Is Fine Art A Safe Haven?

London, UK - 16th October 2011, 5:05 GMT

Dear ATCA Open & Philanthropia Friends

[Please note that the views presented by individual contributors are not necessarily representative of the views of ATCA, which is neutral. ATCA conducts collective Socratic dialogue on global opportunities and threats.]

Pablo Picasso is supposed to have once said, "I'm a joker who has understood his epoch and has extracted all he possibly could from the stupidity, greed and vanity of his contemporaries!" With:

1. The US being downgraded;
2. The Eurozone crisis escalating;
3. The Arab Spring turning into a winter of discontent;
4. The Swiss franc losing its sheen post devaluation; and
5. Fears that gold is looking distinctly frothy;

One of the biggest questions that everyone is asking at the moment -- apart from "What happens next?" -- is "Where are the safe havens?"

“Het Meisje met de Parel” or “Girl with a Pearl Earring” - Johannes Vermeer – circa 1665

Fine Art as Investment

Spooked investors, unsure of where to put their cash, are looking for tangible stores-of-value where they can be confident it will not suddenly vanish. At the recent ATCA 5000 Socratic dialogue in London, one of the suggestions for a safe haven was "Fine Art" also known as "Investments-of-Passion" in some quarters. There is mounting evidence to suggest that sophisticated investors are increasingly turning to art and other investments-of-passion as a safe haven and store of value.

Precedence

There is ample precedent of the role of art, collectibles and other investments-of-passion as a refuge for investors during times of economic uncertainty. Bad news can be good news for collectors and sellers, and so it has been for a very long time. During periods of economic uncertainty not only does capital flee the financial markets, this forces art and other passion investments out into the market that otherwise might never have changed hands.

An ATCA 5000 distinguished member, senior banker and financier, Hervé de Carmoy, based in Paris, said recently, "Fine art is and should remain a safe haven for the years to come, for several reasons: For the very rich and the super rich, money, and hence price, is not the premier issue. They know that in the years to come the market is on their side, for in percentage terms, the number of super rich worldwide is increasing faster -- a two digit multiple -- than the increase in liquidities. Hence prices tend unavoidably to go up. The old British saying that, 'birds of a feather flock together' adds an essential ingredient of differentiation. Whenever super rich people meet they tend to discuss works of art, which have become a distinctive sign of belonging to the same club. Finally works of fine art can move great wealth swiftly without leaving any trace, anywhere!"

Intrinsic Value

At our recent visit to London's Pavilion of Art and Design in Berkeley Square -- running in parallel with the Frieze art fair in Regent's Park -- some art dealers distanced themselves from suggestions that their exclusive events are little more than a gathering of ultra high net worth investors who are looking for somewhere safe to park their money, and instead, claimed that most of the attendees are collectors who are interested in the intrinsic artistic value of the art pieces or collections on display. Results coming out of large auction houses like Christie's, Sotheby's and Bonhams would suggest otherwise!

In the present "Occupy-Wall-Street" zeitgeist, no one wants to be openly associated with Wall Street's "greed is good" mentality that tarnishes some investors, but the fact that so many banks and other financial companies around the world continue to head hunt and hire art investment specialists is a strong sign that investors may go after anything they can get -- including junk art memorabilia -- when decent returns on investment are thin on the ground.

In a world where everybody talks up their own book, some investors -- including art funds and banks -- have been buying up or hoarding art almost like they know that an economic nuclear winter could be around the corner. The sale of Lehman Brother's art collection in 2010 was treated almost like getting rid of the family jewels, which one newspaper described as "crisis trinkets."

Art Volatility

Many investors were stung after the art market meltdown which followed the collapse of Lehman Brothers in September 2008. Could this happen again? Are banks and private equity houses piling into art with the same herd mentality that they did in regard to toxic derivatives and synthetic financial instruments during the boom years of the 'noughties' leading to another, nastier, art bubble?

Having navigated through the worst of times, the art and passion investment fund industry appears to be acting now to lay the ground work for its future success by building investor confidence. At "Art Basel" earlier this year, there seemed to be almost a bubble-like feel in contemporary art. That did not stop the hordes of collectors and investors who descended on the Swiss town in June 2011 to attend the Basel art fair to see if there was anything that could beat gold or cash as monetary refuges of last resort. More than 300 galleries from 35 countries on six continents showed works by over 2,500 artists of the 20th and 21st centuries. UBS has been the main sponsor of the fair since 1994, which in 2011 attracted over 65,000 visitors, many with deep pockets and 99 per cent of the exhibitors in 2010 returned the following year. Cartier, NetJets and AXA Art -- the art insurance arm of AXA -- were associate sponsors.

Art is not an easily sold asset but it is often touted as another area for nervous investors. Some chief investment officers of billion dollar funds, who are distinguished members of the ATCA 5000, even suggest that the idea of contemporary art as a safe haven is only half-serious. Why? They argue that:

1. Art is particularly illiquid;
2. Transaction costs are enormous;
3. There is clearly no income;
4. The industry is unregulated, non-commoditised and emotional; and
5. Capital growth prospects are at best uncertain.

An "Old Masters" dealer told an ATCA 5000 distinguished member, who is a partner on the board of one of the oldest private banks in London, that, "The lottery is a voluntary tax on the poor, and contemporary art a voluntary tax on the rich!" Having thought about it for a moment, the distinguished banker said, "I agree with you but let us take the con out of contemporary...!"

