Collecting Art with Passion A Strategic Approach
by Betsy Bickar Art advisor Citi Private Bank’s Art Advisory & Finance group “Buyer Beware” is a term that seasoned professionals often use when talking about the art market. Unlike traditional portfolios such as stocks and bonds, art can be a complex asset which carries unique risks, but one which can also bring incredible rewards, both financial and nonmaterial. In our experience at Citi Private Bank Art Advisory & Finance, the collectors who generally see the highest return on their purchases are the ones who have educated themselves over many years about what they are buying, collect out of a true passion, and ultimately allow their knowledge and informed intuition to guide them in buying decisions. The process is somewhat of an inverse relationship: buying art purely for expected asset appreciation has a negligible chance of resulting in significant financial gain, but collecting out of passion with research and guidance can certainly lead to a positive return on an art purchase. Moreover, the latter approach provides the priceless benefit of owning a respected and thoughtful collection for emotional and intellectual enjoyment. For some, art has global appeal as a hard asset, especially in the face of foreign currency controls and market fluctuations. It can also function as a way to store wealth abroad in certain instances. The top blue-chip artworks sold at Christie’s and Sotheby’s outperformed commodities when measured over the period of 20002015, with an estimated compound annual growth rate (CAGR) of 14.4% per annum. However, art as an asset can generate carrying costs, tax implications, trust and estate planning issues and almost no liquidity. Art can be an insider’s game; the market for art is opaque and unregulated with a significant barrier to entry, despite
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the fact that anyone can go to an auction house or gallery and purchase a piece of art. Which artworks should one buy - the masterpiece on the cover of a catalogue, the rare yet unknown work by a major historical artist, or the piece by the hot younger artist who will be the next big thing? How much should one pay? What will the future value be – if one is able to re-sell the work at all in the future? How does one identify and get access to the best artworks? Unlike a portfolio of stocks and bonds, diversifying an individual’s art collection is a complex process, as it is composed of unique objects with relatively unpredictable resale performance. Choosing quality over quantity, in fact, is generally a more reliable approach than diversification when building a collection. Prices for blue-chip art over the long term have been less volatile than equities, and well-chosen objects generally at least hold, if not increase in value in nominal terms over time. Value can be a subjective term as it relates to art. It can be a moving target, and like real-estate, the price someone is willing to pay ultimately becomes the true value. In today’s market, it is estimated that over half of worldwide art transactions are conducted privately, with no public record of price paid. Art that is purchased at auction is public record and provides hard data for future comparables; however, the remainder is subject to speculation. Transactions of up to $300 million for a single work of art have been reported in the press in recent years, and although those numbers are quite possibly real, the veracity is unsubstantiated.