The Finer Things: Investing In Fine Art – Part One
Last November, Leonardo da Vinci’s painting, Salvator Mundi (below), sold at auction for
$450 million, including fees, a new world record for a work of art.
In the 1950s, the same painting sold for only a few hundred dollars because many considered it a copy.
Although since authenticated, one expert described the latest sale as a “. . . triumph of branding and desire over connoisseurship and reality”.
By contrast, the auction market for fine art as a whole has been pretty much trendless since its 2008 peak, while values for old masters, such as Leonardo da Vinci, have been in more-or-less continuous decline.
Auction sales turnover has also fallen over the past few years. What on earth is going on?
In the mid-1980s, when greed was good, a Japanese insurance group paid a then-record
$39.9 million at auction for van Gogh’s Sunflowers. Since then, the international art market has developed along two disparate tracks.
The trend has been more pronounced since the 2007-08 financial crisis, with prices for what might be termed ‘trophy art’ becoming even further divorced from the mainstream.
The march of globalisation, which gathered pace during the 1980s, is the underlying cause of the separation. While the world’s poor have certainly benefited from this new wealth, the biggest winners have been the rich.
Several of them have banked their fortunes in fine art, especially works created by household names like da Vinci and van Gogh.
As suggested by the expert quoted above regarding the recent da Vinci sale, this focus on the top names has been driven by hubris, rather than connoisseurship.
Hence, Yasuda Fire & Marine, the Japanese insurer that bought Sunflowers (right) in 1987, at the height of that country’s economic boom, did so to celebrate its centenary and provide a cornerstone exhibit for its new museum, housed on an upper floor of its Tokyo headquarters.
Also in that year, the Australian entrepreneur, Alan Bond, later jailed for corporate fraud, bought van Gogh’s Irises (below) for $54 million, another new record. He did it with borrowed money, which he never repaid.
Bond, who also tried to buy himself a British aristocratic title, was a notorious vulgarian whose chief claim to artistic sensibility was his initial career as a sign-writer.
The financial crisis should have ended such blatant self-promotion.
On the contrary, however, it has been accelerated by quantitative easing, the now- attenuating programme of financial-asset purchases mounted by several governments to overcome the deflationary effects of the crash.
Such programmes have been undertaken by just four central banks, representing the world’s most widely-held reserve currencies: Japan (which originated the policy in the 1990s), the US, the UK, and the EU.
What those banks have been doing is buying, for cash, immense swathes of their respective governments’ debt.
Much of that debt is held by the central banks of countries with large foreign-currency reserves, such as China and several Middle Eastern oil producers.
No prizes, therefore, for guessing who paid the record price for Salvator Mundi and, in 2015, an all-time high of $170 million for a Modigliani, Nu couché (above).
The da Vinci sold to the United Arab Emirates’ Department of Culture and Tourism, which wants to make Abu Dhabi the region’s cultural capital. The Modigliani nude was bought by a Chinese collector, a former taxi-driver and nouveau riche, with, it’s clear, something to prove.
You may laugh, but those buyers are not fools. Another financial collapse will occur in the not-distant future and might prove their expensive purchases ill-timed, but they are bound to come out ahead in the long run.
These paintings are unique, significant, and irreplaceable. As such, they will grow in value over time.
For that reason also, art buyers with better taste and knowledge, but lesser means, need not despair that fine art has moved beyond their reach.
If anything, they should be encouraged by the fact that, apart from these trophy works, the value of many great paintings by important artists has barely moved over the past decade, as already noted.
However, before diving in, there are some caveats.
First, trading in art is opaque, probably more so than for any other collectibles market. The public auctions that attract media attention represent only a minor portion of annual worldwide sales. These topped $67 billion in 2017, according to The Art Market 2018, a report issued by UBS, a bank, and Art Basel.
Dealers, selling through galleries and art fairs, accounted for almost two-thirds of the total, with private sales taking another significant chunk, so leaving auctions with, perhaps, a quarter or even less. That makes any credible assessment of valuations and trends impossible.
Second, the market is highly concentrated. According to the UBS-Art Basel report, works by 52,105 living and dead artists were put up for auction in 2017, but nearly two-thirds of the total sales value was for just 52 of them.
Third, art is an exceptionally illiquid asset. Quite apart from the barrier to trade of opacity, most buyers are connoisseurs or, at least, are emotionally attached to their paintings.
They hardly ever sell them.
It has been estimated that under one percent of art owners actually sell any of their collection.
In short, unless you are a dealer, with all of the necessary connections and knowledge, you should not approach fine art as a trader.
To become an investor, even if your knowledge is good, you must also have enthusiasm and conviction – and enough of both to want to keep whatever you’ve bought forever.
If you or your descendants fall on hard times, you might sell.
However, if you or they look at art in financial terms at all, it should not be as a source of new wealth. Rather, it should be seen as a store of value for existing wealth that will maintain its worth over time, after allowing for inflation.
Assuming you agree, look out for a follow-up post that will suggest ways and means to invest in good art without having much money to spend.
It’s surprising what just a few hundred pounds (or dollars, or euros) can put on your walls.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
