If you're looking for an investment that will beat the stock market but don't feel like putting your money into emerging market funds, there's one market you may want to check out â”€ the fine art market. Fine art, by the way, includes paintings, sculpture, prints, video and photography.
In fact, if you had added fine art to your portfolio over the last couple of years instead of bank stocks, your portfolio might not be looking so bleak. For the ten years that ended in July 2010, the price index of all fine art work sold more than once worldwide has produced a nearly 11% annualized return.
What this means is that the fine art market outperformed Standard & Poor's 500 index of large cap stocks, as well as most other asset classes except for gold, according to artprice.com, which tracks the market.
Recent strong sales of impressionist and modern art pieces pushed the Mei Moses All Art Index to a 13.4-percent gain for the first half of the year, compared to a 6.5 percent loss for the S&P 500 index, according to artasanasset.com, which maintains the index.
Philip Hoffman, chief executive of the Fine Art Fund Group, an international investment partnership in
What is known as investment-grade art has been enjoying a low correlation with other asset classes, including stocks and bonds, strengthening its case as a candidate for portfolio diversification. Some maintain it can act as an inflation hedge, since "real assets" like gold tend to rise in value only when the value of money falls.
If that's the case, why doesn't everyone put their money into art? For one thing, art tends to be a little finicky or in the investment community, "a volatile asset." That's because it's hard to tell when demand for a certain genre or painter will suddenly surge or dissipate.
For example, after a ten-year run, Chinese contemporary art saw prices rise more than 500% and Indian art jumped 700%, before prices for works in both categories dropped by 30 percent two years in a row 2008 and 2009, according to Artprice.
Another reason to be careful is that art is far less liquid than other financial assets, making it harder to sell in a pinch. Lastly, indexes which track repeat sales are somewhat skewed because they include only art pieces that already have an established following. They ignore thousands of pieces whose value has yet to be determined.
If you're still interested, there are steps you can take to mitigate risk and boost your profit potential. According to Artprice, some 70 percent of all artwork sold at auction between January 2008 and June 2009 was priced at $5,000 or less. During that same period, "affordable" art priced below $5,000 gained 60 percent in value, while higher end pieces gained a staggering 150 percent.
But before you even think about using your hard earned money in this market, take time to learn about those forces that impact the art market overall, as well as the niche you're hoping to pursue. Paul Provost, senior vice president, director of trusts and estates at Christie's auction house in
American furniture and decorative folk art, for example, have a different demand cycle than, say, classical antiquities, impressionist paintings or post war contemporary pieces.
Provost adds that "it's the same with investing in the stock market. You have to drill down to the issues surrounding large-cap, mid-cap and small-cap stocks along with the different sectors. Talk to seasoned collectors. Go to the auction houses and ask questions. Get involved with the museum and befriend the curator. An educated consumer is going to be best equipped to maneuver in this marketplace."
Due diligence here has become even more important given the number of unscrupulous art dealers who traffic in fake imitation art. Provost says newcomers should stick with reputable brokers and auction houses that can verify authenticity. He points out that the art market is not immune to the same scandals that have rocked the financial services or real estate markets. He says "investors need to be careful about what they're doing, do their homework and understand who they're working with."
If you don't want to invest in one painting, you can also consider an art investment fund, but these are only open to high net worth investors. The Fine Art Fund Group, for example, is a diversified portfolio of high-end artwork, but it is only open to investors worth at least $2.5 million. Those who qualify can invest a minimum of $250,000 into the broader fund, $100,000 into a specialized fund or own part of a single painting.
Other investment funds, like the new "Collection of Modern Art" fund launched in May by Castlestone Management, requires a smaller minimum investment of around $10,000.
But it is open to investors only through financial advisors who can counsel clients on the risks and potential rewards involved.