Investments of passion are generally not considered a mainstream asset class by wealth managers as this market is rather opaque and remains highly illiquid. However, there is currently a trend toward art as a safe-haven and as a highly fruitful avenue for investment particularly in the current difficult economic climate. Art investment's outcome can be binary due to exogenous factors: meaning that the value can go up or down dramatically as a result of factors beyond one's direct control!

Branding and Corporate Social Responsibility

Some trans-national corporations and financial institutions have large collections of art, notably Deutsche Bank, UBS and Bank of America, which they deploy for a wide variety of purposes:

1. Branding;
2. Corporate social responsibility, such as by supporting local emerging artists;
3. Creating a good working environment;
4. Decoration; and
5. For Public Relations (PR) purposes.

Banks -- just like any corporate art collector -- buy and sell various works as they work on themes with their collections, or fill gaps in the collections or get rid of duplicates. Western banks, which are tapping into emerging markets often have a mix of local and international artists, to show customers and employees that they are locally, culturally sensitive, while at the same time, emphasising their international outlook.

Art Funds

A number of art funds fell over during the downturn, but the Fine Art Fund Group is still around and boasts annualised returns in excess of 25% in its two main funds. However, there are less than a handful of operational art funds investing meaningful capital: greater than US $50 million. The global art fund industry is estimated to be less than $1 billion, with Asian funds accounting for approximately one third of that total.

Interest in art funds continues to grow and the future is certain to see more legitimate vehicles and structures coming to the market. Several funds in the US and the UK are in the process of raising capital for their second or third generation funds and finding it much easier to do so, now that they have established track records. As new art funds proliferate and investors commit more capital:

1. Due diligence is becoming more imperative; and

2. A full understanding of such issues as:

i. Tax consequences;
ii. Legal implications;
iii. Risk management;
iv. Market access; and
v. Collecting trends;

is all the more critical.

Some art funds are theme specific and invest purely in, say, American art, while others have a mix of established and up-and-coming artists in the portfolio. Private equity companies have even tried to get in on the art act. In 2008, IndexAtlas raised $50 million private equity fund and its portfolio now includes investment in companies like Skate's Art Market Research. ATCA 5000 distinguished members at the highest level are even aware of some private equity moving into the art financing area, looking to help high net worth individuals raise capital against their collections.

Investing in Art Funds

When considering an art fund investment, many critical questions must be answered:

1. How is the art fund structured?
2. Are there adequate risk controls?
3. How often is the fund valued and what is the methodology?
4. What are the liquidation and/or exit strategies? and most importantly:
5. Who are the principals and advisors, how are they compensated and what are their potential conflicts of interest?

A deep understanding of the players, artists, sectors and intricacies is also essential.

Emerging Markets

Art funds are raising capital among a new generation of wealthy investors in emerging markets -- like Brazil, Russia, India and China (BRICs) and the Middle-East -- where the ultra high net worths are looking to diversify their asset holdings. The growth of these nascent art markets is directly linked to the economic expansion in each country and the combination of the two has launched a new group of young and avid art collectors. Art funds in developing economies appear to be succeeding whereas some Western art funds are struggling.

Emerging market art funds are focused on acquiring works by native artists and are typically able to raise capital more quickly than Western art funds given the region’s pre-disposition for tangible assets. In addition, the willingness of Asian banks, including ICICI, Kotak Mahindra and Minsheng, to actively participate in the art fund industry has further legitimised interest. Art funds in India, which are in many respects among the pioneers in the emerging markets' art fund space, have come into the spotlight due to poor investment performance in recent years. Many of India’s art funds have struggled with:

1. Eroding valuations;
2. Negative press coverage; and
3. Rumours of difficulty honouring fund redemptions.

As a result, since the global financial crisis began in 2007-08, China has become the more important Asian art funds player. However, as the value of Chinese art continues to rise, Chinese art funds face the challenge of raising increasingly large amounts of capital in order to remain relevant and competitive.

A number of Middle Eastern banks have been offering art-related investment opportunities, notably Bahrain-based Addax Bank in 2008 and Emirates NBD in 2011. Both have teamed up with the Fine Art Fund Group (FAFG) from the UK to offer their wealthier clientele art-related investment opportunities.

Conclusion

1. The outstanding aggregate performance of the art market over the past ten years; concatenated with
2. The trepidation many have about global financial markets since 2007-08;

has led to growing interest in art as an investment and increased dialogue about art funds.

While investors are shying away from investment products of great complexity, like derivatives and synthetic financial instruments, there is continued interest in real assets like art and antiques. Investors are likely to emphasize diversification within their alternative investment portfolios, among various established and new types of alternative strategies like art and collectibles.

The demand for high quality works of art -- with strong provenance and in good condition -- makes them particularly interesting as a long-term investment and for wealth preservation. High quality original art works are increasingly scarce and irreplaceable tangible assets which, by their very nature, exhibit defensive characteristics during weak economic periods.

NOTE: When a financial bubble or collapse occurs, almost all asset classes -- including art -- demonstrate an extremely high correlation: they rise and fall down in sync!

[STOPS]

Before we finalise the agenda for the ATCA 5000 event on 19th October, do you have any thoughts, observation and views that we ought to take into account?

We are celebrating ten successful years since the formation of ATCA 5000 in October 2001. The private event will be held on 19th October between 6:00pm and 8:00pm at an exclusive “members only” private club in Canary Wharf, London.

Should you wish to participate, we are grateful to you for your response to the intelligence.unit@mi2g.com in regard to 19th October. Thank you.

[ENDS]

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