Art investing is an art

What strategies should investors employ to generate the best returns?

The art world is buzzing with excitement at the thought that someone has just paid over $100 million for an art work. To Sotheby's great delight, the star lot of the recent Whitney sale in New York: Picasso's 'Boy with the Pipe' painted in 1905, sailed past its $70 million estimate and smashed the fourteen year old record for a painting sold at auction previously held by the $82.5 million paid in 1990 for Van Gogh's 'Portrait of Dr Gachet'. Whilst Picasso at $104 million is decidedly steep for the majority of private, and indeed public, collectors there is no doubt that spectacular bids like this put the art market in the spot-light and people begin to talk about investing in art.

'The Boy with the Pipe' was purchased by the Whitneys in 1950 for around $30 million which today represents a significant return of around 16.3% per annum on the initial investment. Bearing in mind that this spectacular transaction is the exception rather than the rule, two main questions arise: first of all, how healthy is the art market at the moment, and secondly what strategy might be adopted to achieve the best returns in this field?

Concerning the art market, whilst the financial world has been in a state of turmoil since before September 11 2001, the prices recorded at auction for the best art-works have continued to rise. Art has gained a reputation as something of a recession-proof investment: a 'valeur-refuge' is the French expression.

Immediately following September 11 it became clear that at such a sensitive time few people would be consigning works to auction unless they were forced to do so and that buyers were likely to be more than cautious. There were problems in certain areas of the market, notably sales of Orientalist paintings, and there was real concern that sales such as the important Gaffé Collection, consigned before 9/11 and due to be held by Christie's in New York in November 2001, would be affected. These concerns proved to be unfounded and the sale, which was expected to make 40 million, realised an astonishing $73 million, including world record prices for works by Léger and Miro.

A degree of buoyancy in the market continued through 2002 with the Artprice Global Index recording growth of 4.3%, and more record prices: in the field of Old Master Paintings 'The Massacre of the Innocents', painted c.1608-9 by the Flemish Artist Peter Paul Rubens (1577-1640) was bought for £49.5 million and Constantin Brancusi (1876-1957)'s 'Danaïde', a small bronze head of 1913 overlaid with gold leaf made $18 million (including premium) to become the most expensive piece of sculpture ever sold at auction.

More recently, a continued climate of financial and political instability has seen to be having some effect on the market with the headline news of auction records. It is worth remem-bering in this context that works valued at over $10,000 account for only around 20% of the market (see chart). Growth has continued, but at a lesser rate, with Artprice recording gains of only 1.5% for 2003.

Although the art market crash of 1990/1 has not been replicated there has been a marked slow-down and it is clear that lessons have been learned from the speculation of the late 1980's. Whilst today's buyers may still by influenced to a degree by fashion they are now better informed thanks to databases such as Artnet and Artprice and have become increasingly selective.

The result of this trend has been a continued rise in demand for the best pieces and very little interest in second-rate works. This has been reflected in a high percentage of lots remaining unsold at auction: 37.4% in 2002 improving to around 35% in 2003, and a down-turn in the volume of sales: France, for example, reported a drop of 22% in catalogued sales between 2002 and 2003.

However, despite these negative signs and news that dealers, especially in Europe, have had a difficult year the market has held its own and indications of a revival of confidence towards the end of 2003, particularly in the US, have been confirmed by positive reports for the first quarter of 2004. Areas of the market such as Russian and Asian art are enjoying new growth and for the first time in three years there has been an increase in the number of catalogued sales and the number of un-sold lots is beginning to decline. The May sales of Impressionist and Modern paintings have shown that there is a sustained appetite for works of quality fresh to the market, especially where there is a prestigious provenance.

What then are the criteria for making a good investment in art and how might the unpredictable waters of the art world best be navigated? As in so many other areas, it is important to know the workings of this specific market. In many respects it is highly subjective and rules which govern other areas of investment do not necessarily apply. Whilst it is an interesting option for diver-sification it should be remembered that this asset is not liquid.

The investor is best advised to consider art as a medium to long term prospect (10 - 15 years minimum) and he/she should have sufficient flexibility to stay in the market until the right moment to sell has arrived. Criteria such as the state of preservation of an art work and the importance of a given piece in relation to an artist's output can dramatically affect value and cannot be easily quantified or understood from a look at a list of prices on the internet. Selectivity and making the right choices are of prime importance.

With knowledge and experience playing a key role in the business of selection it can be worthwhile, as with other areas of investment, to seek expert advice. Collecting has become much more democratic in recent years and although new collectors in particular are eager to spend money on their chosen field and keen to increase their knowledge, time is often at a premium. Collectors at all levels who have important professional obligations can find that turning to a specialist art advisor can prove to be advantageous.

The demand for an art advisory service has been recognised by a number of private banks world-wide including BNP Paribas, UBS and Citigroup. The BNP Paribas service was probably the first to be created and dates from 1975. Its team of art historians specialises in Western European Fine Art: paintings, drawings and sculpture dating from the Renaissance into the 20th century, and provides one-to-one advice for individual clients on sales and acquisitions of works of art and on the different aspects of collection management.

By Alison Leslie, Conseil Investissement Art, BNP Paribas Private Bank

Pablo Picasso (1881 - 1973), « Boy with a Pipe », 1905, oil on canvas, 99,7 x 81,3 cm, sold : Sotheby's, New York, Property of the Greentree Foundation from the Collection of Mr & Mrs John Hay Whitney, 5th May 2004, (lot 7), US$104,168,000

Vincent Van Gogh (1853 - 1890), « Portrait of Dr Gachet », 1890, oil on canvas, 66 x 57 cm, sold : Christie's, New York, 15th May 1990 (lot 21), US$82,500,000