ART TUTORIAL : The Art of Investing in Art

Art as an investment avenue has been considered an interesting and
profitable alternative, but it is also extremely risky.
With uncertain stock market returns and interest rates at their lowest
in decades, nervous investors are now considering alternative
investment avenues. Some of them are hoping to find solace in
alternative investments such as fine art, wine and even stamps.
These alternative investments' performance is alluring. Indices
tracking the performance of high-class art have held up well in the
recent economic slowdown, while art-auction houses report record
prices.

Art as an object of investment has been debated for long. However, in
the age of 20% returns on stock markets and a long bull market, the
concept of art as an investment option was passed over.
But the corporate scandals, stock market losses and low interest rates
have helped it to re-emerge. In one of the niost prominent examples of
art investing, British Rail pension fund invested 2.9% of its
portfolio in the 1970s earning a return of 40o pa. above inflation
till 1999.

Virginia Wilson, an art consultant from Australia, says, "Art has been
an attractive investment for centuries and is becoming increasingly
recognized as it has outperformed more conservative investments over
the last few decades. It is an alternative investment earning capital
gains rather than a dividend."

Art can never be considered as financial asset. Critics contend that
investing in art disregards the traditional yardsticks of financial
analysis, since they do not generate income streams that can be
discounted. It is a bet on the price appreciation of something whose
value defies financial logic.

Bill Muysken, Global Head of Research, Mercer Investment Consulting,
feels, "Artworks do not generate any income, except to the extent that
income can be obtained from lending them to galleries, and they incur
negative income in the form of storage and associated costs.

Whilst some artworks have appreciated enormously in value over time,
it is difficult to make a case for artworks overall earning a positive
net rate of return in real terms over the long run."

But advocates of art investing argue with growing volume of supporting
analysis. Prominent among them are from professors Jianping Mei and
Michael Moses, at New York University's Stern School of Business, who
found that art has outperformed S&P 500 (excluding transaction costs,
since they are not included in stock market indices such as the S&P
500 eitber) in the past 50 years.
From 1875 to 2000 art has outperformed fixed income, but
underperformed equities. And in the past two and half years of stock
market losses, art has outperformed equities.

For frightened investors this may sound soothing. But art is high-risk
investment, riskier than stocks. Prices of art fluctuate more widely
than stocks.

Art market is illiquid, opaque and unregulated. Transaction costs are
too high, sometimes up to 25% and may in fact wipe out the profits.
Further, the money invested in art is at the mercy of erratic public
taste and short-lived trends.

Above all, art's unpredictable value makes it as easy to lose as to
profit. However, Wolfgang Wilke, Vice-President, Dresdner Bank's
Economics Department, who has been researching on this topic for the
last 20 years, feels, art investment is high risk only if the selected
investment period is too short.

In the short-term, market volatility is relatively high compared with
other asset classes.

But over the long-term -- experience suggests 10 years and more --
investment in art provides annual average returns, which top
all-coniers. The prerequisite is investment in top-quality art.


WL Fine Arts Sdn Bhd
No 3,5,9 &11,
Jln Chantek 5/13, 46000 Petaling Jaya.
Tel : 03-7958 1848 Fax : 03-7958 8848
Email : [email protected]