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operation
This page considers questions about establishment and management
of art investment funds.
It covers -
introduction
How do art investment funds operate? One student charmingly
indicated to us that fund management is easy: simply a matter
of the manager condescending to take money from investors,
picking works to buy, parking them on the wall of her office
and then cashing them in for an easy profit after a few years.
In practice art fund management is not that easy, one reason
why there are not many major funds in existence.
Fund management involves a range of tasks, including -
- raising
capital, a challenge that has proved too difficult for some
funds
- liaising
with investors
- identification
of potential acquisitions
- buying
the works at auction, in a private sale or from a commercial
gallery
- supervising
works that have been acquired, for example ensuring that
there is appropriate storage, transport, insurance and security
- negotiating
with curatorial institutions if works are to be lent to
museums and galleries
- meeting
government compliance requirements
- determining
when to unload the investments onto the market
- selling
the works and distributing the proceeds to the investor
(and to other entities such as the auction house and tax
agency).
managers and investors
In discussing the operation of private equity funds and hedge
funds we have differentiated between professional managers
and the individuals or institutional investors that supply
capital to those managers. That 'agency' relationship is apparent
in art investment.
Managers get paid by the investors for professional services,
which include the capital raising, acquisition of works, preservation
and profitable sale of those works, and other tasks highlighted
above. Most recent art investment fund proposals appear to
have envisaged that the manager would be able to contribute
capital to the fund (taken by some investors to be a sign
of credibility) and to share directly in returns from disposal
of works, for example take a percentage of the profit on a
sale rather than relying solely on a fixed management fee.
Philip Hoffman's Fine Art Fund, for example, is reported to
charge an annual management fee equivalent to 2%
of the fund's assets, with a 20% share of profits from sale
of works.
Investors would supply capital
(media coverage since the late 1990s suggests that the typical
tranche sought from an investor is upwards of US$250,000,
with Fernwood at one stage seeking between one million and
five million per investor), with the aim of garnering enough
capital for investment in major works or for investment in
a wider portfolio. Investors would typically be locked into
the fund for five to ten years; stakes would not be tradable
through a secondary market. As with hedge funds, most solicitation
of investment has not been through a public prospectus.
A key difficulty faced by art investment fund promoters is
apparently that few investors have embraced the notion of
such funds on a sufficient scale. The herd has not arrived
and arguably will not do so until funds cease to be a curiosity.
an industry?
In contrast to the hedge fund industry - where there are several
thousand funds, numerous studies, multiple benchmarks and
extensive media coverage - it is arguably not realistic to
talk of an art investment fund industry.
The following page of this note highlights examples of funds,
along with comments on practice in Japan during that nation's
property bubble. Overall the
British Rail Pension Fund's excursion into the art world does
not appear to have spawned a generation of vigorous successors.
Financial institutions have considered establishing specialist
funds but in practice have not proceeded, either because they
have encountered difficulty raising capital for such funds
or because they have recognised crucial difficulties.
It is conceivable that some private consortia in Australia
are investing in individual works or even building small collections.
Such collaboration - sometimes referred to as an art club
- might be modelled on traditional investment in real estate
or other assets such as oil leases and on past collaborations
such as the 1890s Peau de
L'ours scheme and Léon Lambert's art club in the
1970s (notable for works by Giacometti and de Kooning sold
through Artemis Fine Arts, the dealership established in 1970
by Lambert and David Carritt) that brought together friends
and were not driven by professional managers.
It is not possible to determine whether such trading is taking
place, given that true ownership of major and minor works
is often not disclosed by auction houses or by dealers. There
have been few indications in the mass media or specialist
journals that would lead an observer to infer that trading
is taking place on a large or particularly profitable scale
(for example reports in connection with divorces, deceased
estates, fraud or other disputes).
