A New Way To Invest In Fine Art

The revolutionary technology blockchain as well as other innovations are making themselves felt beyond the narrow confines of banking, touch areas including the buying and selling of fine art.

The investment world, as readers know, is far more than just
stocks and bonds. A “niche” area is investing in fine art; it is
part of a trend of “hard assets” or sometimes known as
“investments of passion”. Spectacular sales prices for some works
can turn heads but what of the wider trends? In this article,
Miguel Neumann, founding partner at Maecenas and chief operating
officer at DX Markets, considers new ways of investing in art.
Maecenas recently launched a platform to trade shares in fine art
by making use of the revolutionary blockchain technology – the
system that powers the controversial digital currency bitcoin.
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In uncertain times, the fine art market offers a reassuring
investment opportunity. Largely immune to political change, it is
less volatile than currencies or capital markets.

The global market was worth more than $45billion last year, a 1.7
per cent annual increase, according to the European Fine Art
Foundation Report 2017. Prices have fallen back a little from the
peak of July 2015, but are around 15 per cent higher than in the
market trough of November 2012 and the market is ‘stable and
robust’. The outlook is optimistic.

Wealth managers are looking beyond traditional investment
products and there is a strong demand from investors – 88 per
cent of private offices and 75 per cent of high net worth and
ultra-high net worth individuals want art in their portfolios,
according to the 2016 Deloitte Art and Finance report. 

However, the market can be daunting to newcomers. It has a
reputation for being opaque and the major auction houses charge
fees of up to 30 per cent. Global auction house sales fell last
year by 18.8 per cent while sales by dealers increased by 20 per
cent to $27.9billion; looking more closely at the figures, it
turns out the big auction houses conducted more of their business
privately, which does nothing for transparency in the market.

Most investors are not in the art market purely for sentimental
reasons – the emotional benefit of collecting is a pull, but
Deloitte Touche found that strong returns were more important to
64 per cent of investors. They see art as a tax-efficient asset
with the upside of capital appreciation and want as diverse a
portfolio as possible. 

Art funds can offer that, combining “defensive’ pieces by
established artists with some rising stars and a few emerging
faces. A balanced portfolio might look like this: 50 per cent
spread across Old Masters, such as Botticelli and Raphael,
combined with an Impressionist, perhaps a Monet, and a 20th
century name like Modigliani; 25 per cent allocated to post-war
or Modern greats, such as Liechtenstein, Bacon, Dalí; and the
remaining 25 per cent in high risk categories, such as emerging
Latin or Indian art and British contemporary.

That is a good way of managing risk, but art funds are not
liquid, and tend to have a long lock-in period. With minimum unit
sizes normally upwards of $250,000 it can also be difficult for
new art investors to join. And short-term investors should be
aware that even the “blue chip” names can have a bad patch – last
year, there was a 68 per cent drop in the auction sales
volume of Andy Warhol paintings, a 50 per cent fall in Picassos
and falls of more than 60 per cent in Modigliani and Francis
Bacon.

Meanwhile, betting too heavily on an emerging artist is as risky
as backing a promising start-up. Several graffiti artists have
attempted to move on to gallery work – Banksy managed to do it
and one of his drawings from ten or 15 years ago, which was then
worth a paltry £2,500 ($3,238), can now reach 100 times that
amount, but thousands more like him have disappeared without
trace.

“The building blocks of the art market depend fundamentally on
quality and trust,” concludes the European Fine Art Foundation
report. “Key to this are maintaining reputation and credibility
to ensure longevity, stability and resilience”, it said.

But for investors, two of the fundamental problems in the market
are a lack of transparency and a lack of liquidity. Now, a new
art investment platform is promising a unique solution by
creating an online marketplace where owners, collectors and
investors can meet without intermediaries to trade in real time.
It is taking the idea of art funds, where art pieces are
evaluated in financial terms, to a new level by giving investors
the opportunity to have fractional ownership in artworks.

Maecenas will use blockchain technology to tokenise and digitally
allocate single pieces, or portfolios, to several co-investors
who can trade with other parties though an art exchange. While
the owner retains 51 per cent of the piece’s value, the remaining
49 per cent can be traded, transforming the dynamics of the
market and bringing much greater granularity to art investing.
Prices will be market driven and faster digital transactions will
create more data points than ever before, allowing investors to
monitor the evolution of pieces in a way that has never been
possible.

This will democratise the fine art market, creating a secure,
open global platform. Blockchain technology has been used to
bring greater transparency to the provenance of artworks; last
spring, at the ICT summit in Luxembourg, Deloitte Touche unveiled
its ArtTracktive proof of concept, which provides a distributed
ledger for tracking the provenance and whereabouts of fine art
works. But this is the first time blockchain is being used to
make art investment an easier, more transparent proposition.
Lowering the barriers to entry will widen access to the market.

At the Affordable Art Fair in London, works by more than 1,000
artists are on display, ranging in price from £100-£6,000.
Getting investors involved at the bottom end of the market is
important, but creating the first real-time trading market for
fine art is a more ambitious vision, opening up all sectors of
the market and allowing anyone to own a share of a masterpiece.

That could be a catalyst for change in a market that has remained
largely unaltered for 300 years. Just about every sector you care
to mention has been disrupted by technology – now it’s time for
art investors to reap the benefits.