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GUEST ARTICLE: A New Way To Invest In Fine Art

Miguel Neumann, 26 May 2017

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The revolutionary technology blockchain as well as other innovations are making themselves felt beyond the narrow confines of banking, touch areas including the buying and selling of fine art.

The investment world, as readers know, is far more than just stocks and bonds. A “niche” area is investing in fine art; it is part of a trend of “hard assets” or sometimes known as “investments of passion”. Spectacular sales prices for some works can turn heads but what of the wider trends? In this article, Miguel Neumann, founding partner at Maecenas and chief operating officer at DX Markets, considers new ways of investing in art. Maecenas recently launched a platform to trade shares in fine art by making use of the revolutionary blockchain technology – the system that powers the controversial digital currency bitcoin. (For more on this, see this story here.) For readers who wish to respond, email tom.burroughes@wealthbriefing.com  The views of guest contributors are not necessarily shared by editors of this news service. We are grateful for such commentary and hope that it drives debate.

In uncertain times, the fine art market offers a reassuring investment opportunity. Largely immune to political change, it is less volatile than currencies or capital markets.

The global market was worth more than $45billion last year, a 1.7 per cent annual increase, according to the European Fine Art Foundation Report 2017. Prices have fallen back a little from the peak of July 2015, but are around 15 per cent higher than in the market trough of November 2012 and the market is ‘stable and robust’. The outlook is optimistic.

Wealth managers are looking beyond traditional investment products and there is a strong demand from investors – 88 per cent of private offices and 75 per cent of high net worth and ultra-high net worth individuals want art in their portfolios, according to the 2016 Deloitte Art and Finance report. 

However, the market can be daunting to newcomers. It has a reputation for being opaque and the major auction houses charge fees of up to 30 per cent. Global auction house sales fell last year by 18.8 per cent while sales by dealers increased by 20 per cent to $27.9billion; looking more closely at the figures, it turns out the big auction houses conducted more of their business privately, which does nothing for transparency in the market.

Most investors are not in the art market purely for sentimental reasons - the emotional benefit of collecting is a pull, but Deloitte Touche found that strong returns were more important to 64 per cent of investors. They see art as a tax-efficient asset with the upside of capital appreciation and want as diverse a portfolio as possible. 

Art funds can offer that, combining 'defensive' pieces by established artists with some rising stars and a few emerging faces. A balanced portfolio might look like this: 50 per cent spread across Old Masters, such as Botticelli and Raphael, combined with an Impressionist, perhaps a Monet, and a 20th century name like Modigliani; 25 per cent allocated to post-war or Modern greats, such as Liechtenstein, Bacon, Dalí; and the remaining 25 per cent in high risk categories, such as emerging Latin or Indian art and British contemporary.

That is a good way of managing risk, but art funds are not liquid, and tend to have a long lock-in period. With minimum unit sizes normally upwards of $250,000 it can also be difficult for new art investors to join. And short-term investors should be aware that even the “blue chip” names can have a bad patch - last year, there was a 68 per cent drop in the auction sales volume of Andy Warhol paintings, a 50 per cent fall in Picassos and falls of more than 60 per cent in Modigliani and Francis Bacon.

Meanwhile, betting too heavily on an emerging artist is as risky as backing a promising start-up. Several graffiti artists have attempted to move on to gallery work - Banksy managed to do it and one of his drawings from ten or 15 years ago, which was then worth a paltry £2,500 ($3,238), can now reach 100 times that amount, but thousands more like him have disappeared without trace.

“The building blocks of the art market depend fundamentally on quality and trust,” concludes the European Fine Art Foundation report. “Key to this are maintaining reputation and credibility to ensure longevity, stability and resilience”, it said.

But for investors, two of the fundamental problems in the market are a lack of transparency and a lack of liquidity. Now, a new art investment platform is promising a unique solution by creating an online marketplace where owners, collectors and investors can meet without intermediaries to trade in real time. It is taking the idea of art funds, where art pieces are evaluated in financial terms, to a new level by giving investors the opportunity to have fractional ownership in artworks.

Maecenas will use blockchain technology to tokenise and digitally allocate single pieces, or portfolios, to several co-investors who can trade with other parties though an art exchange. While the owner retains 51 per cent of the piece’s value, the remaining 49 per cent can be traded, transforming the dynamics of the market and bringing much greater granularity to art investing. Prices will be market driven and faster digital transactions will create more data points than ever before, allowing investors to monitor the evolution of pieces in a way that has never been possible.

This will democratise the fine art market, creating a secure, open global platform. Blockchain technology has been used to bring greater transparency to the provenance of artworks; last spring, at the ICT summit in Luxembourg, Deloitte Touche unveiled its ArtTracktive proof of concept, which provides a distributed ledger for tracking the provenance and whereabouts of fine art works. But this is the first time blockchain is being used to make art investment an easier, more transparent proposition. Lowering the barriers to entry will widen access to the market.

At the Affordable Art Fair in London, works by more than 1,000 artists are on display, ranging in price from £100-£6,000. Getting investors involved at the bottom end of the market is important, but creating the first real-time trading market for fine art is a more ambitious vision, opening up all sectors of the market and allowing anyone to own a share of a masterpiece.

That could be a catalyst for change in a market that has remained largely unaltered for 300 years. Just about every sector you care to mention has been disrupted by technology – now it’s time for art investors to reap the benefits. 

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