Buzz
Investing in art might seem like a distant ambition for those without an art background. While the idea of purchasing a Picasso may be far from reach financially, this doesn’t rule out art investment altogether. New platforms are emerging, allowing you to buy shares in artworks, much like how you would invest in stocks of a public company.
However, for a beginner investor, is investing in art shares a smart choice? Let's break down how this concept works.
What makes art an appealing investment?
Art is a valuable asset, much like any other investment. And it's one that generally appreciates over time.
Deloitte's 2019 Art & Finance Report highlights Artnet’s Index for Top 100 Artists, which saw an 8% compound annual growth rate from 2000 to 2018, outperforming the S&P 500 during the same period (3%).
The sales figures alone are impressive. Post-war and contemporary art sales reached $3.88 billion last year, while modern and impressionist art sales at auction totaled $3.28 billion.
Scott Lynn, the founder of Masterworks.io, an art investment platform, said, 'Most people have read about how expensive a lot of this artwork is today, but they just never thought they’d ever have the opportunity to own it.'
However, art isn't a quick path to wealth. Like any investment, the longer you hold it, the greater your chances of seeing returns. Until recently, this required enough capital to purchase an artwork and allow it time to appreciate. According to the 2019 Online Art Trade Report from Hiscox, 53% of women and 65% of men consider the 'value potential' (return on investment) when buying art.
Enter fractional ownership, a concept designed to make art investment more accessible by dividing a piece of art into smaller shares. (Though, not literally, as that would destroy the value of the artwork.)
'The target audience is clearly those who have more wealth than time, but still possess a passion for culture and broadening their horizons,' said Robert Berry, a gallerist and consultant based in New York City.
How fractional ownership works
There are several methods for owning shares in artwork.
One option is to invest in artwork purchased by a company. This firm registers with the Securities and Exchange Commission (SEC) to sell shares of the artwork. It determines the price per share, the minimum investment required, the duration for holding the artwork, the management fees for investors, and how investors should report gains or losses on their taxes. Companies like Masterworks, Otis, and Artopolie offer shares through this model.
Another approach is using blockchain-based technology. This allows investors to buy and sell art shares using Bitcoin or other cryptocurrencies. Look Lateral, Artbloc, and Maecenas are some platforms offering this option.
There’s also a third method that combines fractional ownership with art patronage. Feral Horses is one such platform where shareholders can own as little as 0.01% of a piece of contemporary art.
However, this model comes with risks, some of which are tied to shifting tastes. 'The likelihood of an artwork doubling in value is about 10%,' said Berry, referring to artists whose work is priced below $20,000. 'There’s also a 10% chance that the artwork you just purchased will be worth nothing in a few years as art trends evolve, and an artist can quickly fall out of favor.'
What to keep in mind before investing in art shares
How did you select the investments in your current portfolio? You’ll want to apply that same critical approach when considering investing in art shares. 'None of these [platforms] have the established track record of a traditional hedge fund or mutual fund,' noted Berry.
Before you get started, it's important to understand the investment requirements for each platform, as this could exclude certain potential investors. According to Lynn, the typical Masterworks investor has no previous experience with art collecting and is willing to invest between $6,000 and $7,000 to begin. Some other platforms may allow you to start for as little as $50.
Next, you'll need to think about the duration of your investment, as different platforms have various timelines, and some may even vary depending on the specific artwork.
'These investments typically span between three and seven years,' Lynn explained regarding the pieces that Masterworks manages. 'If you need liquidity at any point during your investment, this may not be the ideal asset class for you.'
If you're still in the process of building your emergency fund or contributing to your retirement savings, investing in art shares might not be the best option for you. However, if you're thinking about investing a significant amount of money in art, it's wise to consult a financial planner before making any major decisions.
Once you’re ready to invest, the next step is choosing an artist and a piece of artwork on the platform of your choice. 'I would recommend proceeding carefully until these newer platforms gain credibility and traction,' said Berry. 'It’s better to work with companies that offer a diverse range of modern, contemporary, and price points to protect your investment in case an artist’s career faces challenges.'
An artwork by a renowned master like Monet tends to be more reliable than investing in a living artist who has only a few years of auction history. It's up to you to decide how much risk you're comfortable with. Do you prefer to gamble on a contemporary artist whose auction prices may fluctuate, or would you rather stick with a proven master whose works have lasting appeal? Your choice will influence your potential return on investment.
Berry also shared another piece of advice: It's crucial to understand how the platform you’re using decides to sell its artwork. 'The secret to building an art empire is knowing when to sell,' he said. 'Ultimately, the success of your investment comes down to who is making the decisions about what to buy and when to sell.'
