The Investor's Art Portfolio

According to Artprice, the world art market grew by 26% between 2013 and 2014, grossing $15.2 billion in auction sales. Art is about emotion, but can also offer investors opportunities for risk diversification over the long term. Evaluation must be done with special care, though, since traditional metrics do not apply: this is not your standard financial market; in fact everything is unique and nothing is standard about the art market.

Market failures are intrinsic to the good being traded: the unicity and rarity of an art work make the artist a natural monopolist. The act of purchase can often descend from irrational considerations, with passion and determination crowding out cool assessment (e.g. the case of Yves Klein's blue monochromes in the 1950s). The art market is characterized by information asymmetry, more so than financial markets. Last January in Davos, Nouriel Roubini brought attention to the fact that there is presently no regulation of art markets, which leads to tax evasion and money laundering. In the highly segmented art market, liquidity is low and opacity high, in spite of the fact that traded volumes and recorded prices have significantly grown. Price formation is dominated by the presence of high transactions costs. Lastly, the risk-return ratios in quantitative assessments of art markets do not take into account issues about authenticity and provenance, such as the risk of purchasing works of art which have been stolen.

This attracts the interest of investors seeking extra returns, by exploiting market imperfections and offering instruments for indirect investment in art. The creation of an art investment fund entails the management of a portfolio of works of art. The process goes through the following phases: portfolio building, selecting the reference parameters to assess the portfolio's risks and returns, the measurement of financial performance. The latter is the most uncertain of all phases: we currently lack adequate experience, time-series data availability, and appropriated methodologies to verify performance. The difficulty of evaluating art through the financial dimension calls for caution about including art in portfolios, particularly if there is no shared project with the investor. But the when the passion for aesthetics turns the investor into a collector, investment valuation goes beyond mere financial logic.