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     models

This page considers specific fine art investment funds and questions about practice in emerging markets.

It covers -

• introduction
• BRPF - questions about the prototype investment exercise and peeers such as the BNP Paribas fund
• Fernwood & Co - comments on a high profile successor of the BRPF
• elsewhere - funds in India and other countries

     introduction

As Eileen Chanin notes, "investing in art" is not an easy risk-free way to make large amounts of money, any more than "investing in shares" or "investing in property".

Outside of Japan, where the 1980s property bubble fuelled giddy speculation, it has also not proved to be an easy way to raise money. As noted in the preceding page, that is one reason why art investment funds have not proliferated.

Proposals for funds have received considerable media attention but only a handful of publicly identifiable funds have moved from concept to ongoing operation. The British Rail Pension Fund's foray into fine art and other high end collectibles remains an anomaly, an exercise that is much cited but little emulated.

Issues can be illustrated by looking at the fortunes of particular investment exercises.

     the BRPF

Historians have pointed to pre-1900 exercises such as the Peau de L'ours art club, ignoring the failure of Matisse and some German contemporaries in efforts to establish similar schemes. In practice the precursor of the contemporary art investment funds is the British Rail Pension Fund (BRPF), responsible for handling superannuation investments of what was then one of the largest employers in the UK.

In 1974 - amid forecasts of inflation and substantial appreciation in the price of paintings, sculpture, antiques and other auction house fodder such as incunabula - the BPRF trustees decided invest a small portion of the Fund's capital in works of art. That investment would be for what was characterised as the "long term" (ie more than ten years, rather than month by month or weekly trading) and involve purchasing items at auction or from dealers specifically for future sale.

The trustees, drawing on advice from the Fund's managers, justified the £40 million investment as a visionary but realistic diversification of the BRPF portfolio. Sotheby's was retained as the BRPF advisor, a decision that now might provoke some disquiet, given perceptions of potential conflict of interest and criticism by regulators of misbehaviour of the leading auction houses.

In 1980 the Fund announced that it was not making further art purchases, having acquired some 2,500 objects. (Some items, such as a US$105,600 manuscript sold by the Folger Shakespeare Library, were bought after that date to "round out the collection".) Its holdings included Impressionist and Modern paintings, silver, furniture, manuscripts and oriental ceramics. The BRPF progressively liquidated the holdings during the 1980s, reflecting personnel changes among the Fund's managers, rising prices and criticism that investing in art was inappropriate.

Initial sales of some 1,000 items raised an aggregate US$24 million. That represented a return of around 11% per annum, less than received from share trading. However, in 1989 at the height of that decade's art boom the BRPF sold 25 Impressionist and Modern works through Sotheby's, for £34.8 million. That handful of items, such as Monet's 1908 Santa Maria della Salute et le Grand Canal, Venice, accounted for 20% of the Fund's overall sales of £170 million and provided a 20% pa return. The remaining holdings were sold during the next decade, providing an aggregate return of 11.3% compound from 1974 to 1999.

Critics have noted that most items did not provide exceptional returns and that timing was important. Monet's Santa Maria della Salute at £6.1 million provided an excellent return on its 1979 purchase price of £253,000. However comparable Monets did not show major increases in the decade after the 1989 sale and it appears that retention of the overall collection into the 1990s would have produced disappointing returns relative to investment in other areas.

That is consistent with failure of the Chase Art Fund (managed by Chase Art Investors, an arm of Chase Manhattan) to secure its target of US$300 million in 1989 and the apparently disastrous foray into art investment by the BNP Paribas Fund (BNPPF).

That fund, under the auspices of the Conseil Investissement Art arm of major French bank BNP Paribas, reportedly lost over 40% of its US$8 million investment in art (a decline similar to losses by some hedge funds in 2007). The unpleasantness has been attributed to paying too much for works in the collection and failure to accommodate market conditions when planning sales.

     Fernwood & Co

The turn of the millennium saw over 50 proposals for establishment of discrete art investment funds or provision of art investment services to individual clients of major banks.

Those proposals appear to have originated in -

• perceptions that it would be easy to replicate the claimed success of the BRPF
• art as the "new investment class", of interest to a new generation of wealthy individuals and managers in financial institutions whose sophistication encouraged provision of capital to private equity funds and other investment opportunities beyond traditional bonds, shares and real estate
• emulation of hedge funds and media coverage of hedge fund managers as the latest "masters of the universe"

Promotion of funds echoed suggestions that consumers should buy individual works for investment rather than pleasure. One enthusiast thus announced that

singles can use artwork to diversify their investment portfolio while lowering the volatility of traditional securities (stocks, bonds, currencies, derivatives). The long-term performance of your portfolio, enhanced with art-related investments, can be impressive. Further, adding art to your portfolio (instead of buying a Maybach to impress your date) may increase the overall return of your investment portfolio.

