The firm asked respected market researcher Dr. R.A.J. Campbell of Maastricht University’s Faculty of Economics and Business Administration, to investigate whether art really represented an analyzable and investible asset class. The results make for interesting reading for any investor looking to diversify their portfolios into real assets.

Her research shows that real assets, including art, have outperformed financial assets in certain decades, especially during periods of inflation. If, as many fear, the global policy of ‘printing money’ leads inevitably to high inflation, art fund investing could help to shelter portfolios from the inflation storm. This could well be the case for the next decade as value of money continues to decrease.

An extended abstract of the research follows; the research can be accessed here under “Is Art an Investible Asset Class?” Sources are all in the original research note: www.collectionofmodernart.co.uk/#/research/.

Extended Abstract

The history of art as investment
History of art investing reveals just one proven strategy for art fund investing: ‘buy and hold’ of a diversified portfolio. Parisian financier André Level began one of the earliest ‘art funds’ in 1904, investing in pieces by Picasso and Matisse. He quadrupled his investors’ money by the time he liquidated the fund in 1914 as war threatened. The British Rail Pension Fund achieved an impressive 11.4% annualised return on its large investment in art from the mid 1970s to 1999, with mainly modern art delivering most of those returns. Although art investment funds appear to be a fairly recent development, in fact, the history goes over a century.

Art as a real asset
Art delivered an average annual return of 7.7% a year between 1875 and 2000, compared to a return of just 6.6% from equities. Art, like gold, is an unleveraged, irreplaceable real asset, which many investors turn to as a safe haven in times of economic uncertainty. The two real asset classes, art and gold have historically shown similar characteristics and performance, especially over the last decade.

Art as in inflation hedge
Art, in the same way as gold, has traditionally been used to hedge against inflation. Many commentators and economists see inflation as an inevitable outcome of dramatic increases in money supply that have resulted from the monetary policies being pursued by central banks in the wake of the credit crunch. In such an environment, the value of money falls. When the value of money declines, the value of real assets—unleveraged, irreplaceable assets such as art—rises. In recognition of this fact, several respected financial intuitions have already begun to allocate to art.

The Harvard and Yale University Endowments have already considered this development by allocating a great share of its investments to real assets. Brandeis University and Deutsche Bank among other institutions have also invested in real assets and specifically in art over the past years and doing so built respectable art portfolios.

Art as a diversifier
Investing in art gives an investor the opportunity to diversify their portfolios away from traditional financial assets. Adding art to a well-diversified portfolio can improve its efficient frontier—that is, the lowest possible level of risk for the highest possible level of return—providing superior risk-adjusted returns. Research shows an 18.47% allocation to art increases the annual returns to 9% from 8.6% while decreasing risk by 1%.

Buying opportunity as prices correct
Art prices did slide along with other assets during the late 2008 to early 2009 period, which may provide a buying opportunity for those seeking to diversify into art ahead of the expected upturn in inflation and recovery in art prices.

Global demand for art will grow
Globally, more than 100 new museums have opened over the past 25 years, dramatically increasing the demand for high quality art. This trend can only continue based on urbanization and population growth trends. Cities open museums as they pursue respectability and increased tourism. The “Bilbao Effect” is the term used to describe how a successful museum can achieve a city’s drive for respectability and increased tourism, eventually reviving an entire city. Examples include: The Tate Liverpool and The Lowry Salford in the UK and The Louvre Abu Dhabi in the Middle East. Demand for art will continue to grow as investments in museum quality works of art prove more immune to economic downturns than most traditional investment products.

Conclusion
Due to its status as a real, unleveraged, irreplaceable asset, art probably deserves a place in any significant investment portfolio, especially now that the benefits of art are readily available in regulated art investments funds. If the value of money falls as much as the growth in money supply implies, those holding real assets should emerge in much better shape than those who don’t. As an unleveraged real asset, the art market lags the equities market by about 6-18 months. Therefore, since the equities market has turned in March, 2009, this sends a positive signal to potential art market investors.

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About Dr Campbell
Dr. Campbell completed her PhD on risk management in international financial markets at Erasmus University, Rotterdam in 2001. She currently works at the University of Maastricht as an assistant professor of finance. Her work has been published in a number of leading journals, including the Journal of International Money and Finance, Journal of Banking and Finance, Financial Analysts Journal, Journal of Portfolio Management, Journal of Empirical Finance, Journal of Risk and Derivatives Weekly. She teaches for Euromoney Financial Training on art investment and works as an independent economic advisor for The Fine Art Fund in London, and for Fine Art Wealth Management, UK. She currently is a member of the supervisory board of ARTESTATE GmbH, based in Germany.

Castlestone Management is a privately owned independent fund manager, specializing in providing alternative assets for clients globally. Castlestone offers a broad range of funds, structured around assets including gold bullion, precious metals, commodity and stock indexes, currencies, hedge funds, property and art. Castlestone Management was founded in December 1996, initially as a family office, by fund manager and joint CIO Angus Murray, a former president of Macquarie Bank (USA) and co-head of the international equity department of NatWest Markets USA. The firm began managing alternative assets in October 1997, and since then has built up a unique expertise in structuring investment products. Today, it has operations in five continents, with principal offices in London and New York. website.

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