Such joint investment is likely to involve the partners using
guidance from an art adviser rather than putting capital into
a commercially operated investment fund.
strategies
One reader of this page commented that 'investment' is a misnomer:
art investment funds are more accurately characterised as
trading mechanisms. Strip away the gesso, glitter and genuflections
at Sotheby's or another upmarket venue and art investment
funds involve the same patterns of speculation found in commodities
as unromantic (and potentially lucrative) as pork bellies,
oilseeds or copper ingots.
The strategies employed by art funds are likely to take two
forms.
The first is to trade recognised major works, for example
paintings by masters such as Pablo Picasso, Francis Bacon
or Jasper Johns that are recognised as being significant parts
of their oeuvre, do not have a questionable provenance (eg
are unlikely to be the subject of a repatriation
claim) or conservation status, have been anointed by academic
experts and publicised by journalists (one reason why museums
create value through exhibitions featuring loaned works),
and are therefore likely to appreciate in value faster than
works without those attributes.
The supply of works by Bacon and his peers is finite; prices
can therefore be expected to increase. However, the various
sales indexes demonstrate that over the past 30 years there
has been some volatility in the market for artists as diverse
as Rauschenberg and Monet: prices do not always go up and
do not always increase at a standard rate or outpace those
paid for work by other artists.
A second strategy is to acquire, hold and then sell works
that are more clearly undervalued. Such works include those
by artists who are recognised as important but not of the
first rank. They also include those who have yet to migrate
from commercial galleries to national or provincial collections
and genres that are about to get the requisite academic benediction
(eg photography in the 1980s).
It is a riskier strategy, because it involves some forecasting
about what will be recognised in five, ten or twenty years
time. However it is likely to be more profitable than buying
a recognised masterwork and trusting that demand for that
work will inevitably push up its value.
The second strategy is analogous to buying shares in small
but established high tech companies (rather than giants such
as IBM), on the basis that they combine during possibilities
for appreciation without the risks associated with investment
in startups. Using that analogy blue chips, such as Picasso,
will retain value but not show the same increase in value
as less prominent competitors.
Some funds have proposed offsetting costs by leasing their
collection. One example is The Art Fund, an Australian unit
trust marketed (PDF)
in February 2008 as enabling -
income
generation to defray the Trust management costs through
the renting of works of art from the Trust Collection. Additionally,
the Trust will deliver to its investors the ability to rent
art from the Trust Collection
at a favourable rate, and the ability to purchase works
of art from it.
The
trust has sought $25 million, with initial acquisition of
some
or all of the collection of Australian Art Investment Pty
Ltd [established in 1997] ... which consist of 958 works
of art by 119 artists as at 30th June 2007. The reason for
this acquisition is that these works of art already form
the basis of an art rental business, a business with strong
future growth potential.
That
acquisition would involve an independent valuation. Rental
charges are expected to be around 15 to 20% of a work's value.
personnel
The people working in (or proposing) art investment funds
appear to have come from three discrete streams and overall
it is likely that the structure of funds broadly reflects
those origins.
The first stream is that of the professional investment adviser
- the people in expensive suits who have worked in major financial
institutions advising superannuation trustees, university
or other endowments, public pension funds, wealthy individuals
and other entities about where to park capital.
Those advisers are the same sort of people working in client
relations and management positions in private
equity funds. Most appear to have no background in the
art world and it is likely that for some art is just another
commodity.
The second stream is people with a background in the commercial
art world, notably those who have run commercial galleries
or held senior positions in leading auction houses.
They are of significance because they bridge the gap between
the suits and technical specialists (discussed below). They
often have contacts across the art world - scholars, journalists,
curators, consumers and artists (or artists' estates) - and
have the public persona for marketing upmarket collectibles,
persuading consumers that buying a Barbara Hanrahan (1939-1991)
linocut is simultaneously a commercially rational decision
and something that confers nobility and spiritual contentment.
