As an adventurous type, I’ve toyed for many years with the idea of investing in what some call “emotional” assets. This huge, very personal investment space covers everything from stamps and vintage cars through to more mainstream assets such as art and fine wine.
In the past few years, financial types have been figuring out how to democratise access to these quirky markets. The internet has been instrumental in opening them up, with operators including BullionVault in physical gold and Cult Wines in fine wine allowing retail investors to invest in a portfolio of these assets.
A more recent development has been fractional ownership. An investment platform, using the internet, essentially sets up a special purpose vehicle (SPV) or company to own a specific asset, such as an artwork or a car. This is then fractionalised into shares of that SPV, which can be marketed to investors.
A good UK-based example is the Showpiece platform backed by Stanley Gibbons (I am a non-executive director of the largest investor in Stanley Gibbons) which is currently selling fractional shares in the ownership of a print of Andy Warhol’s “Reigning Queens”, created in 1985. Another is the CarCrowd platform which sells shares in rare cars — its newest deal is a highly collectable 1962 Jaguar E Type.
Arguably, though, the most ambitious fractional ownership platform is in the contemporary art market, via the US-based company Masterworks. Though aimed at American investors, it is nonetheless available to those in the UK who can meet the minimum investment of $10,000.
Masterworks selects an artist and artwork, choosing what it thinks has the greatest “momentum”, then buys and securitises it before selling portions on its platform.
It warns investors they may be waiting between 3 to 10 years before it subsequently sells an artwork and they can take their profits — unless they find a willing buyer for their stake before on its secondary market. It levies an annual charge of 1.5 per cent on their holdings (taken in the form of equity) and takes 20 per cent of the upside on any eventual sale.
I’ve been watching deals on this platform for the past couple of years and if you are after modern art, it’s the platform to watch. Let’s take a couple of examples. The most recent fractional investment I’ve seen is for a piece by Yayoi Kusama. Masterworks reckons that similar kinds of art have seen price appreciation 19.5 per cent a year.
Another is Banksy’s “Exit through the Gift Shop” (2009) which was worth $7.4mn via a Masterworks campaign with annual appreciation of similar works at 19.9 per cent a year. For the old schoolers there’s also a Picasso — “Homme à la Pipe” — valued at $17mn.
You may wonder where those numbers on price appreciation come from. To my mind, Masterworks’ selling point isn’t really its fractional ownership platform, where each new painting is an SPV with its own IPO under US securities law. That does give investors some bankruptcy protection, but what is much more relevant is that Masterworks has built a database of more than 350,000 auction transactions with roughly 5mn data points. Constructing such a database makes sense in a very big market, with global sales of $65.1bn in 2021, according to an annual report by Art Basel and UBS.
So how does art compare with the returns of other asset classes during different financial periods? From 1973-81, art outpaced inflation, equities and gold. After the 2008 global financial crisis that changed: it tended to behave less like gold and more like equities.
But there’s a catch — every artist and every key piece of work is different. If we focus just on contemporary art since 1995, Masterworks reckons there has been a 13.85 per cent annual price appreciation. That compares with 9.2 per cent for all art and 7.4 per cent for impressionist and modern art. So Banksys are in, but Monets and the Old Masters return a steady 2 to 3 per cent a year. Over the same period the S&P gave a total annual return of 10.2 per cent.
The Masterworks team has also compared returns with risk, using something called a Sharpe ratio. Contemporary art has kept pace with US equities and property, with only private equity outperforming. But ratios vary enormously by artist. Yoshitomo Nara, for instance, has a ratio of 1.85, Joan Mitchell is at 1.23 but Damien Hirst is -0.15, implying the returns from holding his work are not worth the risk.
There are some obvious questions. David Kempton, a friend, fellow investor and columnist for Citywire has been very active in the modern art space — and is cynical. “Contemporary art is the biggest bet. If you get it right [its value] increases massively — but get it wrong and you have an unsellable investment.” He adds that auction houses charge a buyer’s premium that varies depending on the value of the work, but can be upwards of 20 per cent — a significant drag on returns.
Masterworks largely avoids that last problem by buying many works off-market. It’s been involved with more than 120 paintings (involving over 30 artists) and invested over $500mn plus in acquisitions since inception and expects to acquire roughly $1bn of art in 2022. But its growing power in the art market makes me slightly worried about how scale and strategic players in relatively illiquid markets can become problematic.
It can point to some portfolio successes already, having bought Banksy’s Mona Lisa at an offer price of $1.04mn in October 2019 and then selling it for $1.50mn a year later. It purchased George Condo’s “Staring into Space” in July 2020 for $1.76mn and sold in November 2021 for $2.90mn, a gain of 31 per cent. But the small handful of completed deals doesn’t represent a huge sample size.
I’d also highlight one final risk, which came up in a podcast I recorded with the platform’s eloquent chief executive Scott Lynn. Worried as I am always by charts which show gains heading in only direction, I asked Lynn what he thought was a big risk. He volunteered that if tax regimes become more hostile to the uber wealthy that could crimp the art market — as could falling stock markets knocking personal wealth.
I think that’s a fair concern and is the reason why I’ve stayed my hand until now. I worry that wealthy collectors — Masterworks’ main competitors — have had too much money (and perhaps not enough sense) and may have bid art prices too high. If we are to have a recession, then the pricing environment in the art market might be in for a big change.