Online Magazine
 
Book Review
A Credit Suisse report on art and investing
While capital markets continue to remain in some stress world over, auction marks in the modern and contemporary art market are scaling new peaks, moving from one level to the next. Demand for quality artworks should keep up rising, with the emergence of new institutional and private buyers coupled with growing global wealth, according to an insightful research report prepared by Dan Scott and Marc Häfliger of Credit Suisse.

The investment advisory group is among the world’s top financial services companies, which advises clients in different aspects of finance. It offers high-net-worth private clients, companies and institutional clients, as well as several retail clients worldwide. Apart from comprehensive solutions, it provides diverse investment products in keeping with the prevailing market conditions. Two of its researchers have prepared a new document, entitled ‘Art Investing: A Screaming Success?’ that discusses various aspects that emphasize the various factors that make art an attractive investment proposition.

New auction records have been set in the last two years that point to a reasonably recovering if not booming market. In 2010, Picasso’s ‘Nude, Green Leaves and Bust’ was sold for the sum of 106.5 million dollars at Christie's, making it the most expensive painting ever sold at auction, whereas ‘L'homme qui marche’, the Giacometti sculpture, went for 104.3 million dollars. In May this year, ‘The Scream’ by Edvard Munch fetched a record price of 119.9 million dollars, the highest amount ever paid for any painting at an international auction. Just a couple of weeks later, as the Eurozone crisis seemed to deepen, Franz West’s ‘Gekroese’ was reportedly sold for more than 1 million dollars at Art Basel, among the world's top art fairs.

However, these are not isolated cases. Roy Lichtenstein, Joan Miro, Jackson Pollock, Ai Weiwei and many other artists have witnessed record prices for their works in the recent months - with ninety percent of the top ten price points ever touched for art in public auctions and private sales happening since 2006.

These developments are consistent with the prevailing perception that the art market is experiencing strong growth. An earlier research report compiled by thematic & derivatives research fellow Roger Signer along with his colleague Dominique Baumann at Credit Suisse had underlined the fact that demand for art was largely being driven by growing wealth, especially in the emerging countries. The two stated that it would continue to rise further thanks to new wealth sources established, in the countries like China, Russia, and the Arab world. Investors from these parts of the world have already become the most powerful and defining buyer groups at top international art auctions. Because of them, art is enjoying a renaissance.

This positive trend continues to be affirmed by the AMR Art 100 Top 25 percent Index, based on the median of the top 25% of prices attained and is updated on monthly basis. While the past decade is considered the ‘lost decade’ for stock markets, the AMR Index has surprisingly more than doubled (146%). Since 1985, the index has given an average annual return of close to 10%. The MSCI world has produced an average annual return of just 5.9% in the same period. It is worth pointing out that the higher returns also come with lower volatility. While the former has an annual volatility rate of just 12%, the MSCI World Index showed a volatility rate of 16%.

In essence, it’s worth considering as an investment avenue provided you seek right expertise and approach specialists. Here’s why, to put it in the words of Dan Scott and Marc Häfliger: “Fine art as an asset class offers several further attractive characteristics, including generally low correlation with other assets, such as stocks, bonds and gold. This low correlation makes art an excellent portfolio diversification tool. Additionally, given current concerns over high government indebtedness and loose monetary policy, art can provide inflation protection as a tangible real asset, and has shown it can perform better in an inflationary environment than equities.”

Of course, as the analysts rightly point out, not all art looks and performs the same way as an asset class. The various subsectors and categories of the art market, like contemporary art, modern art, old masters, European 19th century art, European and North American sculpture, contemporary Chinese art, and of course, contemporary Indian art have displayed varying performances, as well as in their characteristics and returns. Take a look at the following observations:

• With an average annual return between 1985 and 2011 of 11.6 percent, but volatility close to 50 percent, volatility and returns are the highest for contemporary art.

• Sculpture is at the opposite end of the spectrum on both measures, with returns at 7.5 percent and volatility at 7 percent.

• For the MSCI World Index over the same period, average annual returns were 5.9 percent and volatility was at 15 percent.

• The difference in respective returns and volatility show that the market for art is at best a fragmented one but is even better treated as a series of micro-markets.

Though deemed more a ‘passion investment’ with emotional value as the key factor, not only has art as an asset class clearly outperformed bonds and equities, it also enjoys a low correlation with these asset classes. Apart from creating an attractive diversification opportunity, it’s also ‘tangible’ in nature, making it ideal for hedging against stiff inflation to some extent. To sum it up, art is a completely justifiable and attractive mode of investment that offers good scope for return.