If you have an old relative with a room full of Irma Stern paintings, you might want to be extra nice on those weekend visits. After all, Stern’s work has been known to sell for more than R10 million at auction. The rest of us will need have to build our art collections from scratch. But is fine art really a good investment?
There’s no doubt investing in art can produce incredible returns. Seeing work painted in Stern’s small Cape Town studio in the 1940s sell for over R15 million at a London fine art auctions is all the evidence one needs.
Does that make art a smart investment? There are reasons for caution.
Let’s consider why we it can be easy overestimate the (financial) value of a building an art collection.
First, we tend to only really notice how much our old relatives’ art is worth when it’s worth a lot. We don’t hear tales of fortunes made and lost on the art market because, for the most part, the work wasn’t bought as a nest egg but because the buyer really liked the Irma Stern or the Gerard Sekoto in question. You can be assured your great aunt also bought a bunch of other artists’ painting, but you didn’t notice because those works never caught the public imagination, or the auctioneer’s eye, in the same way.
Second, art is not a very liquid asset. However high the estimate given by an evaluator, a work of art will only sell for what a buyer chooses to pay. Your Bjork Bjorksson may be a rare and beautiful example of Icelandic expressionism, but if nobody is in the mood to pay top dollar for Icelandic expressionism, you could struggle to sell at an adequate price. That’s not a great situation to be in if you were planning to sell your art collection to fund your retirement.
Confidence in your exquisite taste shouldn’t necessarily translate into confidence in your ability to read the vagaries of the art market – especially when you consider how quickly the South African art market is changing, and how hard it is to predict global trends.
The culture industry
Picking a winning artist isn’t an exact science, but that hardly discredits the idea of investing in art. We still need more evidence.
Think about it: it’s hard to predict how well any one artist’s work will sell, but that’s not how serious investing works. After all, no sensible person invests in only one company’s stock. You could’ve struck it lucky by putting your life savings in Apple shares, just as you could’ve been fortunate enough to buy a crate-load of young Mr Picasso’s paintings. But in the real world, a sound investment strategy means building a diverse portfolio (after all, you could just as easily have put all your savings into Enron stock). So, how does art perform as an investment class?
Despite the glamour of the art world, the answer is: less than spectacularly. Researchers studied art auction data and discovered that the rewards of incorporating art funds into your portfolio are pretty muted. In fact, the evidence demonstrates that an art investment doesn’t do much at all to boost traditional investment funds. So if you’re looking to beat equity markets, you’ll probably have to look elsewhere.
Investing in pleasure
If art funds don’t offer uniquely strong returns and buying individual art works is a risky business, are there any compelling reasons to invest in art? Here are a few: because you enjoy the work, because you want to support the artist, because it’s a rare chance to acquire something personal, because the painting or sculpture or installation has a depth of meaning that exceeds its monetary value.
Who knows, you may also be leaving your children a fortune.