Angus Murray is the founder and head of the investment committee at Castlestone Management, sponsors of the Collection of Modern Art fund. Murray suggests a buy, hold, sell strategy for investments in post-war, deceased or non-producing artists with established reputations will deliver returns.
What are the assets under management of your art fund, Collection of Modern Art?
At the end of May we were managing $28 million. This is increasing rapidly and we estimate we've added $4 million of assets since then. Around $22 million of our corpus, which was the initial capitalisation, is from the Castlestone partners -- recently all our fund-raising has been third-party money.
What do you invest in?
We buy high-quality, post-war, deceased or non-producing artists with established reputations. We avoid contemporary artists, whose work is more speculative. Our current portfolio includes Andy Warhol, Pablo Picasso, Jean Michel Basquiat, Jasper Johns and Willem de Kooning. Our sweet spot is works costing between $250,000 and $500,000.
What are your parameters for investors?
Our minimum investment size is just $10,000 and barring a timing mismatch, we are willing to take money monthly. The timing mismatch could arise because the next auction at which we intend to source art is a few months away -- we would then advise interested investors to wait a few weeks.
We do not like to be cash-heavy. Indeed, one of the things we offer investors is the chance to participate in a fully-invested fund. Even our 1% management fee and 20% performance fee are payable in units in the fund so effectively get re-invested for the eight-year life of the fund.
What is your investor profile?
We accept money only from institutions or financial advisers. Investors increasingly want to buy simple products without leverage which are easy to understand, rather than complex structures created by investment banks. But I've noted that investors who choose to buy into an art fund are likely to be people who find art attractive -- even though I encourage people to view art like any other alternative asset class. Our average investment size is $75,000.
How has the fund performed?
We started investing in November 2007 and the value of our art probably peaked in September 2008. We are down around 37% from the peak. But that's life -- every other major asset class is down as well.
What makes you confident the art market will recover?
Our experience is that art trails equities by around six to 18 months. I believe the art market has bottomed and we have limited further downside risk. Bear in mind that art is an unleveraged asset class (unlike say real estate) and the recovery in such asset classes has begun. Further, I think it was the contemporary art market that was fuelled by bonuses and hedge fund buyers, more than our target artists.
What is the investment strategy?
Our team comprises three finance experts, including myself, and three art experts. Our strategy is buy, hold and sell. Our research suggests that this is the only strategy likely to yield returns. Our aim is to ultimately own two works of art by each of the 50 leading post-war global artists. We currently own 30.
What is your target return?
I view art like gold -- gold prices are no longer driven by geo-political risks but by the fact that it is a real asset and thus an inflation hedge. Like gold, art provides a hedge against the fall in the value of paper money, which is especially valuable in a time when central banks are printing money. On this basis, we expect at a minimum, art should appreciate 8% per annum.
Can investors exit before the end of eight years?
We have our portfolio of art valued quarterly by independent experts like Christie's and Sotheby's so investors know the value of their holdings. If an investor wants to exit and this causes us to sell a work of art [to fund the redemption], the financial loss suffered by the fund [is deducted from] the exiting investor's account. The work of art we sell will be decided by our investment committee.
How do you source and exit the art?
We buy mainly from public auctions by Sotheby's, Christie's and Phillips de Pury as we find it is easiest to establish the provenance of the work through these sources. Among galleries, we buy from the Gagosian as we find it has access to estate sales, especially in the US. We anticipate exiting through the same channels.
How do you store the art?
Storage depends on where we buy as we seek to minimise taxes. If we buy in New York, we could move the art to a storage facility in Switzerland. We recently hired an expert from Sotheby's who will help us place our works of art in exhibitions with the intent of gaining visibility to increase their value. We could also loan our art to museums such as the Tate Modern.
What has been the interest in the fund from Asia?
We have already raised money from some financial advisers in Japan. We recently received MAS [Monetary Authority of Singapore] approval so will now open the fund to investors in the region. In Hong Kong, investors have to buy through an approved, regulated platform.
This story first appeared in the August issue of FinanceAsia magazine.
