Can apps like Masterworks help you diversify with alternative investments?

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Heading into a new year, people tend to be more optimistic about things to come. That’s hardly the case at the moment in the world of traditional stocks, shares, equities and bonds, where investor sentiment remains skeptical at best. By making investments in fine art more accessible, the Masterworks app is allowing retail investors to include this high-performance alternative asset class in more diversified portfolios.

There’s a lot of evidence that investors are becoming wary of traditional assets. A recent Bank of America study suggests that 75% of investors aged between 21 and 42 believe it’s impossible to generate above-average returns simply from investing in equities, bonds and stocks. As a result, 80% are looking to invest in alternative asset classes that may have greater potential.

A similar sentiment resulted from a survey of financial advisers at the recent CAIS Alternative Investment Summit, where 62% said they plan to allocate up to 25% of their clients’ portfolios into alternative assets, while 85% said they will increase their allocations to at least one new asset class next year.

Fine art is a hot prospect

As investors search for promising alternative investments, the once-exclusive fine art market is increasingly looking like an enticing prospect for those who’re determined to secure higher returns in 2024.

Fine art offers a lot of favorable investment characteristics compared to traditional assets, and is seen as a superior store of wealth to hedge against inflation and stock market downturns. This was true during the 2020 COVID-19 pandemic, where many other markets showed exceptional volatility, whereas the art market remained more or less stable. This suggests that investment-grade art is independent of external market forces, and has a tendency to steadily increase in value over time, regardless of how other assets perform.

In the fine art investment space, there is a lot of focus on so-called “blue chip” artworks, which carry the highest price tags and are the most popular among collectors. This segment has displayed remarkable value accretion since 2000, outperforming the S&P 500 Index by more than 250%, according to the ArtPrice Index.

Indeed, from 2000 to 2018, the ArtPrice Index delivered an annual price appreciation rate of 8.9%, versus a 3.4% rate for the S&P 500 over the same timeframe. The ArtPrice Index is based on data from more than 6,300 auction houses globally, and weighted by artists’ average performance over the last five years, adjusted annually just as the stock market index is.

The difficulty for most investors is that the fine art market has always been largely inaccessible. In order to invest in fine art, investors must ingratiate themselves into privileged networking circles and establish relationships with private art dealers. Most art transactions take place behind closed doors, with opportunities offered through word of mouth from knowledgeable art dealers. For investors without the required credentials, it’s highly unlikely they’ll ever be privy to such opportunities.

Blue chip art is also seriously expensive, with the most sought after works costing millions of dollars. There’s also a distinct lack of liquidity in the market, with investors required to go through multiple steps to sell their art. Negotiations over art sales can take many months, and while auction houses provide a more rapid alternative, they charge exorbitant fees for selling any artwork.

The Masterworks model makes fine art accessible

In spite of these challenges, the fine art market is looking like a much hotter prospect thanks to the emergence of the innovative platforms that have transformed the way artworks are owned, financed and sold.

There are a few platforms on the market now that offer fractionalized shares in blue chip art. Founded in 2017, Masterworks was the first to launch, making it possible for almost any class of investor to participate in the blue chip art markets and become a part-owner of exclusive works from the likes of Banksy, Basquiat, Monet and Warhol.

According to the company’s website, the Masterworks acquisitions team identifies artworks that have strong potential to accumulate value, working with its exclusive network of auction houses, collectors and dealers. Its due diligence is based on proprietary data analysis that allows the company to identify up-and-coming contemporary artists who seem to show strong sales momentum.

For each art piece it identifies, the company carries out extensive vetting to ensure it’s authentic and of high quality. This includes scientific testing such as pigment analysis, radiography and canvas count threads. Experts are also involved in the process too, conducting a detailed examination of the piece in question, before submitting a comprehensive report to compare it against industry benchmarks and valuations.

Once Masterworks acquires a piece of art, it will file a circular offering with the U.S. Securities and Exchange Commission, allowing it to create and sell shares of each one. In this way, a piece of art that costs millions of dollars can be split into thousands of more affordable shares, eliminating the price barrier that prevents typical retail investors from participating.

Masterworks will, on average, hold onto the painting for anywhere between three and ten years, before, hopefully, selling it on at a substantial profit. But the beauty of its offering is that, while investors are free to hold onto their shares for the duration, they don’t have to. That’s because Masterworks offers its own internal marketplace where investors can buy and sell their art shares freely, with the price of each share based on the piece’s estimated market value.

So far, the model has been successful, with Masterworks having purchased 344 individual works of art to date, while growing its investor base to more than 800,000 individuals. The company claims to have more than $822 million worth of art assets under management.

Diversification to hedge against market volatility

With its platform, Masterworks provides a compelling opportunity for retail investors to diversify their portfolios. Diversification is crucial for any investor, as it enables them to hedge their bets across numerous asset classes and reduce their vulnerability to the volatility of traditional assets.

Art is an excellent choice for diversifying any portfolio, because, unlike traditional bonds and shares, its value isn’t dictated by economic conditions. Rather, the value of blue chip art is largely derived from the reputation of its painter and its historical significance.

As a result, the art market doesn’t tend to see the ups and downs associated with investments such as traditional stocks, the price of gold, oil or other commodities that are strongly affected by economic forces.

Examples of this include Yves Saint Laurent’s art collection, which raised more than $470 million over a three-day, six-part auction held by Christie’s in Paris at a time when the stock markets were reeling due to the Great Recession in 2009. Later that year, an Andy Warhol’s piece, 200 One Dollar Bills, was auctioned off for a cool $43.7 million, as part of a wider collection of contemporary and post-war art that raised $134.4 million in a single night.

A level playing field

The advantage of blue chip art is that it has consistently displayed its ability to generate strong returns for investors, irrespective of the current state of the economy. Of course, smart investors will know there’s no such thing as a sure profit on any investment, as there’s no guarantee that its past performance will be repeated. But the enthusiastic response to Masterworks’ offerings shows there are plenty of investors who believe fine art can be a solid hedge against the volatility of most other assets.

At a time of slow economic growth, as we’re seeing today, more investors are looking to diversify into alternative assets. The advantage of the Masterworks fractional art investing platform is that it levels the playing field, enabling people from all walks of life to invest their funds into the world’s most famous and valuable artworks.

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