Monday, 23 October 2006

Asset Class - Fine Art

The lack of correlation between the stock market and the art market makes Fine Art a possibly attractive asset class to use to diversify a portfolio beyond the traditional stocks, bonds and real estate. However, while art can hedge against some of the movements in the stock market, it has a similar level of risk and, for most individuals, it is too expensive to invest in individual art works. Even funds such as the popular London-based Fine Art Fund require investors to hand over a minimum of $250,000 in order to play the art market. And those investors will have to be willing to wait at least three years before they can cash out of their investment.

How has Fine Art performed as an asset class compared to, say, stocks? The Mei/Moses Fine Art Index, the creation of NYU Stern School of Business finance professors Jiangping Mei and Michael Moses, tracks 9,000 pieces of art that were auctioned by Sotheby's and Christie's since 1950. The index measures the value of the art market by analyzing repeat sales of the different pieces of art that comprise the index. While it is generally considered a fair benchmark for art valuation, it excludes transaction fees, works that fail to sell at auction and certain styles of art, such as photography and prints.

Over the last 50 years, stocks (as represented by the S&P 500) returned 10.9 percent annually, while the art index returned 10.5 percent per annum. As can be seen below, there is a low covariance between the Art Index and the S&P500 index:

One of the problems of consideraing Fine Art as an investment asset class is that in the art market, only about 30% to 50% of the works that change hands in any given year do so on the open market, at auction, where the public can see the prices. In the contemporary market, that figure plunges into the single digits. In addition, access to the market isn't always easy or cheap -- the supply of contemporary works is controlled by dealers, for instance, while hefty auction fees make it hard to compare the art market to any securities market. Therefore, the entry fee and management fees of any Art Fund are likely to be high - similar to that of Hedge Funds, but with performance that has historically been more in line with the stock market.

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