Two factors are of greatest interest to wealth managers when considering an increase in client wealth allocation towards art. For one, art, especially at the high and ultra-high end of the spectrum, can be non-correlated in nature or at the very least less dramatically affected by macroeconomic swings and geopolitical uncertainty. While we saw a dramatic contraction in the gross value of art sold during New York’s spring auction season
, the prices achieved were generally within expectations. Thus, wealth managers hold a view that art is well used as a store of value, rather than as a yield-oriented investment vehicle. An all-time high of 51% of wealth managers hold this view, up from 35% in 2014. Another key factor for including art in investors’ portfolios is inflation protection. Thirty percent of the wealth managers surveyed held the view that art could provide a buffer against inflation, doubling the 15% of those surveyed who held the same view in 2014.
The focus of art investment has shifted as a result
Two years ago, the art world was caught up in a flurry of speculation around emerging artists. Prices famously rose at astronomical rates (3,000% in just a few years for artists like
). Things have since calmed down significantly. And the notorious “art flippers,” as they were called, have fallen out of the limelight as their headlining profit opportunities have largely disappeared. This means that investment-oriented art purchasing is also less visible to those working in the art trade.
However, collectors’ concerns about the potential return on investment when buying art has increased significantly in the past two years—from 47% of collectors citing this as a significant factor when buying in 2014, to 64% in 2016. The vast majority of collectors (72%) say their purchases are passion-led and investment-informed, while only 6% said they’re buying art purely as an investment. Wealth managers’ interest in art as a store of value can also be seen in the extent to which more consistently performing sectors of the market, like the Impressionist and modern segment, have grown in overall market share (33% in 2015 over 27% in 2014), while the contemporary market has stagnated at an overall higher 45%. The greater provenance and proven price track record for works in the Impressionist and modern sector make for lower, more predictable risk and thus a more palatable investment in less-certain times, macroeconomically-speaking.
Though the art market is currently down, certain sectors of the market continue to outperform key economic indicators
As with much of the investment landscape, the biggest returns when investing in art are at the very top of the spectrum. The Mei Moses World All Art Index (a somewhat controversial but widely cited market indicator) was down 3.1% in 2015, while the S&P was up 7.14%. However, works sold for over $10 million have generated a 27% compound annual growth rate, or a 1,000+% return over 10 years. Deloitte highlights that this return more than doubles that of gold and other frequently cited commodities. Looking at a 20-year spread, the Mei Moses’s compound annual return of 5.26% was below the 8.33% of the S&P500. However, if you segment out post-war and contemporary art or traditional Chinese art, Mei Moses beats the S&P at 10.71% and 9.13%, respectively. A similar picture is painted when looking at a 50-year spread, with art returning 7.89% annually against the S&P’s 9.17%, but post-war and contemporary delivering 10.85%.
Significant growth in the art-secured lending space is allowing those with assets allocated to art to access the value of those works without selling them
In the past, a major hesitance among wealth managers with regard to their clients including art and collectables among in their portfolios has been that art—often even more so than real estate or private market equities—is a relatively illiquid asset. To achieve maximum return, resales must be timed precisely. And even then, if we’re talking about a truly significant piece, there are only major sales in New York (the most business-friendly city for art dealing) twice per year. However, art-secured lending has grown rapidly in recent years to fill this gap. (Deloitte estimates 15–20% annual growth in the sector over the past five years.) Now only 62% of wealth managers cite liquidity as a major concern for clients with art in their portfolios, down from 83% just two years ago.