Netherlands banking giant ABN Amro foreshadowed establishment of an inhouse fine art funds (and large scale contribution to independent funds) under the umbrella of ABN Amro Holding NV, aimed at institutional and wealthy individual investors. Its plans leveraged the bank's art advisory unit, which provided services to high net worth clients in competition with other financiers (eg the Art Advisory Service formed by Citigroup Private Banking in 1979, Deutsche Bank's service and UBS' service) and the major auction houses (Christie's and Sotheby's for example having expanded into real estate marketing).

Enthusiasm within ABN Amro and competitors such as JP Morgan Chase faded as it became evident that individuals were satisfied with existing services and that institutional investors were wary of proposed independent funds, whether because few funds were operating or because adequate returns were provided by other areas.

Most proposals appear to have expired because investors were unimpressed by the authors (an ABN Amro consultant sniffed that they were "not professional money people, lacking expertise in both art and money management") and/or the concept.

High profile antiquarian map and book dealer Graham Arader for example apparently failed to secure US$200 million for a fund specialising in US paintings, being reported as commenting "the idea is still very foreign to them". He had more tartly claimed

Art dealers have a terrible reputation. Would you rather have your daughter marry a plumber or an art dealer?

Disquiet presumably contributed to - and was reinforced by - the very public demise of New York-based Fernwood Art Investments, founded by Bruce Taub. It was promoted as -

the first independent investment adviser to develop a comprehensive array of art-focused investment research, advice, financial products, and, services for sophisticated investors and collectors

and -

the first company to provide investors with art-focused investment opportunities, offering two art-focused services; one, art holdings from the fine art market, i.e. Old Masters to Contemporary Art, the other component includes art partnerships, financing galleries, and, art auction deals.

Fernwood indicated that it aimed to raise US$150 million, although apparently only scoring US$8 million. It gained attention through high profile sponsorship of contemporary art events such as Art Basil Miami and the Brooklyn Museum's Basquiat exhibition, along with awards through the Fernwood Art Foundation to US museums.

One visitor to Fernwood's offices on the 35th floor of the Fuller building enthused -

You could see all of New York. There was a beautiful library. Contemporary photographs. Everything was so well done, and new, and crisp. They had just had their furniture delivered the week before. And it just seemed like they were on their way to great, great things.

Alas, despite claims that Fernwood would "democratise investment in art" through a "forward looking predictive tool" and partnership with dealers, the specialists left the building in 2005 before the fund took off.

Its promoter Bruce Taub was sued by Roy Disney for US$1 million in 2006. During the following year other investors launched a separate suit, alleging that Fernwood -

was in fact little more than a vehicle for Taub to propel himself into the rarefied social circles of the art world by using other people's money.

     elsewhere

The art investment fund bug has infected other countries, with financial advisers and journalists promoting investment in art per se and hyping proposals for investment funds.

One Indian site features enthusiasm about "Cash for Canvas" -

why should you be interested in something as esoteric as art? Well, you should be because you redeem your reason for your visiting the equity market again and again: the art mart often allows you to make bigger killings and aim for the jackpot of your life. Here is no notional paper game but a physical asset. Unlike a lottery or the casino, it is backed by physical security. If nothing else, you can flaunt it as proof of your having arrived, making a safe landing, with good taste thrown in.

Oh for an Indian Max Weber or Thorstein Veblen! One promoter claimed a one-year return of 38.5% net of all costs. Another claimed that its US$22m fund (under the auspices of a leading auction house) grew by 4.1% in the first two months. That is an impressive figure but comparable to some share investments and more meaningful if growth was sustained quarter after quarter rather than being followed by a 40.1% slump.

Neville Tuli, promoter of the Osian's Art Fund (associated with the Osian's auction house) proclaimed in 2006 that " If you get anything less than 35-40 per cent returns from the fund, it will be a failure for us". The Osian fund at that time was described as aiming to invest in works by 250 contemporary artists from the Indian subcontinent. Investors will have a three-year lock-in period, with profits being shared 70:30 between investors and the fund manager. The annual management fee was to be equal to 3% of assets, with a a maximum 6% for expenses.

Osian was reported as planning to launch an offshore fund open to international clients and to offer investment in film memorabilia, books, photographs, posters and maps. It emphasised that the fund wuld be self-regulating, with the 2007 report (PDF) noting that "The Art Fund is not regulated by or registered with any regulatory authority whether in India or abroad".

Tuli announced that

The main reason why international art funds have underperformed and not fulfilled their potential is because they have been led by financial and not art institutions. No financial institution can understand the aesthetics and history of art as a result of which no financial success is sustainable in the long run.

Competitors include Yatra Art Fund, Crayon Capital and Indian Fine Art Fund. The trustee of the Yatra fund noted that

Art is by far the riskiest asset class since there are no price discovery mechanisms, no regulatory authority and its pricing is purely subjective.

In 2008 the Securities & Exchange Board of India characterised an art fund is a "collective investment scheme" under the Securities and Exchange Board of India Act, requiring a certificate of registration as a collective management company.  The Board indicated that

Launching or floating of art funds or schemes without obtaining registration from Sebi amount to the violation of the Sebi Act and Regulations

an announcement welcomed by some observers as "likely to check the rampant price manipulation in the art market". 

    next page  (current art funds)