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Art
for the Venture's Sake
Value is increasingly in the eye of the investor. |
Edward Steichen's The Pond-Moonlight
(1904, multiple-process platinum) is being auctioned
with an estimate of $700,000 to $1 million at the Sotheby's
New York auction on February 14 and15. |
Study of a Male Torso by Michelangelo Buonarroti
(1475 - 1564), one of only a handful of the artist's
drawings still in private ownership, will be auctioned
at Christie's New York on January 24, and is expected
to sell in the region of $4 million. |
Art
is emerging as an alternative asset class, offering valuable
diversification benefits to an investment portfolio consisting
of stocks and bonds.
Until very recently, a major impediment to investing in art
has been the lack of a reliable benchmark to gauge market
performance. Although art indices have been around for years,
their performance has been crudely calculated. The return
was arrived at by simply tallying up yearly sales, and then
dividing the sum by the total number of sales. The major drawback
is that this method fails to take into account an artwork's
repeated sales – hence revaluation – over time.
Finance professors Jiangping Mei and Michael Moses, from the
Stern School of Business at NYU, have created a solution:
the Mei/Moses Fine Art Index, comprised of 8,000 pieces of
art auctioned by Sotheby's and Christie's since
1950. Mei and Moses have done extensive research and compiled
complete sales histories on each piece. By using regression
analysis of repeat sales, the Mei/Moses Index presents one
of the most precise measurements of values in the art market.
The returns of the Mei/Moses Index have been competitive with
other asset classes over time. From 1950 through 2004, the
index generated an average annualized total return of 10.47
percent. This return handily outperformed bonds over the period
and slightly underperformed the 10.68-percent return provided
by the S&P 500 Index.
The true investment benefits of art, however, lie in its ability
to provide meaningful diversification to an investment portfolio.
The Mei/Moses Fine Art Index has a low correlation with the
stock market, as clearly shown over the five-year period ending
in 2004. During that time, stocks experienced heightened volatility,
and the S&P 500 Index produced an average annualized return
of -2.4 percent. Over that same time, however, the Mei/Moses
Index performed much better and provided an annualized return
of 7.9 percent.
The art market is also regarded as a safe haven during a “flight
to quality” from the stock market. Following the stock
market crash of October 1987, many investors cashed out of
stocks and reallocated to art. This led to an art-market boom,
and Sotheby's and Christie's embarked on a very
busy and lucrative period. The highlight of this boom occurred
just one month after the crash, in November 1987, when Van
Gogh's Irises sold for $53.9 million –
a record price for a piece of artwork at the time.
Even more recently, the performance of stocks has been affecting
the art market from a different perspective. The underperformance
of museum investment portfolios is forcing a number of high-profile
U.S. art institutions to bolster revenues by liquidating some
of their collections. The Metropolitan Museum of Art, the
Museum of Modern Art, the Art Institute of Chicago and the
Los Angeles County Museum of Art have all recently announced
plans to bring collections to auction. The sales reportedly
include paintings by Picasso, Modigliani and Chagall, as well
as rare photographs from Alfred Stieglitz and others.
Many of the pieces to be auctioned have been sitting in storage,
out of view for decades. That many of these works will be
auctioned to the public for the first time is akin to a private
company going public. And if this is indeed the case, then
the art market will soon offer investors the opportunity to
invest in many attractive and potentially lucrative IPOs.
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The
Bank of New York
Edward M. Foley, managing director, 914.421.8022
Jean Marie Connolly, vice president, 914.421.5332
www.bankofny.com |
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Photo
credit:
Image 1: Courtesy OF Sotheby's, image 2: Christie's
Images ltd. 2005 |
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