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Investing in Arts-Collectibles: An Alternative Asset Class

Collectibles are gradually emerging as an alternative asset class, offering investors decent returns...

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Investing in Arts-Collectibles: An Alternative Asset Class
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Collectibles are gradually emerging as an alternative asset class, offering investors decent returns relative to stock and fixed income markets. Collectibles are items that are worth far more than they appear because of their rarity and or demand. Common categories of collectibles include antiques, toys, coins, comic books and stamps.

The painting you bought to match your living room may increase in worth or it may be become worthless with time. As with any investment, you need to do your research and go beyond your comfort zone. The art market is fickle and there are no guarantees of profitability, but with a little legwork and forethought you can fill your home with images that may prove worthy investments down the line. Consider these tips for choosing fine art and identifying the best from the rest.

Paintings and Giclées

You walk into a gallery and fall in love with a US$5,000 painting, but you just can't justify the price tag. The gallery owner shows you a selection of the same artist's work for a humble US$500, explaining that the pieces are giclées. A giclée is a machine-made print, a reproduction printed on fine paper or canvas with color and clarity that can rival the original but it's still a copy. The rarity of a work of art is what gives it value, so an original will always be worth more than a reproduction. While a giclée may come labeled with superlatives like "museum quality" or "archival," and the seller may provide a certificate of authenticity, it will never be as valuable as an original. Some artists and appraisers even view giclées as a gimmick for novice artists and neophyte collectors.

Still, there's no denying that a giclée puts fine art within reach for many art enthusiasts, and while a certificate doesn't lend much value to the reproduction, a fresh signature and especially a Remarque (an original drawing made by the artist in the margin of the giclée) could bump up future value.

You may hear stories of giclées being proudly exhibited at noble institutions and Museums but the pieces held in these collections are usually copies and not original ideas and they are not reproductions of original paintings. Museums do, however, sell giclée versions of masterpieces to generate income; these giclées, though pleasing to your eye and soul, won't pull in any future income for you.

Prints and Posters

Posters, like giclées, give you access to a masterpiece, but a poster is not the same as a fine art print, which can be in the form of a hand-pulled silkscreen, lithograph or block print.

You can often distinguish an artist print from a poster with the naked eye, though in some cases you may need a loupe or magnifying glass. The process of offset printing leaves a tiny dot matrix on the paper - think of a comic book with its exaggerated dots of color.

Several factors determine the value of an artist's print: the size of the edition, that is, the number of prints the artist makes of one work; the significance of the work; the condition of the print; and whether it is signed and numbered by the artist. In the market for prints, it is rarity that bestows value. A low run of limited edition prints is more valuable than a mass-produced image. Even an earlier pull of a print - say No.10 of 100 (rather than No 80 of 100) - can mean better value.

Cruise Art Auctions

A cruise art auction is exactly as it sounds: it's a sea cruise that displays and sells fine art. With name-brand artist prints, drawings and paintings that come hyped with certificates of authenticity, the cruise auction can seem like a boon to the aspiring art investor. The artwork changes each day as lots are sold off and written appraisals suggest pieces are offered at a fraction of their value. You might feel like you've stumbled into a floating investment paradise.

The artwork at these auctions is genuine, but that doesn't necessarily make it a good investment. Cruise auctions work on the principle that buyers believe authenticity equals high value. Unfortunately, authenticity does not guarantee the rarity of a piece or its importance in the art world. The critical guideline for buying art cannot be repeated too often: art that is valuable is art that is rare.

But how can you know whether your auction find is a rare commodity? Do your personal research very well. You can Google the artist and the specific artwork to get some history, and check sites such as artfact.com to get a representative sample for pricing.

Formulating an art investment strategy

According to Jonathan Reuvid in his handbook of Personal Wealth Management, the art market remains more visual than intellectual and therefore hard to standardize and difficult to quantify. In essence, all art is valued by insurers at basic cost of manufacture, compounded of time and materials. The intrinsic factors for valuing art are quality, artistic merit, condition, subject matter and size. Secondary factors may include authenticity, attribution, artists’ reputation, historical importance, familiarity, provenance, fashion, sale location and sale inducements. Fundamentally, scientific research has demonstrated that by reducing the features of the visual world, the brain is less stimulated, which is more likely with modern contemporary art. The law of demand and supply also play an important role in the value of an art. Studies have shown that the number of best quality works is usually in the same proportion to the total number, with the market tending towards long term upward pricing equilibrium.

A key factor is freshness on the market. An item that has appeared comparatively recently on the market will lead to a lower price than one that has been in a particular collection for a number of years. During the last 100 years, the average holding period for a painting was 20-30 years but is now shortening. Studies have also shown that prices which rise during an artist’s lifetime, often round the time of death, fall subsequently. Moreover the market’s rise and fall are to a great extent manipulated by a consensus of opinion in the form of the art trade, museums, academia and the media, according to Ian Robertson’s recently published book “Understanding International Arts Market and Management. The growing importance of the internet, online auctioneering and technology for scientific art analysis may mean this is not always the case.

