Welcome to the SWAG Economy: Art Investment Takes Off as the Superrich Despair of Stocks
Welcome to the SWAG Economy: Art Investment Takes Off as the Superrich Despair of Stocks
In a year when the S&P 500 made headlines by moving just .04 points in 365 days and the Dow Jones Industrial Average gained only 5.5 percent despite mountains of volatility, the art market has shown an impressive 35 percent gain over the last 12 months based on evening sale totals at Christie's and Sotheby's*. Welcome to the SWAG economy (more on that later).
A recent report from ArtTactic and Deloitte Luxembourg began to chip away at why the art market is so robust — and it doesn't seem to be because people just like art more these days. Rather, using fine art as an investment tool is becoming more and more popular as equities remain flat and works by blue-chip names like Picasso, Lichtenstein, and Richter continue to appreciate on the secondary market. New York-based art dealer Christophe Van de Weghe recently told Bloomberg that he has noticed quite a few new faces at the auctions over the past few years. "The art market is a place for new people these days," he said, adding, "The collectors who bought 15 years ago aren’t prepared to pay today’s higher prices."
This falls in line with the thrust of ARTINFO's recent interview with Michael Plummer and Jeff Rabin of the art investment advisory firm Artvest Partners. "The conversation has turned from 'Is art an asset class?' to 'Art is an asset class,'" Plummer said, "and then to 'How do we take advantage of art as an asset class?'" (He was specifically addressing the time period of the last eight years.)
This new breed of collectors is largely buying art for its appreciating value, and thus has an interest in keeping prices soaring upward. In the Deloitte survey, 49 percent of collectors said they bought art for its value as an investment. At the same time, banks are increasing the art finance-related services that they offer, meaning that this niche market, until now mostly the purview of a few select banks and the financial services divisions of the big auction houses like Christie's and Sotheby's, may be developing into a larger industry. An increasing number of financial institutions are already offering art-backed loans, and many of the banks surveyed by Deloitte reported seeing stronger demand for tangible assets like art. Some 39 percent of private banks surveyed reported moving toward providing an art investment fund for clients in the coming years.
Which brings us to SWAG. Art, it seems, isn't the only tangible asset that has outperformed stocks in the last decade. The Deloitte report refers to increased investor interest silver, wine, art, and gold — or SWAG, a term coined by Investment Week's Joe Roseman — which have all outperformed stocks over the last decade. These four "hard" assets share several things in common including longevity, lack of "incumbent debt" (meaning that, unlike with real estate, a buyer is not assuming previous commitments associated with the asset), no income tax liability, and scarcity — all of which contribute to their appeal to international high-net-worth individuals who are looking for somewhere to put their money besides the anemic stock market.
*For the record, comparing gains from the handful of evening sales used in this example to stock indeces that change on a second-by-second basis every day is probably not an accurate way to make investment decisions.
Comments
I think that it's both shameful and ashame what has been happening to the art market over the last few years. As an art collector for over 50 years and a professional investor for over 30 years, I have seen many investment products designed for the perceived suckers looking for the next get rich quick scheme. As Retail investors heard about arbitrage, my original business, in the 1980's, they blundered into it and ruined it for the real professionals by uneducatedly bidding up prices until the business was not viable, and most of us exited that business by the beginning of the 1990's. Then, there were funds of absolute return and funds which called themselves hedge funds because the public liked those names, while the funds, themselves, had nothing to do with hedging or the arbitrages their names implied they were invloved in. In the 1990's,when cheap brokerage became available on-line, and every plumber and electrician suddenly thought that investment was easy, and the uneducated masses took the NASDAQ from 1000 to 5000 and back again. Then, those same self-styled investors remortgaged their homes to replace their lost wealth; many foolish loans were made; the loans got repackaged and sold to those same foolish self-styled investors, and the latest finacial crisis finally came to fruition, by the later part of the last decade, having been delayed by but not averted by the reshuffling. The investment business designs new investments, as a matter of course, to satisfy all of those self-styled investors, ravenous for the next killing. They make obscure frames that allow those people to see what they want to see, while, if they looked deeper, they would see the folly. That is only the beginning of the game. Fund managers make indexes to show off their returns, dropping losing funds from the index and adding winners to perpetuate the myth that they are doing really well. Fund managers even use obscure language, like, we beat the market last year without saying that the market was down. The list goes on. Now, I have to watch all of this obfuscation, designed to promote the monetization of art. In this article, for example, they compare a stock market price index to dollar turnover of art auction markets: apples and oranges. In fact, the dollar turnover of the NASDAQ stock exchange, for example, was up in 2011 over 2010, but who really cares: that is not the point. Dollar volume doesn't say anything more than that more was offered at sale, or that, as with most markets, over time, dollar volume is mostly increasing, as a market grows. Indeed, I personally find it alarming how many collections and works that have been out of circulation for decades and more have come to be offered for sale, recently. I think that better, more telling points have been made, elsewhere, lately, like, in a recent Bloomberg article that pointed out that the value of the top 10 art auction lots, in 2011, was actually down 40% from 2010. As a recent analysis on artmarket blog pointed out, if you take out the once-in-a-lifetime sales of Stills and Richter, the rest of the market was down in value. It is easy for people to prey on all of the people who think that investment is easy. Especially, since most people really don't understand the intricacies of investment, yet believe it is easy, it is easy for people with a little knowledge to try to fool them, which is what most of this article is about. When it points out that the old buyers from the market have left and have been replaced by new, that only shows what the smart money has done and that the same type of uneducated person that has wrecked many another investment market has, now, arrived in the art market: it is not solace but a warning sign.