and art auctioneers to find out about the current and future trends in the art world, both locally and internationally.

Art is a medium to long-term hold and offers portfolio diversification, hedging against inflation risk and low correlation to equity and bond markets. While not as volatile as shares, art investments are less liquid. In times of volatility, tangible investments that you can see and feel, such as artworks, can be appealing, although often the value of the art depends on demand and what’s in fashion rather than the economy.

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Damon is the content editor for Citi’s wealth business