Prinseps


Is Art An Asset?

There is little doubt that Art is an investment asset ! It has been further argued that Art is also an "alternative" asset - implying that it's returns have low correlation with the stock markets and therefore if included in one's investment portfolio improves the risk-reward profile.

Lets refer to a renowned economist , Nouriel Roubini, for some guidance and also to a report from Deloitte.

Nouriel Roubini

Here I rely heavily on studies or observations by Nouriel Roubini, the economist who correctly predicted the the lehman/credit crisis which was caused by over-leverage and reliance on sub-par assets as collateral. Why Nouriel ?, because he has a healthy dose of skepticism and tends to analyze the macro-economy without being perennially bullish (as some other economists). Interestingly enough he was referred to as Dr. Doom by his critics and disparaged on TV , till the calamity hit ! As a trader in a hedge fund - I have used his analysis extensively.

Cherry-picking some of his quotes as to why he thinks that Art in an asset class

  • It is not hard to imagine the market capitalization of this asset class (i.e. art) at one trillion USD !
  • Art is used as a portfolio investment. People invest in art because they believe that there is going to be a meaningful return on their investment.
  • Jianping Mei and Michael Moses, the two academics behind the Mei Moses indices (now a part of Sothebys) that track art valuations, claim that long term returns on art can be similar to the return on stock
  • Art is an asset class because there are many market participants

Is Art An "Alternative" Asset

Firstly what is an alternative asset ? Loosely, an asset that reduces the risk of your portfolio is an alternative asset. The analysis below is taken from the Deloitte Art & Finance Report 2016 (link below) and clearly shows reasonable returns and an extremely low correlation with SP500 implying a better risk adjusted return ( a higher sharpe ratio) for any portfolio if art in included as an asset class

Mei Moses Index analysis
mei moses last 50 years

Risk Factors / Caveats

The Mei-Moses index suffers from one major drawback - that of selection bias. The Mei Moses index tracks subsequent re-sales of the same art work , in a sense similar to the Case-Schiller Real Estate Index. The problem being that some art works can be held back from a re-sale if it is thought that the work would not fetch its due price. This would cause an upward bias in the index.

Transaction costs are not entirely transparent. While the buyers premium may be listed the sellers premium is a private negotiation. Notwithstanding the upward bias in the index and the lack of transparency in transaction costs, Art is clearly an asset class and this is a global phenomenon.


Reference Credits & Sources
Why Art Is an Asset Class
Deloitte - Art & Finance Report 2016
Art - A Growing Asset Class