Have art funds had their day?

Art sales are breaking records again. LS Lowry’s The Football Match sold at auction house Christie’s in London for £5.6m last month, contributing to a record-breaking sale of 20th-century British Art. As prices for works of art soar, more and more people are trying to plug art investment funds. Last September there were only 12 active art funds across the globe. Now there are 41 in development. But should you buy in?

We’re not sure you should. If you look at the performance of existing funds, the sector can look appealing. The Fine Art Fund says it has produced an annualised return of 25.5% on sold assets. But be aware that performance figures for funds are not always based on selling prices. For example, Castlestone Management’s Collection of Modern Art reports a 7.5% annualised return. But “few art funds, including Castlestone’s, have sold any works yet, so their numbers only indicate what they might achieve when they liquidate their collections”, says Kathryn Tully in the Financial Times.

Costs and fees are another big issue with art funds. The Fine Art Fund has a minimum investment of $250,000, for example. The most common fee structure is a ‘hedge-fund-style 2 and 20’: that’s a 2% fee on the assets you put in and a 20% charge on any profits made. That means the fund will have to do very well for you to see any significant return.

But the biggest problem we have is that art is about speculation rather than investment. An investment pays you an income over time, which is what enables you to derive the price you’re willing to pay for it today: art doesn’t. Any profit comes from capital gains. In other words, you’re relying on someone else coming along and paying more for the artwork in future than you originally paid for it.

That might be a respectable investment strategy when a market has hit rock bottom and asset prices are well off their highs. But that’s certainly not the case for art right now. The boom in the number of emerging market millionaires and billionaires has driven up demand for luxury goods of all sorts. However, there are signs that this boom may be peaking.

Moreover, buying through an art fund means you don’t even get the benefit of enjoying the artworks your cash is paying for. As far as we’re concerned, if you’re interested in art, then treat collecting it as a hobby. If you’re looking to make a return on your money, stick with more traditional investment sectors.


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