Art investment for Esquire

Profit in Pictures


As the hammer went down to mark the end of Christie’s Spring Art Auctions last month there was a palpable buzz in the packed auction room in Hong Kong. The Asian and Chinese 20th Century Art auctions sold 100% of the works at over three times the estimate. This comes just weeks after Pablo Picasso’s "Nude, Green Leaves, and Bust" sold for $106.5 million at Christie's in New York, setting the world record for any work of art sold at an auction. Art – it seems – is firmly back in favour, and a number of art funds have sprung up to offer alternatives for those wanting to diversify from stocks and bonds.


“The volatile markets have been hard for many to stomach and therefore many investors have been looking to move into tangible assets,” explains Alistair Bailey, Executive Director of Art Equity. “High net worth individuals have changed from wealth creation to wealth preservation, and to put their money into a great artwork is something that individuals and companies are ready to do,” he says.


An art fund is an investment vehicle similar to a hedge fund but that buys art with the hope that over a fixed time frame the art collection will increase in value. Often with US$100m or more at their disposal, experts then ‘play’ the art market to try to increase the value of the fund. Art investment funds are not a new concept. European groups have been pooling resources and speculating on art for centuries. The British Rail Pension Fund spent US$100m on an art fund in the 1970s and 1980s that saw an annual compound return of 11.3%. During the art boom of five years ago, the investment world saw a number of art funds emerge, but raising money from investors wasn’t easy. Long term financial commitments combined with the difficulty of rapidly withdrawing funds scared some, while the high costs of expert staff, insurance, storage and sales commissions led others to believe that the returns could never match that of the stock markets. And according to some figures that was true.


The Mei Moses index – an index that determines rate of return of the global art market on any given year – indicates that the most recent ten year compound annual returns for art was 5.5%, substantially higher than the return of stocks over the same period at -1.3%. However over a 25-year timeframe, stocks outperformed art at 10.4% verses 6.5% and again with a 9.4% return for equities verses 8.9% for art over a fifty-year period.


However, art funds have become increasingly intelligent in how they operate. They are not simply buying a warehouse full of paintings and hoping when they sell them a decade later they’ll be worth more. Today, the art funds are run by a combination of former city boys and art impresarios. In the art fund world, art is regarded as a commodity no different from steel or oil seed that can be bought one day and sold the next if the price is right. Networks, contacts and manipulation of the market through media and exhibitions is something that's not frowned upon but in fact encouraged in the art equity game.


Philip Hoffman is the founder of the London based Fine Art Fund, which was established in 2001 and launched it’s first fund in 2004. He was at Christies auction house for over a decade (where he was both finance director and ran the fine art dealing operation) and is now on his fifth fund. Hoffman says that his team of 40 international art experts is permanently in contact with dealers, gallery owners, curators, museum directors and buyers enabling them to know the market, the buyers and the sellers inside out.

“It’s an insiders’ game and whereas insider trading is not allowed in the stock market it’s this market knowledge that most people can’t get [that’s valuable],” he says.

Hoffman explains that the experience and global networks of his team enable him to make some great purchases and fast profits. Hoffman recently snapped up an old master that was on sale for US$2.6m for just US$ 750,000 because his fund was the only buyer that was ready with the cash. He also tells of how the fund bought a Peter Doig work in 2005 for US$ 880,000 and sold it exactly 12 months later for US$ 2 million.

“We bought a work for US$ 4.75m one day and sold it a day later for US$ 6m,” he says – another example of how his fund operates with trader-like skills.

The team of experts needed to bring in The Art Fund’s constant 30% profit on sales doesn’t come cheap: from Hoffman’s 40 million in sales profit, 26 million of this was sales cost. Nevertheless, that still leaves a remarkably healthy 14 million profit for the Fund’s investors. The Fine Art Fund says that it receives 30% returns on every sale, but obviously has costs and much lower returns on non-invested capital. They project 10 to 20% returns and have so far been achieving this.

What is becoming increasingly important is not just knowing when to buy and sell works, but also what and where too. The Fine Art Fund has recently launched a China Fund and a Middle East Fund: “We look at the Middle East for contemporary and modern work,” says Hoffman. “The art from that period is completely overlooked and there is a big demand from the younger generation who want to buy their history.”

In fact, new buyers from the Middle East, Russia and China are dominating auction houses. China’s economic boom has seen an entirely new demographic of domestic buyers who are buying cultural relics and traditional paintings. The demand for ancient Chinese works is booming among the country's ever-growing rich elite, but supply is decreasing as collectors and museums take these ancient works off the market. Simple supply and demand theory is why China Mingsheng Bank’s second art fund was fully subscribed within a week of its launch, and China Fine Art Management focuses specifically on traditional works that increase at 20 to 30% per year, rather than the never-ending supply of Chinese contemporary art that some fear is only a flash in the pan.

It seems the art funds are finally getting a handle on how the art market plays in the global context and the creases of the first generation of funds are being ironed out. “There is a great deal more opportunity right now,” says Bailey from Art Equity. “We’re now about to embark on the next run."

Art investment tips

* Invest between 1 to 5% of your total worth

* Most funds expect a minimum investment of US $ 250,000

* Expect to invest for 5 to 10 years but be willing to be flexible.

* Buy works from as little as AU$5,000 from Art Equity and let them manage it and rent them out for you.

* Buy Blue Chip works such as French impressionist works and the old masters for a safe long-term bet.

* Nearly all of the British Rail Pension Fund’s profit was made from just 25 impressionist works out of their total of 2,400 paintings.

* Trend driven work might have high short-term returns but is less likely to survive the test of time.

* Look at picking up some Greek, Turkish or Brazilian contemporary art for a quick turnaround.

* Anything over US$250,000 will rarely lose significant value over a long period of time.