Published in the South China Morning Post June 2007
As wealth builds up worldwide, the demand for investment products is following suit. In addition to the usual plethora of financial creations, high net worth individuals (HNWIs) are casting their nets wider in search of sustained returns.
According to the World Wealth Report 2006 published by Capgemini and Merrill Lynch, HNWIs are expected to put 22 per cent of their portfolios into alternative investments this year, more than double the 2004 allocation of 10 per cent.
Under their definition, besides products such as hedge funds, commodities including precious metals, and private equity, alternative investments also includes investments of passion, including fine art and collectables.
In March 2007, several artists set new world auction records for themselves at Christie’s Asian art auctions in Hong Kong. Li Keran’s modern masterpiece All the Mountains Blanketed in Red sold for a staggering HK$35,040,000 after spirited bidding.
Wu Guanzhong’s Scenery of Northern China commanded HK$31,680,000. Xu Beihong’s oil on canvas Portrait of a Lady fetched HK$24,960,000 while contemporary artist Yue Minjun’s Portrait of the Artist and His Friends secured HK$20,480,000, five times more than the pre-sale estimate.
“The whole art market has been going crazy these few years,” observed Oscar Ho, program director in cultural management at the Department of Cultural and Religious Studies, Chinese University of Hong Kong.
“We will keep seeing record-breaking auction prices. Chinese contemporary art has gone quite crazy. A lot of galleries can’t even find enough art pieces. It is a phenomenon.
“Everyone is suddenly looking into China. Also there are increased amounts of money in China looking for investments. This will encourage investments of all kinds including art. I foresee that this investment fever will still go on for a while,” added Mr Ho.
Indeed, China is the flavour of the month, both in terms of artists and investors. “Chinese buyers are mainly oriented towards their own culture and are focusing on Chinese art,” remarked Jonathan Stone, international business director of Christie’s Asian Art Departments.
Activity here has been vigorous. The third largest art auction house in the world, Bonhams, recently set up a Hong Kong office in January. “Hong Kong is the centre of the world for selling Chinese art,” said Colin Sheaf, chairman of Bonhams Asia.
But when it comes to treating art as an asset class, auction house Christie’s advises caution. “We do not recommend people to buy art purely for investment purposes,” said Mr Stone. “Good quality pieces normally appreciate in value, but this value-adding should better be viewed as a ‘bonus’ and extra pleasure in your art collecting process.”
Many people see art as an emotional investment rather than a purely financial one. “There are different reasons why people purchase art. For a long time, it was simply out of interest,” said Mr Ho.
“My understanding is they buy it because they love it. Art investment in Hong Kong is not that clearly defined. Normally people start off as collectors,” he continued.
Out to prove the detractors wrong is the Fine Art Fund, a London-based investment fund that buys and sells paintings rather than equities and bonds. Launched in 2004, the fund has a “handful” of investors from Hong Kong, Shanghai, Korea and Taiwan, albeit quite significant ones, according to chief executive officer Philip Hoffman.
“One has invested in all our funds,” he revealed.
Despite what critics may say, Mr Hoffman is confident that there is money to be made in art investing, qualifying it as a serious asset class. Over the last 26 years, the top 10 per cent of artwork generated 10 to 12 per cent growth per annum, he said.
Mr Hoffman added that his own funds have returned 50 per cent annualised gain on cash when taking into account pieces of artwork bought and already sold. When considering also the unrealised pieces, he said their average annual yield was growing at about 20 per cent compound.
Mr Hoffman has been buying Impressionists, Old Masters, Modern, Contemporary and Chinese. He recently doubled his investment when he bought a Degas for US$350,000 and sold it for US$700,000 eight months later.
He claimed to have made even more with a piece by the contemporary artist Peter Doig, which he bought for US$450,000 and sold 12 months down the road for US$1.2 million.
One person who is not convinced of art is an investment class is Mr Sheaf. “I don’t believe in investing in art because the statistics are not there. It is an unrealistic way to regard investment,” he observed.
“You are talking about investment, not about whether you like it or not.
“In real estate or derivatives, there is active day to day pricing. The variables of the art market should be similar to buying real estate or a block of ICI shares. You want proven track record with the art regarded as a blue chip in its category and you want potential for growth.
“In the art market there is nothing that works like that. It is completely subjective. Where do you start,” Mr Sheaf questioned.
Art indices such as the Mei/Moses index, created by Michael Moses and Jianping Mei, two professors at New York University’s Stern School, and the 500 indexes produced by Art Market Research, a art consultancy group headed by art expert Robin Duthy; may be helpful but while buyers like Mr Hoffman use them for guidance, they hesitate to base their decisions on them.
What Mr Hoffman does is scan thousands of artists. “We try to find the young ones who are on their way up. We buy early and sell when we think they’ve hit their peak,” he revealed.
“We look for a 40 per cent return a year, or two to three times our investment within three to five years,” he added.
Christie’s has three pointers for people who would like to start collecting art. “Buy what appeals to you personally, i.e. buy what you like; buy the best you can afford; and buy from auction houses, galleries or people you trust,” advised Mr Stone.
When valuing art, investors should consider the following: the condition of the piece, the rarity, its provenance, its significance, the reputation of the artist and its recognition level in the local and international art scene and the exhibition history of the piece.
But even with the best valuations, prices are still unpredictable. “It could be the outbreak of the Avian flu or a major collector misses a flight to a sale,” pointed out Mr Sheaf. “Any of these can have an effect on prices.”
Art as an investment class has a mixed report card. It has not been easy getting consistently good returns on art pieces although the British Rail Pension Fund, the only major case study of a fund investing in art, managed to show an overall return of 11.3 per cent compound from 1974 to 1999.
In 2005, ABN AMRO pulled the plug on its art advisory investment service set up as a major private banking initiative to promote art as an alternative asset class, a move that left the art world infuriated.
Perhaps the best way to approach art investment is with an appreciation for art. This way, if the market underperforms, the investor still has the pleasure of enjoying the art piece on an aesthetical and intellectual level.
How to Value Art
• The condition of the piece
• The rarity of the piece
• The provenance of the piece
• The significance of the piece
• The reputation of the artist
• The recognition level in the local and international art scene
• The exhibition history of the piece