Tuesday, September 2, 2008



"Non-financial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence." Roger Ibbotson and Gary Brinson, "Global Investing"

The devolution of confidence in traditional investment alternatives, in concert with the elevation of the importance of design and aesthetic throughout the world, points to a renaissance in the value of art to a degree never before witnessed.After all, the art auction market is fair and transparent with a degree of stability that many financial institutions, and even some AAA-rated U.S. government debt, can only dream about.

The very fact that sovereign wealth funds are dramatically altering their asset allocation decisions for the first time in decades, in recognition of a drastic change in the risk profiles of traditional and even AAA-rated securities, should prompt a revaluation of individuals' investment parameters toward the incorporation of real assets that have served as stores of value throughout time, such as art.

"The main contributor to both absolute total returns and to the variance of total returns was the asset allocation policy decision." ( Global Investing: The Professional's Guide to the World Capital Markets, Roger G. Ibbotson and Gary Brinson)

Even absent the conditions present in the market today, making the deliberate decision to remain in the stock market inherently implies acceptance of a degree of risk. In that case then the decision should be made to diversify with the inclusion into the portfolio of assets which have no or little correlation with that of the market, in order to minimize risk and maximize return potential.

As a real and tangible versus a monetary asset, art's low correlation with the stock and bond markets makes it an excellent diversification vehicle -- enabling reduction in overall portfolio risk. A key study examining the returns of 82 large pension portfolios by Gary Brinson, Brian Singer, and Gilbert Beebower uncovered that over 91% of the variance of returns is attributable to the asset allocation policy decision, rather than specific stock or bond selection decisions. (Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower, "Determinants of Portfolio Performance II: An Update," Financial Analysis Journal, May/June 1991.) Therefore, the research data argue persuasively that allocating a portion of all investment portfolios to art as an investment class is as imperative as the very decision to employ an investment policy. It shows that for an investor with the twin goals of preserving wealth and growing capital, with today's market conditions, history points to the capital preservation and return superiority of art.

Hence, it doesn't matter what genre of art is selected, what matters most is the policy decision for its inclusion. This study therefore highlights the importance of the investment policy with a clear implication for the Art market. Why not apply the respected and proven paradigm of the investment world as it relates to financial assets, to the real, tangible asset that is Art?

Art's status as a store of wealth is undeniable by historical standards. Under the old paradigm, one would observe that with a buoyant art market in large part due to exuberant participation of buyers from a single industry, that with the sudden ill fortunes of that industry, would necessarily mean at lease the near-term deceleration of the art market. Not so this time. The growth of the current art market is traceable not simply to a single industry or even a single continent, but to a hitherto unseen confluence of global wealth and acquisitive desire.

It has been an incredible year for contemporary and modern art. Christie's and Sotheby's together posted record sales over $12 billion. Despite all the economic travails discussed in these posts, art has been one of the only asset classes that has continued to outperform and bring an important degree of diversification to owners' portfolios. If you consider the fact that the 10-year inflation-adjusted return of the benchmark S&P 500 has actually been negative, that real estate can no longer be considered an asset upon which to retire, and the inflation which will only continue to ravage real returns, the choice for art becomes clear.


1 comment:

Laura Barbosa said...

Love this article and I agree that Art is the best investment you will ever make. Where else can you purchase a piece of someone's soul? Where on earth will you ever own a special painting found nowhere else. I am of course an Artist and my emergance has been quick and exciting. I have raised $7500.00 in charity money for a local therapy dog group that visits patients through my public collections. I have also been published in print both off and on line. This is the best foot I can put forward into the world that leads my clients into a window where they can peer into my soul and maybe find something they can relate to. Maybe find a part of me that is also a part of them. Afterall, we are all connected in some way. ART CONNECTS US ALL WITH EACH OTHER! Laura Barbosa

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