Wednesday 20 July 2022

Thinking of dabbling in unitized art investing

I had seen some online adverts and reviews for the  investment scheme, and Moomin had made some investments via Masterworks. I've recently added some regularly small investments into gold, silver and platinum to my overall asset allocation, and thought that also putting a small allocation of future investment funds into art might also be good idea (or at least no worse than my previous forays into agribusiness investments (that went bust), unlisted pre-IPO internet company GEM in 1999 (which went bust before getting to IPO stage, just before the boom), and various 'good story' small cap stocks (such as Aerodata, Holyman Ferries, etc.) that turned out to be not as good in reality as the company annual reports had anticipated). Due to the upcoming settlement of my off-the-plan apartment investment I might not have a large amount of free cashflow to invest, but I thought I might as well 'apply' to join Masterworks and find out some more about the process.

I filled in the online 'application' and, probably due to indicating I was thinking of investing up to $20,000 in the first 12 months, was 'fast tracked' to arrange an on-boarding 'interview' (aka 'sales pitch') later that evening (1am Sydney time was a convenient 10am local time appointment for the allocated Masterworks 'adviser').

The phone interview was reasonably low pressure (I wasn't pushed into making an initial investment straight away, although that was definitely suggested several times as a good way to 'get started'), and I clarified a few questions about the initial mark-up when artworks purchased by Masterworks are unitized and the investment processed via the SEC (the mark-up or "true up" as Masterworks calls it is around 5-8%, which doesn't seem too outrageous as there are costs involved in researching, selecting, acquiring the artwork and then setting up the investment offer). Ongoing annual fee is 1.5% (which is similar to many specialist active investment funds or niche investment funds), and Masterworks retains 20% of any realized profit when the Artwork is eventually sold (the remaining 80% of the profit is distributed to unit holders).

The 'normal' minimum investment amount is currently around $15K USD, but can be varied according to your situation (Masterworks wants to attract new investors, but reasonably affluent ones). In my case an initial $5K USD investment was suggested, which seems reasonable to 'get started'. At the moment I've deferred taking the initial plunge, as I want to digest the details of the current handful or artworks on offer (Masterworks brings on maybe 1-2 new artworks every month or two, and the units are available until the investment is fully subscribed - which can vary from a few days (or hours) for a 'hot' artist like Banksy, or be a few months).

One thing I'm slightly uncomfortably with is the fact that Masterworks decides when (and if) to eventually sell the artwork. The stated 'suitable' investment timeframe is 8-10 years (due to it being a volatile/risky asset class), but recently sales have often occurred after a holding period of only a few (2-3) years. My concern is that Masterworks, while always purchasing artworks that they expect to make a profit, would be tempted to sell artworks that rapidly appreciate as expected (as this will make investors happy, provide Masterworks with a healthy 20% of the profit, and provide great average annual return data to spruik and grow their AUM and annual fee revenues) and might hold onto poorly performing artworks indefinitely. That way mistakes and poorly performing (e.g. artists that fall out of fashion) art can be 'hidden' by never selling at a loss and realizing negative returns. While still proving Masterworks with an annual 1.5% management fee. Indeed one of the 'welcome emails' mentions "a low probability of any price declines over the last 25 years".

This is similar to the way active fund managers keep (and advertise) funds that perform well, but close down poorly performing funds (often citing lack of investor interest as the fund shrinks due to poor returns and investors making withdrawals from underperforming funds). Once a fund is closed the data no longer appears in fund managers 'available funds' performance charts, ratings etc.

In Masterworks case it would be the most successful investments would be sold fairly quickly, providing examples of great annualised returns, but 'dogs' would be left quietly sitting in investors accounts and never sold. The "Net Annualized Track Record" is for the overall 'portfolio' of 119 purchased artworks and is a mix of actual realized prices for sold artworks, and Masterworks estimates of the value of artworks still retained.

However, this isn't any worse than investing in artworks directly. You always have considerable holding expenses (if you insure your artworks) and considerable selling costs (if you sell via an auction) and uncertainty about the value of the 'investment' until it has been sold. And on the plus side, investing via Masterworks allows you to make a relatively small investment to get an interest in an artwork that would otherwise be out of one's price range.

I've yet to work out the technicalities of making the first investment - I'll setup another appointment when I feel ready to make my initial investment (you can't just transfer some funds into your 'account' and then make a unit purchase online. Apparently all investments are done with the assistance/via your investor relations manager). There will be some bank fees (and FX cost) to send the USD amount via a wire transfer. But it shouldn't be a huge cost - my bank charges $50 for an AUD transfer to a foreign currency, plus there will be an exchange rate 'spread' of up to 4% (I'll have to check what the actual costs will be - Moomin apparently used OSX for the money transfer). Sending $5,000 USD via Western Union would currently cost me around A$7,350.

I don't intend to make artworks a significant percentage of my overall asset allocation, so I've yet to decide if making a relatively small investment will actually be worth the time and bother compared to the likely impact on my overall NW performance. Another factor is that the investment is in USD, so you are also getting a currency speculation along with you underlying asset performance.

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1 comment:

mOOm said...

You make an investment online and then get OFX to wire the money to the account they tell you (separate for each painting) and they usually get it in a day or two. With OFX the cost is only around 1% or so. They told me the minimum investment is USD 10k and I think that is what they told the SEC, but seem prepared to accept lower amounts... They do have an incentive to sell early to realise their performance fees. The main issue is that foreigners can't sell on their secondary market, which would get you out of the underperforming assets. I'm hoping they eventually introduce that.