Neil Caffrey
Perhaps it is all the research I’ve been doing lately on investing in the art market, but I find myself enjoying the exploits of Neil Caffrey, the gentleman art thief, bond forger, and lead character of USA’s White Collar. In the recent season finale, Mr. Caffrey was kind enough to return to its original owners a priceless Raphael painting he had “borrowed” to avoid implicating his ex-girlfriend. Mighty sporting of him.
Caffrey has a taste for the finer things in life, and an eye for fine art. Alas, I realized a long time ago that I will never have Mr. Caffrey’s fashion sense, let alone his artistic connoisseurship. And it is precisely the exclusivity of this market that creates its value.
Earlier this year, I wrote a piece for MarketWatch about investing in the art market (see “Profiting from the Art Boom”). In the article, I tied the boom in fine art to a broader investment theme—the rise of the global nouveau riche, led by the legions of new high-net-worth individuals in China and other emerging markets—that was causing a boom in everything from high-end cars to expensive booze.
I warned against investing in art directly, arguing that it is a “thinly-traded market dominated by a relatively small number of expert opinion makers and wealthy patrons” and that the high prices for each piece made portfolio diversification all but impossible with less than a nine-figure net worth (I’ll save you the chore of counting on your fingers; that would be a net worth of 100 million dollars).
Interestingly, an entire niche industry has sprung up to assist modestly wealthy investors with overcoming these obstacles. Artvest Partners, a New York-based investment advisory firm run by two long-time veterans at auction house Christie’s, Jeff Rabin and Michael Plummer, offers “investment advice for the art market.”
Among other services, Artvest offers separately-managed art investment accounts, art investment funds and partnerships, and art financing. They even offer estate planning for investors with art assets in their estates.
In the firm’s Fall 2011 Market Analysis, Artvest made comments similar to my own, noting that the art market is “opaque, illiquid, unregulated, non-commoditized and emotional” and that entering the market without doing significant study was akin to “letting a child drive the family car.” Well said, and I would argue that the same would apply to most alternative investments. Insiders have enormous informational advantages that the average investor simply doesn’t have.
Artvest also picked up on another theme I’ve been covering—that the global boom in art is being driven by China. Chinese investors accounted for just 5% of art sales as recently as 2006. By 2010, they had risen to 19%, and the number continues to march higher. What’s more, in addition to buying Western art, Chinese investors tend to fancy their domestic works as well. Chinese art has been a bigger seller in recent years than Impressionist & Modern and Post-War & Contemporary—traditionally the two most broadly traded sectors.
Investors have begun to fret about slower GDP growth in China and on what affect this might have on Western firms that export to China (see “Why China’s Slowdown Won’t Hurt Luxury”).
At 7.5% GDP growth, I’m not particularly worried about the prospects for China’s wealthy. Should the property market continue to weaken or China’s banks come under pressure, I would recommend that investors dump luxury-themed stocks and avoid art investments. But until then, I would continue to recommend both as “backdoor” ways to get exposure to China’s wealthy.
In my last article on art, I suggested that readers invest in art indirectly, though a company like Sotheby’s (NYSE: $BID) that auctions it. I continue to view this as the best option for most investors.
But investors with larger bankrolls and a willingness to dig into the research might take a stab at something a little more exotic. A classical Chinese painting, anyone?
