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Art – A Gaudy Show of Might

Kooning. Cezanne. Gaugin. Pollock. A layman may not recognize any of these names, but all these artists have art pieces that have sold for over $200 Million (adjusted for inflation). One may laugh when art galleries sell a simple “Yellow and Blue” painting for 46.5$ million, but is there more to ‘high-brow’ fine art than simple frivolity?

An excerpt of an interview in ‘Seven Days in the Art World’, by Sarah Thorton, reads, “After you have a fourth home and a G5 jet, what else is there?”. Such a statement seeks to paint fine Art as it is commonly perceived, an indulgence at best, and a grotesque show of wealth at worst.

Yet such a simple explanation cannot possibly account for its gargantuan sale value. It is estimated that the total value of all sales of the art and antique markets was $65 billion at its peak in 2007. The outstanding value of artworks in totality – $3 trillion. For context, that is the total market capitalization of the Bombay Stock Exchange.

Moreover, art markets experienced a Compounded Annual Growth Rate (CAGR) of 8% (1993-2009). The CAGR for the S&P 500 for the same time period is 7.16% (Including dividends and adjusted for inflation).

Yet, even in light of this data, art is often used to complement traditional portfolios, not simply compete against them. Art is commonly used as a means of “hedging” against the volatility and unpredictability of financial assets given that art is tangible, and hence perceived as more reliable. In the aftermath of the financial turmoil of 2008, a report by Capgemini and Merrill Lynch from 2009 suggested the same, wherein they indicate that High Net Worth Individuals (HNWI) approached “passion investments’ with greater zeal due to them being perceived to have “tangible long term value”. One of the two most attractive categories mentioned by such individuals was art.

Yet, art cannot be simply viewed as a fringe investment to protect oneself in times of extreme global financial crisis. The art market has also become an increasingly safer investment in the past two decades. As social and macroeconomic trends bolstered emerging economies such as China and India into prosperity, the art market received a heavy dose of globalisation. In 2005, China’s Art Market share was 3.7%. By 2016, it had risen to 19%. In the words of Patty Wong, chairman of Sotheby’s Asia “(Asian collectors) no longer just follow the data but are part of making the data”. This not only led to the expansion of the art market in general, but also made it significantly more credible and diversified.

As evidenced, one may contrast the financial crisis in the art market in both the early 1990s (caused by Japan’s “Lost Decade”) and in 2008. While during the premier it took the Market 14 years to return to pre-crisis levels, it took only 14 months for the art market to recover during the latter. This stands as a testament to how globalisation has benefited the art market, creating a substantially more stable asset class.

Admittedly, Art is not without its pitfalls. The industry has a record-high amount of informational asymmetry and market manipulation, due to the traditional opaque processes.

In support of this argument, one may bring under the spotlight the case of the Japanese. In the 1980s, following the revaluation of the Yen through the International Plaza Agreement, the art market boomed, primarily due to the influx of interest by Japanese engagement in the market. Following the crash of 1987, the art market went onto a great price escalation between 1987-1990, which led to the emergence of the notion that the Art Market was immune to the volatility of the Money Markets.

What really happened under the table was an artificial price escalation driven by an influx of cash by individuals, institutions, and most importantly, an expansive, meticulous Japanese money laundering operation.

It is also important to note that the money laundering operation was discovered years after its events actually took place. This serves as a strong reminder that, especially in markets of non-traditional assets such as art, all is not what it seems to be on the surface. It can also be said that such a high-level laundering operation is proof that many other such operations may have been swept under the rug in the past, never to emerge in front of the eyes of the general public. Yet, it is important to note the mention of the word ‘past’ here.

While one may concede such arguments to be valid, it would not be wise to treat these as fundamental characteristics of an asset class. If that were the case, one may also apply this logic to the Stock Markets and how it struggles with insider trading, such as the case of the Galleon Fund or market manipulation, such as the case of Avalon FA.

While the claim that “Art as a market has yet to develop completely” would be a valid assertion, it would be concerning if one were to dismiss it as an asset class or a viable investment option altogether, as that would demand a set criterion. The formulation of such a criterion would be impossible without rejecting traditional asset classes. Ergo, via proof of contradiction, Art is an Asset Class.

It is also important to note that while the informational asymmetry that understandably plagues the market is surely concerning, the art market has been making leaps and bounds in this particular field.

This particular criticism of the market gains its teeth from the heterogeneous nature of art. Art, by definition, is non-fungible. Even if one were to create a copy of the Mona Lisa perfect to the last stroke, it is unlikely that it will rise to the same value. This is because Art derives its value from a litany of hedonic characteristics such as artist attributes, technique, genre, size, age, provenance and attribution. Such qualities can only be quantified by comparables.

