Fine art is making huge financial news this week, what with cosmetics-heir-turned-super-collector Ronald Lauder paying $135 million for a Gustav Klimt painting and Sotheby's and Christie's posting gigantic numbers (Click here to read about Sotheby's, and see the June 20 release on Christie's here) at their Impressionist and Modern art auctions.
Rating masterpieces by their sales prices may seem irredeemably gauche and beside the point. Nobody would pay $135 million, or $10 million, for a painting for solely economic reasons (unless it was a dealer who had a buyer lined up). Collectors like Lauder buy paintings for prestige, status, ego, or a passion for collecting. Lauder has spent huge sums of the family's fortune creating a jewel of a museum devoted to Austrian and German art.
But at these prices, fine art certainly represents a huge investment. And not even billionaires like to see the value of expensive purchases decline over time. So, it's worth asking: Is fine art a good investment?
For the last several years, two professors at New York University's Stern School of Business, Michael Moses and Jiangping Mei, have been compiling data that allows them to track the long-term performance of fine art. The result is the Mei Moses Fine Art Index. (Registration is free.)
The Mei Moses index focuses on mature artists whose works command significant prices at auction. They take the original sales price and then subtract it from the most recent sales price at Christie's and Sotheby's in New York and calculate an annual return for a single painting. So, for example, a J.M.W. Turner view of Venice sold at auction at Christie's in London on May 29, 1897, for $35,000 and then sold at Christie's in New York last April for $35.8 million—which yields about a 6 percent annual return for 109 years. Which is pretty darn good.
Moses and Mei have compiled 9,000 such repeat-sale pairs and add between 300 and 400 every six months, enabling them to compile an index. (The paintings in the index aren't all blockbusters. Moses estimates that the median size of recent transactions charted is about $200,000 or $300,000.) As their most recent update shows, 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. And in the five years between 2001 and 2005, art trounced stocks. But not all art performs equally. In recent years, old masters haven't done so well, while American art before 1950 has been soaring—up 25.2 percent in the last year alone. And across categories, masterpieces (like the Klimt that Lauder just bought) tend to underperform lower-priced paintings by a substantial margin. Why? Like blue-chip stocks, well-known paintings by blue-chip artists are known quantities and offer safety and stability. As with stocks, the greatest opportunity for growth in art values comes when investors suddenly focus their attention on a hot new sector or name.
There are some obvious differences between Van Gogh canvases and Verizon shares. Art is far less liquid than stocks: You can't simply push a button and sell a Picasso tomorrow. And while you might assume that the fortunes of the art market are closely to tied to the fortunes of the stock market, Moses found that fine art actually has a very low correlation with stocks and a negative correlation with bonds. "In some sense, it's a good portfolio diversifier," says Moses.
Like stocks, art is susceptible to fits of irrational exuberance. In 1990, Japanese executive Ryoei Saito capped off the Impressionist art bubble by paying a whopping $82.5 million for Vincent Van Gogh's Portrait of Dr. Gachet. Between 1985 and 1990, the Moses Mei art index returned about 30 percent a year—the same unsustainable rate at which the Nikkei grew in that period and at which the S&P 500 grew in the second half of the 1990s. Despite today's massive prices, Moses notes, the mood surrounding the art market is nowhere near as exuberant as it was when Western Europe's cultural patrimony was flooding into Japanese corporate boardrooms in the late '80s.
In recent years, financial whizzes have created investment products surrounding all sorts of stock, bond, and commodity indices. But there's been little effort to turn art into a security. In the 1970s, the British Rail Pension fund, with Sotheby's assistance, famously committed about $70 million to fine art. The huge portfolio it built up came to include works by Canaletto and El Greco and proved quite profitable—a compound annual return of 11.3 percent between 1974 and 1999. As Scott Reyburn notes, Britain's rail workers were fortunate that the fund chose to cash in a bunch of Impressionist and Modern works at the height of the bubble in April 1989.
More recently, funds have been created to allow rich people to invest in a portfolio of fine art assets. One of the funds, Fernwood Art Investments, created by a Merrill Lynch executive and a veteran of Sotheby's, inspired a Harvard Business School case study. But even in this hothouse environment, it failed to launch. The London-based Fine Art Fund, created by a former Christie's executive, is still in business but hasn't made much of a mark.