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In today's selection --
from The Value of Art by Michael Findlay. When the economy is
booming, well-heeled investors are often offered the opportunity to
invest in "art investment funds" -- money pooled to buy art that is
then expected to appreciate handsomely. But according to renowned art dealer
Michael Findlay, these funds rarely perform well. One of the few exceptions
was a 1904 fund that helped make the reputation of a very young Pablo
Picasso:
"There
is an adage among old hands in the art world that the emergence of art
investment funds signals that a boom is over. This was true in the late 1980s
and again in 2006-08. The wisdom is based on the fact that art investment
funds are usually created by and designed to appeal to individuals with
limited experience in the art market. And indeed, the setbacks that some
parts of the art market suffered as a result of the global financial meltdown
in the fall of 2008 were not predicted by the most recent crop of art-fund
promoters. For them, the art market defied gravity, and they ignored its
historically cyclical nature.
"Strong
prices, high-profile big spenders, and glittering openings make good copy.
The media carries the message that 'art is hot' far outside the art world,
and people like me start getting calls from financial reporters anxious to file
stories about one or another aspect of what is to them a novel phenomenon.
These stories inspire entrepreneurs to use art to approach individuals,
insurance companies, and pension funds with billions of dollars but no
passports to the seductive world of art investment.
"The
basic premise of virtually all art funds is that you put up the money and
someone else chooses and buys works of art that are warehoused until sold.
Then the profits are shared. ...
"From
an economic point of view, works of art have the interesting feature of being
dual in nature. On the one hand, they are 'consumer durables' or objects to
consume as they are viewed, yielding an aesthetic and non-monetary viewing
benefit. On the other hand, they are simultaneously capital assets that yield
a return from their appreciation in value over time like other financial
assets.
"This
sounds very promising indeed -- until art's relative lack of liquidity meets
the carrying costs of art as durable goods and is combined with transaction
costs higher than for most financial assets. Most art funds underestimate the
time it will take to sell, the cost of selling, and the maintenance costs of
as-yet-unsold art 'holdings,' let alone the cost of sourcing sought-after
works. The art funds require their own well-paid experts who, no matter how
solid their skills and reputation in the art world, still have to pay
commissions to the dealers, galleries, and auction houses that do the actual
buying and selling. ...
"Unknown to most art-fund
organizers today is the only one to have had great success, largely a matter
of good luck with timing. In 1904 a young French financier, Andre Level,
invited twelve friends to form an art investment fund he named, with
intentional irony, La Peau de l'Ours, after a fable by La Fontaine in which
hunters sell the skin of a great bear but were unable to catch it -- a
warning about speculation. The group bought work by artists such as Gauguin
and Monet, who were still unfamiliar to many members of the public, as well
as complete unknowns like Picasso, Matisse, and Vuillard, a total of almost
150 paintings. They made no secret of the fact that they were buying for
investment; and after ten years, in 1914, they put up everything at auction.
The return was approximately four times their investment. They gave 20
percent of their profits back to the artists. The sales focused attention on
many of the younger artists, particularly Picasso, whose huge painting Family
of Saltimbanques (1905), now at the National Gallery of Art in Washington,
D.C., was the star of the sales. The principal reason for success was
galloping inflation and the luck of scheduling the auctions before, and not
after, Archduke Ferdinand was assassinated in Sarajevo. Thus started the war
to end all wars, which would have put a considerable damper on the
venture.
"Most dealers and
collectors I know are skeptical of art funds, many of which are stillborn,
while a few limp along until, as is inevitable, the art market reaches a
plateau or even falls. Many financial specialists are less than enamored of
these strange animals. In a letter to the editor of the Art
Newspaper titled ''Art Is Not a Prudent Investment,' Max Rutten of the
Said Business School at Oxford University writes: 'I believe a lot of funds
will fail, consolidate and only a few large and diversified players will
survive before art as an investment class will be generally accepted. In the
process, many private and institutional dollars invested in art funds at this
early stage, will end in a valley of tears.'
"There
were very few art funds left standing in 1991. After 2000 new ones started to
emerge, but few survived the economic setbacks of fall 2008. As for tears,
there were many. The online Distressed Debt Report for January 2009 announced
that the bankrupt hedge fund SageCrest was suing art lender Ian Peck and his
Art Capital Group for millions of dollars, part of a tangled web of suits,
countersuits, and claims of fraud. This is just one example of many such
unhappy endings involving art funds."
The Value of Art: Money,
Power, Beauty
Author: Michael Findlay
Publisher: Prestel Publishing
Date: Copyright 2012 by
Michael Findlay
Pages: 56-60
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