Art Investment Not Yet "Mainstream", Sector Gaining Momentum - New Research

Tom Burroughes Group Editor London 8 May 2011

Art Investment Not Yet

Art investment funds are not yet big enough to be ranked as a “mainstream” alternative asset class but the hunger for “real” assets and rising affluence in emerging economies are helping to propel rapid growth in the sector, according to a new survey.

Still a relatively opaque and under-researched asset class, fine art funds can be as small as a few million dollars to tens of millions, while art and other “investments of passion” funds hold around a total of $800 million globally, said a report by Fine Art Wealth Management, a consultancy based in London. (Its founder and managing director, Randall Willette, is a member of this publication’s editorial advisory board.)

As a sign of growing interest, the Art & Passion Investment Funds Report noted that the Art Fund Association, the first such professional trade body focused on such investments in the US, was set up recently to promote the sector and increase awareness.

And knowledge about art investment, and collective vehicles for holding art, are growing rapidly; among the 41 vehicles contacted by the survey authors, 60 per cent of respondents said they intend to launch one or more funds while only 10 per cent are unsure about such plans, the report found.

The report noted that Luxembourg is emerging as the top jurisdiction of choice for many new vehicles, encouraged by a desire for a stable domicile at a time when European regulations on alternative funds have been brought in. Other domiciles are Jersey, Guernsey, Cayman Islands, British Virgin Islands, Ireland and Singapore.

Following a tough period in 2008 and 2009 when art markets were hit by the global economic crisis, the market has recovered, the report said. However, there are some factors hindering growth, such as a questioning of modern portfolio theory by investors bruised by the crisis.

“Another post-crisis phenomenon that appears to be hindering the breadth of growth and the accumulation of assets for these funds is a broad, somewhat overarching demand by investors and investment advisors for liquidity,” the report said.

“Since 2008, there has been a shift of power in the art fund space towards boutique alternative investment management firms, a sign that the market is becoming more sophisticated in applying traditional alternative investment methodology to art,” the report said. “Over the past two years, most of the new entrants to the art and passion investment space have come from alternative investment management firms embracing art as an asset class,” it said.

The report checked investment vehicles in 13 countries: Australia, Austria, Brazil, China, France, India, Israel, Luxembourg, Russia, Spain, Switzerland, UK and the US. The survey was carried out during October and November last year. 

On definitions, “investments of passion” comprise the following: vintage watches, wine, precious jewellery, diamonds, stamps, coins, rare letters and manuscripts, paper financial documents, musical instruments and bloodstock. "Art funds" include investment vehicles dedicated to the major art sectors generally defined by period in accordance with standard art market practice (Old Masters, Impressionists, Modern and Contemporary) as well as investment in regional and other niche categories such as decorative art.

The survey covered a mixture of closed-end and open-ended funds, although the names of the funds were undisclosed.

The report found that the majority of art and passion fund managers are located in the UK, followed by the US, Switzerland and Luxembourg. As has been noted elsewhere, the report noted that developing economies – such as Brazil and China – are providing considerable momentum for the market.

Art funds in India, meanwhile, have come into the art funds space, although performance has been a disappointment so far, the report said.

Institutional interest in holding art funds remains relatively low, as these funds lack the size and scale required of a mainstream alternative asset by investors such as pension schemes. Such institutional investment has been a big driver in the growth of private equity and hedge funds in recent years.

“Having navigated through the worst of times, the art and passion investment fund industry must now act to lay the groundwork for its future success by rebuilding investor confidence and meeting institutional standards,” the report said.

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