Investing in the Art and Collectables Market: A $1.7 Trillion Asset Class

Art has a long history as a transactable asset, with marketplaces and auction houses like Sotheby’s having existed for more than 275 years. Art has always demonstrated long-standing cultural significance and aesthetic qualities, which allows it to be universally appreciated and desired around the world. It is also broadly understood that art could be beneficial to the owner financially, particularly for buyers at the high-end of the market. Yet this idea of art value appreciation was largely supported anecdotally by the ultra-wealthy. The lack of research, in addition to inaccessibility, prevented the majority of investors from becoming involved in the market. However, with improvements in technology and increased interest from investors in alternatives, the financial profile of art is becoming increasingly understood, and also more widely available via securitization of the asset class.

What does the art investment market look like? Who have been the major participants?

• In terms of total available market, Deloitte has estimated the total global value of art and collectables to be ~$1.7 trillion⁽¹⁾ (3-4% of which is traded on an annual basis). At this level, the asset class is similarly sized to the other major private markets, almost all of which have hundreds or thousands of institutions participating and making the asset classes available to investors.

• The lack of institutionalization within the asset class has limited participation in the art market to the ultra-wealthy. The closest the art world has come to broader distribution of art as an asset has been through art funds, however this investment structure suffers from several challenges that have hindered its success for the following reasons.

How will securitization transform the asset class?

• As a previously non-securitized asset, the price points of blue-chip art made investing difficult, both in terms of owning one piece, as well as diversifying within an art portfolio itself. However, by enabling investment in a painting via shares, more investors will be able to gain exposure across a broader variety of works.

So what drives art market appreciation? What has price appreciation historically looked like in the different segments of the market?

• Art market appreciation is driven by three key factors:
  • Secular growth in purchasing power among the global ultra-high-net-worth community
  • Decreasing available supply as artwork is acquired by museums and permanent collections
  • Tangible, mobile, internationally marketable store of value that can be sold across locales/currencies

• Art, contemporary art specifically, has demonstrated the key characteristics of an attractive alternative asset class on an absolute return basis. Contemporary art has demonstrated 14.0% annualized price appreciation from 1995 through 2020. These mid-teens appreciation rates alone gives art a strong case for inclusion into an investor's portfolio.

Besides returns, what are the financial characteristics of art?

• Art exhibits low correlation and strong capital preservation qualities. The low correlation between contemporary art and other asset classes is a result of the underlying driving forces of art market returns. The purchasing power of high-net-worth individuals, general illiquidity of art and the global nature of the asset class all contribute to art’s lack of correlation with equities, bonds and real assets.

• Contemporary art has also demonstrated low loss rates, experiencing realized losses only approximately 8% of the time, as measured over a 2-year investment horizon. The max net loss over this time was 11.4%. These low loss rates are at partially attributable to low transaction volumes during unfavorable market conditions. The lack of correlation, combined with Contemporary art’s strong preservation of capital characteristics, make it an attractive risk diversifier asset class that can help improve the downside protection of a portfolio.

What is the state of the art market today?

• According to the 2021 Art Market Report published by UBS and Art Basel, the number and wealth of billionaires reached all-time highs while also indicating their interest in collecting had increased coming out of the pandemic

• The push online has increased the number of young buyers in the art market. Sotheby’s estimated that buyers under 40 accounted for 25% of bidders in online-only auctions (compared to 15% in live auctions)

• Gallerists, dealers and auction houses all believe total sales will improve in 2021 as the art world begins to return to in-person events, while maintaining the ability to interact with global investors via their online platforms

In conclusion, given the securitization and digitization of the Art and Collectibles marketplace, we are seeing more and more interest from younger buyers and collectors. Coupled with the impending handover of wealth from one generation to the next (the largest in history) it is fair to expect to see a continued rise in valuations as more young investors begin to participate and look to earn uncorrelated market returns from these investments. This is surely an area to keep an eye on in the future as investors could benefit from knowledge and access to such ecosystems.

Sources: Deloitte, ArtTactic: Deloitte Art and Finance Report 2019. Preqin. McKinsey & Company: Private Markets Come of Age: McKinsey Global Private Markets Review 2019. Internal Masterworks Analysis. Yahoo Finance. MSCI Database. FRED (St. Louis Federal Reserve).

Footnotes

1. Estimated based on surveys of wealth allocation to art and estimates of total wealth held by individuals. Estimated value of artwork held by individuals.
2. Private market assets under management investing in debt
3. Private market assets under management investing in real estate, natural resources, and infrastructure
4. Private market assets under management investing in private equity
5. Repeat-Sale Pair (as defined by the applicable auction house) using Standard & Poor’s CoreLogic Case-Shiller Home Price Indices Methodology. Index shown through 2020. Index data updated as of December 31st, 2020.
6. The Standard & Poor’s CoreLogic Case-Shiller Home Price Indices Methodology results in a value-weighted index. Auction results realized in a currency other than U.S. dollars have been converted using exchange rates provided by FRED (St. Louis Federal Reserve) at the time of the most recent sale. This adjustment is made to account for long-term exchange rate trends that would otherwise distort artworks’ performance.
7. S&P 500 Total Return Index as of December 31st, 2020.