The stream also includes the receptionists and other people
who are there to facilitate stroking of the clients: answer
the phone nicely, provide petit-fours and a demitasse when
the money comes visiting, soothe the publicists and other
marketing types.
The third stream is technical specialists, for example people
who can tell an original from a reproduction and - just as
importantly - can either assess the suitability of a repository
for the investments or identify and supervise an expert to
provide that assessment.
As in much of the art world many of those specialists are
unlikely to be well paid, given the blurring of vocation and
occupation and the willingness of many fine arts graduates
to do anything that brings them closer to their love or gives
them a foothold in the industry.
costs
Contrary to blithe assertions that art fund management is
low cost, or even 'no cost', it is clear that funds face a
range of expenses throughout their operation. Some of those
costs have the potential to substantially erode returns for
investors if the choice of acquisition is poor or merely unlucky.
Other costs do not appear to be recognised by some of the
people with whom we have discussed art investment.
A salient cost is people: paying managers, advisers and a
range of service providers from receptionists through to publicists
and lawyers. As with many commercial galleries, some money
is likely to be allocated to promotional and client relationship
activity such as cocktail events and even one on one dinners
with dealers and potential investors.
In discussing the art business we have noted
that provision for storage, transport and insurance may be
essential: few investors would expect their capital to be
displayed on the fund manager's office wall or parked in the
manager's spare bedroom and events such as the 2004 Momart
storage facility fire are a reminder that insurance is a good
thing. Hoffman's Fine Art Fund indicated that investors could
lease items from its holdings for an annual fee of 1.25% of
the art's insured value.
Transaction costs, arguably understated by number crunchers
such as Moses & Mei, also potentially impact on the operation
of funds. Modern works in some jurisdictions may for example
be affected by Droit de suite.
Dealers and auction houses impose a range of charges. These
can include costs of up to 40% for new works sold through
commercial galleries and 'buyer' or 'seller premiums' for
works traded through action houses, along with national/provincial
sales taxes. In aggregate those costs can be in the order
of 10%, 17.5% or even 20% of the price.
primers
One of our crueller academic contacts sniffed in 2006 that
the art investment fund sector is one of the few remaining
areas that has not yet been colonised by a 'Dummies' guide
(Art Investment Funds for Dummies to accompany Ann Logue's
Hedge Funds For Dummies?)
As the preceding page noted, there have been few detailed
public studies of art investment funds per se. Much
of the literature circulating within banks and other financial
institutions appears to be decidedly thin, essentially centred
on advice to high net worth individuals about diversifying
their personal or family investment portfolios by adding a
token Warhol print, Picasso oil or even a Pro Hart canvas
to the share portfolio, bonds and property holdings.
The problematical nature of art investment funds and the absence
of readily identifiable public funds (ie models for emulation
and for benchmarking) has meant that there are no operational
guides or manuals about setting up and managing a fund.
Enthusiasts have instead drawn on a heterogeneous literature
that encompasses -
- guidance
about dealing with institutional investors and wealthy individual
investors, for example including some of the studies highlighted
elsewhere on this site regarding angel
finance
- data
about sale records and other art prices
- information
that allows comparison with other investment opportunities,
for example statistical information about major stock market
indices and venture capital
fund performance
- non-statistical
material that underpins assessment of whether individual
works are authentic or otherwise problematical (for example
is a particular BritArt candy & condoms confection going
to self-destruct?), of potential future demand as local/international
markets evolve, and of whether there are signs that a particular
artist is about to discovered or no longer undervalued
In
practice much of the literature has not moved on from works
such as Susan Abbott's Corporate Art Consulting (New
York: Allworth 2004) and Alan Thompson's Buying and Selling
Pictures Successfully (London: Hale 1997) or Terence
Ingram's A Matter of Taste: Investing in Australian Art
(Sydney: Collins 1976), aimed at individual consumers, particularly
those who do not have the resources to buy a Whiteley oil,
Breker marble or a Maillol bronze.
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