This has, for centuries, been the fundamental of informational asymmetry for the Art Market. As such information was in the hands of only Art Galleries and Auction Houses, who were incentivised by profit margins to be secretive. The arket was prey to the worst forms of market manipulation.

Yet in recent times, with the age of democratization heralded by the internet, Art Indices have made art pricing much more accessible. A variety of organisations, such as Artnet serve as storers of databases, processors of crude data into easily understandable infographics and also secondary markets. These organisations have not only carved out their own market share, reducing the dominance of auction houses and galleries, but also serve to decentralise the entire process and make it more accessible, and in turn, make sound investments in the Market a greater possibility.

Hence, with crucial information moving freely from one stakeholder to another along with the agency to instantaneously act upon that information, the argument that the Art Market is opaque falls flat. This also allows for an explanation for why such a notion exists in the first place, and how recent advancements have helped refute it.

A case can also be made for the democratisation of art. For this, one may refer to Buste de Mousquetaire(1968), by Pablo Picasso. Upon the walls of an Art Museum in Geneva, the painting has 25,000 owners. Each paid approximately 51 dollars on the online marketplace Qoqa. The painting has become an emblem of what’s to come, or if one were to look closely in the tech industry, what has. Masterworks, a New York-based startup, granted authorization by the Security and Exchange Commission, allows its users to invest and trade fractional shares of Art Pieces. Its annual revenues exceed 2$ million.

Additionally, a report by Deloitte claimed that 80% of the auction transactions are estimated to be below 10,000 euros. This shows how Art as a Market, previously only accessible to the ultra-rich, is steadily becoming more welcoming to the consumers on the lower end.

Even then, the dissonance between such an opportunity and its exploitation by investors is a concern that goes unaccounted for.

This dichotomy can be explained by relying on two concepts, competence and comfort. Art is a very special asset in such that it cannot be understood in terms of cash flows. It is largely incomprehensible to novice investors. To quote Tom Watson Jr., the founder of IBM: “I’m no genius. I’m smart in spots—but I stay around those spots.”

As a remedy, Art Funds were established. Art Funds are financial investment vehicles with art as the underlying asset. They employ various specialists of both the Art and Finance industries to evaluate investments. Nevertheless, these funds remain woefully underfunded. On average, a fund that seeks to raise 100$ million at the start of its funding, close funding and start buying Art with a paltry 10$ million.

Such inconsistencies can be blamed upon a lack of investor sophistication. Investors are often irrational and fall prey to mimetic theory, investing based on what earned their peer’s money, and not what facts may proclaim as the best investment opportunity. Investor awareness and education hence remain the biggest hurdle in establishing art as a fruitful investment.

In a nutshell, while the Art Market is yet to undergo its trial by fire, in the form of whether it can maintain these returns as it slowly gains traction, it is undoubtedly a strong investment on paper and must be strongly considered by rational investors when they plan to expand or diversify their portfolio. To return to the original question, after careful consideration of hard facts, one may attribute certain elements of this Market to simple Connoisseurship, but that does not discount its value as a speculative asset with abundant intrinsic value.

Naman Gambhir
Writing Mentorship, 2021

References

1. wsj.com/articles/sothebys-sells-rothko-for-46-5-million-1431486062
2. https://www.business-standard.com/article/markets/market-milestone-m-cap-of-bse-listed-companies-at-record-usd-3-trillion-121052400996_1.html
3. https://www.economist.com/sites/default/files/special-reports-pdfs/14950908_0.pdf
4. https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/artandfinance/lu-art-asset-class-122012.pdf
5. https://www.capgemini.com/wp-content/uploads/2017/07/World_Wealth_Report_2010.pdf
6. https://www2.deloitte.com/lv/en/pages/finance/articles/art-market-increasing-transparency.htm
7. https://news.artnet.com/market/how-the-art-world-became-the-art-industry-1710228
8. https://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1218220132831&acceptedDisclaimer=true
9. https://books.google.co.in/books?id=sTBkAwAAQBAJ&lpg=PP1&pg=PP5#v=onepage&q&f=false
10. https://www.sec.gov/news/pressrelease/2017-63.html
11. https://www.nytimes.com/2014/01/16/arts/design/christies-and-sothebys-woo-big-sellers-with-a-cut.html
12. https://www2.deloitte.com/content/dam/Deloitte/tr/Documents/financial-services/lu-art-finance-report.pdf (Source for Graph 1)
13. https://www2.deloitte.com/content/dam/Deloitte/tr/Documents/financial-services/lu-art-finance-report.pdf (Source for Graph 2)
14.https://www.britannica.com/topic/art-market/Art-as-investment

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