Demand is driven by new money which tends to buy new art. Major auctions are often an irresistible spectacle of celebrities and millionaires, typified in the past by buyers in the 17th century from Holland, in the 18th and 19th century from England, in the late 19th and 20th century from America, and in the 1980s from Japan.

Art as Investment

There are two main schools of thought on collecting purely for investment purposes; specializing in a particular area or by artist/craftsman, or in one that has remained unfashionable for years. Others suggest buying art for its diversification potential, though some argue that by itself art already provides too much heterogeneity. Unlike most investors, art is based only on the capital gain when the investment is realized since there is no interest, dividend or rent on the capital invested. The profit on sale must be greater, therefore than other capital gains including these dividends, all less inflation. The theory is that as the number of buyers in the market goes up, supply stays static of declines, so promising a long term upward movement in prices

The capital appreciation has to be substantial to make up for initial cost of acquisition and disposal, valuation and provenance research fees as well as insurance, conservation and storage. Even without these costs, a recent study by Zurich Financial Services demonstrated that a painting bought at auction for GBP1000 net in 1997 would fetch a sum of GBP2, 159 in 2007 to produce an 8% compound annual return including an inflation rate of 3%. According to the art insurer Hiscox, insurance costs range from 0.2 or less to 0.4% for the most valuable and easily portable works.

To benefit the investor, the art market has price data going back hundreds of years. They are also helped by an increasing number of economic studies since the 1980s measuring art market returns. The best known study is by Mei and Moses using data from 5,000-8,000 repeat art sales since 1875. They calculated that from 1954 to 2003, art returned an annualized 12.6%, which was slightly ahead of the

S&P 500’s 11.7% and well above treasury bills. They also demonstrated that the art market never really crashes

Selling Your Art Investment

Most people who buy paintings don't end up selling them later on, and that fact can skew pricing samples for art. When a painting is auctioned, it's often because the owner of the work thinks the piece will attract a handsome price. Auction prices reflect only a tiny amount of art re-sales, and some experts estimate that only 0.5% of paintings bought are ever resold.

On the bright side, though, market watchers have compiled data over the past several years that track more than 9,000 pieces of art to verify the long-term performance of fine art. According to an article from CNN.com, "In 2005, the Mei/Moses Fine Art Index showed compound annual returns of 14.52%, while total returns for the S&P 500 were 4.9% and the U.S. Treasury's 10-year notes returned 2.68%"

If you have a true find hanging on your wall and you're ready to part with it, your best shot at a decent payout will be a fine art auction house, which will typically charge as little as 3% or as high as 50% of your sale price for auctioning your piece, according to ChicagoAppraisers.com. The do-it-yourself internet auction sites usually draw far less coin. When you choose to sell on these sites, you will have to pay transaction fees that can often be as much as 20% of the sale price.

Art is a long-term investment, and while the art market can be stable or even show gigantic returns on an investment during boom times, it is one asset that can easily plummet in value during seasons of recession. When you're ready to hit the galleries and invest in the future of art, go in with your eyes wide open. Gallery owners will tell you that buying art is an emotional decision, but don't fall for that line if you are thinking of it as an investment. Research any living artists who catch your eye, learn about their education, their commissions and their exhibits. Visit museums, galleries and art institutions in your area regularly so you can recognize potential valuable art works. If you're considering a piece by a renowned artist, get an appraisal. Look for quality and don't buy anything in bad condition.

Conclusion

If you are an investor with a longer term horizon and seek to take some risk in alternative assets, then you might consider art investing. Collectibles as discussed above can generate decent recent relative to stock and fixed income markets. With a little effort, you may unearth a lost masterpiece that's worth a million dollar. 

ABOUT OMEGA CAPITAL

Omega Capital Limited is an Investment management, private equity and   investment advisory firm. The Company is authorized and regulated by the Securities and Exchange Commission of Ghana.

Analyst:             

Nana Kumapremereh Nketiah (JP)

Sophia Obeng- Aboagye

 

Omega Capital Research

No. 23 Sunyani Avenue

Kanda Estates

Accra, Ghana.

Phone   +233 302 734 744

Fax   +233 302 734 745

Email: nana.nketiah@omegacapital.com.gh

Website: www.omegacapital.com.gh

Disclaimer

Additional information is available upon request. Information has been obtained from sources believed to be reliable but Omega Capital Limited   (“Omega Capital” or “The Firm”) do not warrant its completeness, accuracy or veracity. The firm is licensed and regulated by the Securities and Exchange Commission of Ghana (SEC). This material is for information purposes only and it is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and estimates herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information.

 

Credit: thebftonline

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