financial returns

This page considers investment in collectibles such as fine art.

It covers -

• introduction
• the shape of returns
• rationality and relativities
• studies - econometric and other studies about returns on investment in fine art
• hot property - spoliation and export restrictions

It is complemented by a note on fine art investment funds, sometimes touted as the aesthete's verson of hedge funds.

     introduction

Since the birth of the modern art market it has been recurrently claimed that "art is a good investment", one that will preserve value in times of inflation or other difficulty and that will allow the investor (typically guided by the person making that claim) to generate returns that are equal to - if not markedly better than - investing in bonds, shares, property or other investments.

One enthusiast thus asserted that

Unlike property and shares, quality art is largely insulated from the volatility of investment markets providing vital diversification when markets are falling. The art market is considerably less volatile and is less sensitive to economic crises and geopolitical events than other assets. Compared to many alternative investments, art also involves low transaction and holding costs.

In recent years the claim has been illustrated by some of the figures highlighted later in this note, and explicated to mean that all art, any art will show substantial price increases over a period of ten to twenty years.

The claim has often been extended to encompass other collectibles, whether traditional commodities such as rare books and coins or exotica such fine wine, theatrical memorabilia, motor vehicles, fountain pens and even cookie jars (the latter presumably provides Andy Warhol with some enjoyment amidst a camera-free part of Hell).

Announcement that "art is the new asset class" is however problematical. It has fostered discussion of art investment funds, noted elsewhere on this site, and a range of econometric studies. It is clear, however, that not all art will provide superior returns and indeed that although much art may provide pleasure for the observer it does not necessarily constitute a rational investment.

The owners of particular works sold for multi-million dollar prices are presumably pleased by appreciation of their assets but in many cases would have done better, from a financial perspective, to have invested in the stockmarket or a mundane field such as urban property. Despite the enthusiasm of some journalists and vendors for "quick, safe" returns many new investors in art would do better from investment outside cultural commodities.

Robert Hughes observed in 1989 that

Contemporary art has become, quite simply, currency. The market burns off all nuances of meaning, and has begun to function like computer-driven investment on Wall Street.

Jerry Saltz commented in 2007

Consider the lame-brained claim made by Sotheby's worldwide head of contemporary art, Tobias Meyer, who recently effused "The best art is the most expensive because the market is so smart". This is exactly wrong. The market isn't "smart"; it's like a camera - so dumb it'll believe anything you put in front of it. Essentially, the art market is a self-replicating organism that, when it tracks one artist's work selling well, craves more work by the same artist. Although everyone says the market is "about quality", the market merely assigns values, fetishizes desire, charts hits, and creates ambience.

That is consistent with 'The Impact of Museum Purchases on the Auction Prices of Paintings' by Wernher Pommerehne & Lars Feld in 21 Journal of Cultural Economics (1997) and other works highlighted later in this note.

     the shape of returns

What are the returns from fine art or other collectibles. It is typically claimed that such investment offers two types of returns for an investor -

• psychic returns, encompassing 'prestigious' utility (the status associated with possession and donation, or even sale, of culturally significant or merely expensive items), functional utility (the collectible as a decorative item or something that fills a blank space on the wall) and civic utility ("an altruistic need to support art or artists in society")
• financial returns, centred on the collectible as a readily transportable store of value (eg in periods of inflation or political turbulence) or generator of potential profit (ie increased value beyond the expected rate of risk and return for other investments such as shares).

     studies

For investment perspectives see William Goetzman's 1993 'Accounting for Taste: An Analysis of Art Returns Over Three Centuries' in 83(5) American Economic Review and the landmark 'Unnatural Value: or Art Investment as a Floating Crap Game' by William Baumol in 5 American Economic Review 1986, complemented by the 2002 paper (PDF) 'Art as Investment and the Underperformance of Masterpieces: Evidence from 1875-2002' from Jianping Mei & Michael Moses and William Grammp's Pricing the Priceless (New York: Basic Books 1989).

Other studies include Jean Picard Stein's 'The Monetary Appreciation of Paintings' in 85(5) Journal of Political Economy (1977) 1021-1035, James Pesando's 'Art as an Investment: The Market for Modern Prints' in 83(5) American Economic Review (1993) 1075-1089, M G Fase's 'Purchase of art: Consumption & Investment' in 144(4) De Economist (1996), Graeser's 'Rate of Return to Investments in American Antique Furniture?' in 59(4) Southern Economic Journal (1993) 817-821, Pesando & Pauline Shum's 'Investing in Art: A Cautionary Tale' in 9(4) The Journal of Wealth Management (2007) 80-87 and 'Auctions and the Price of Art' by Orley Ashenfelter & Kathryn Graddy in 41 Journal of Economic Literature (2003) 763-786.

'Financial Returns & Price Determinants in the Australian Art Market, 1973-2003' by Helen Higgs & Andrew Worthington in 81(253) Economic Record (2005) 113-123 complements their 'Art as an Investment: Short and Long-term Comovements in Major Painting Markets' in 28 Empirical Economics (2003) 649-668 and Annette Van den Bosch's The Australian Art World: Aesthetics in a Global Market (St Leonards: Allen & Unwin 2004).

There is a broader view in Muses and Markets: Explorations in the Economics of the Arts (Oxford: Blackwell 1989) by Bruno Frey & Werner Pommerehne, Gerald Reitlinger's pioneering three volume The Economics of Taste (London: Barrie & Rockcliff 1961, 1963, 1971) and Creative Industries: Contracts Between Art & Commerce (Cambridge: Harvard Uni Press 2000) by Richard Caves.

Government and academic studies regarding Droit de Suite are identified in the note elsewhere on this site. Fluctuations in reputation and prices are highlighted in Robert Hughes' persuasive Nothing If Not Critical: Selected Essays on Art and Artists (London: Harvill 1992).

For a view of Japanese speculation, ostentation or rationality see the 2005 paper by Takato Hiraki, Akitoshi Ito, Darius Spieth & Naoya Takezawa on How Did Japanese Investments Influence International Art Prices?

Publication about the fine arts has sparked other research, for example the 2001 The Death Effect on Art Prices: Revisited (PDF) by Victor Matheson & Robert Baade.

     hot property

Questions of spoliation and repatriation are discussed in a separate note elsewhere on this site. It incudes detailed pointers to online portals, introductions and case studies such as Lynn Nicholas' The Rape of Europa: The Fate of Europe's Treasures in the Third Reich and the Second World War (New York: Vintage 1995) and works regarding legal frameworks.

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