Art is not a sure path to riches, although investing in the sector can bring rewards that cannot be measured in purely financial terms. The author of this item looks through some of the risks and issues arising in the business of fine art.

Investing in art waxes and wanes – the recent UBS/Art Basel report showed the market remains strong in certain respects, although dominated by the higher end of the market. Clearly, the market isn’t for the faint-hearted – and the uninformed. What sort of risks should high net worth clients be aware of? Steven Kettle, head of client management, partner, at Stonehage Fleming, the UK-based multi-family office, has some views on these matters, and advice for those who wish to make money. (A regular commenter on art investment in these pages is Randall Willette, a member of our editorial advisory board. See an example here.)

Art collectors can be a determined bunch. Their obsessive drive to research, source, and capture the object of their desire can result in school fees and retirement funds being sacrificed in pursuit of ‘the collection’.

As guilt often accompanies such acquisitions, a rationalisation process invariably begins – and the most powerful argument is that a recently acquired work will serve as a wonderful investment. Never mind that many collectors will not sell any part of their collection, merely reframing it in this context is enough to temporarily soothe the guilt-ridden mind.

Though understandable, this can be a dangerous line to take. The number of collectors who buy art not just for enjoyment, but with an eye on investment is growing and is of concern. Allocations to art and other “passion assets” within the portfolios of ultra-high net worth individuals are expected to increase over the next ten years, according to Deloitte’s Art & Finance Report (2017). Following a slowdown in the global art market throughout 2016, total auction sales at Sotheby’s, Christie’s and Phillips were up 18 per cent in the first half of 2017, compared to the same period the previous year.

However, new art collectors should be reminded of the risks inherent in “investing” in art, as well as the more deep-rooted risk of regarding art as a traditional investment asset. Those who treat art as an investment may very well lose money.

It may come as a surprise, but investing in art is not an historically trodden path. It is a relatively recent concept, christened perhaps with the sale of seven paintings belonging to Erwin Goldschmidt at Sotheby’s in October 1958 for £781,000, the highest price ever achieved at the time by a single sale. A meagre sum compared to the sale, for example, of one painting, “When Will You Marry?” by Paul Gaugin for $210million in February 2015, 57 years later.

To invest in art is to speculate. Would-be investors will buy with their ears and therefore often buy fashion; whereas true collectors buy with their eyes and such collections stand a far greater chance of holding their value. True collectors are likewise not driven solely by the desire to acquire objects, but also by a desire to acquire knowledge. However, even a collection thoughtfully assembled that holds its value must still be distinguished from a good investment that outpaces inflation.

Owning and managing an art collection is a complex business requiring frequent advice from a variety of experts. Many of these experts will have their own agendas and, unlike investment management, the art world is largely unregulated. This means that it is one of the most manipulated markets in the world.

A conservative estimate of forged or misattributed art in circulation is 40 per cent and, even if you do happen to own a genuine work of art, due to the unreliability of art market indices you will only know the actual value once it is sold. This is a sobering thought when one considers the money involved. Art collecting requires dedication and passion.

Investing in art is therefore not so much about making, as it is about not losing money. Much art will not appreciate in value and the contemporary art market exhibits elements of a Ponzi scheme, with a large proportion of such works of art having little value a short period of time after purchase. Some buy art because they are seduced by the luxury goods lifestyle.

This explains why prolific contemporary artists with highly recognisable art fetch high prices, which is at odds with normal demand / supply dynamics and an expectation that rare works might be more valuable. Waiting lists to buy fashionable art are often followed by waiting lists to sell.

Real consideration must therefore be given towards the illiquidity of the art market, the substantial fees involved in both buying and selling a work, ongoing costs towards the insurance, storage and conservation of a collection, and the risk that the artist may well drop out of favour.

It is extremely rare for an individual to become wealthy from their art collection - the very best collections sold return an average of 10 per cent a year. This is not much different to that of the S&P 500 over an equivalent period and yet is achieved with a great deal more work and risk. Though one cannot quantify the visual dividend, it is possible to calculate foregone yield or opportunity cost of this capital, which is significant over time.

In recent years a predictable “art fund” market has sprung up, but it remains very small for the very good reason that art is not an investment asset class. Art funds generate neither appropriate investment returns nor enjoyment. Owning only a small share of a work denies the owner its most obvious utility – aesthetic pleasure.

Moreover, the performance numbers are poor and the attractiveness of art as a collective investment vehicle is reduced when lack of liquidity and the inherent volatility of the art market is factored in. Collectors and investors alike increasingly prefer buying art directly.

For this reason, Stonehage Fleming clearly distinguishes between investment portfolios and art collections. In addition to a substantial investment business, a separate team of six art professionals assists clients with the management of over twenty global art collections acquired over the past one hundred years. As we enter 2018, my advice to novice and experienced collectors alike remains unchanged: buy the best art that you both enjoy and can afford.

Buy less often and ideally try to choose works that have been tested by history – unless you wish to speculate. All good things come to those who wait and a disciplined and patient approach to building a collection over many decades will yield a collection of substance.