Strategy
A Diversified Art Portfolio.
A sound investment portfolio diversifies its assets with the objective of minimizing risk. While this approach can apply to both financial market and non-financial market assets, our concern is with the latter. With the exception of real estate, non-financial market assets are less speculative and are referred to as “real and tangible.” Foremost among these non-financial market assets are gold and art.
The 1970s is a good example for analyzing art investments because the global economy experienced a period of high inflation and stagnate growth. During this time real assets reported annual returns superior to their financial counterparts, while the opposite effect occurred in the 1990s when inflation was low and there were higher growth rates. In 2009 governments had concerns about unemployment and low growth rates and in an effort to revive the economy they created stimuli that will result in an unprecedented increase in the monetary supply. This excess of liquidity in circulation will likely lead to a period of inflation and slow growth, causing financial instruments to generate very poor rates of return for investors with savings. Real and tangible assets are a good alternative and have a strong growth potential.
Art and gold have similar indices of correlation, that is to say they tend to behave comparable to macroeconomic changes. Both are examples of real assets. In the past, investments in art were focused on the evaluation of the assets as judged by very few connoisseurs and such information was released selectively. In that pre-internet age, the market lacked the transparency that it enjoys today. Present technological and art market accessibility has changed all of that. Art has become a more well known asset thanks to the existence of indexes that compile more than a century worth of data and sale records providing quantitative assessments for art. Today it is accurate to say that art reduces risk in an investment portfolio without significant reduction in expected returns. Wealth managers have a fiduciary responsibility with their client to include art as an asset when working on an optimal asset allocation.
Art remains the most undervalued investment in the market, outperforming both the real estate and stock markets more often than not in the past 20 years. Art is a rare asset and every day it becomes more so as museums and private collectors take works of art of all kinds into their galleries and off the market. In China alone an estimated 6,000 new galleries will be built by the year 2020. All of these works housed in museums or private hands will go a long way toward keeping inventories low and prices elevated.