With financial markets in turmoil, art is an alternative asset class that is being incorporated into portfolios in the interest of diversification. Art’s low correlation with the equities market and desirable risk and reward ratio, as price appreciation defies all logic, makes it an attractive investment. The volatility, irrationality and illiquidity of the art market make it hard to compare to more conventional investments such as bonds, stocks, cash, and money markets.
World trends have impacted the South African art market, with local paintings realising excellent prices. In 2007, Bonhams of London established its first-ever auction solely devoted to South African art. It saw over $2 million worth of art being auctioned, including works by major South African artists.
More recently, South African art has been fetching record prices all over the world. One reason for this development is best described by what happens in boom times. Before the 2008 crash, people were feeling good about life, they had invested in bull markets and their equity investments had yielded lots of excess cash. They looked to find something exciting and interesting to spend their money on, and South African art was an attractive option.
What about the downturn?
Is the local art market feeling the effects of the global recession? The simple answer is no, says Wilhelm Janse van Vuuren, wealth manager at FNB Private Clients. “At the top end of the market are wealthy serious collectors who are far less likely to feel the credit crunch than the general public,” he says. “These collectors do not have a lot of debt and will buy a piece if they come across a good deal. At the same time, serious corporate collectors continue to buy too, which means the market remains fairly buoyant.”
What should you buy?
How does the new investor know what to buy? Janse van Vuuren recommends keeping it simple. “It’s an approach that can be applied equally to property, equity or art,” he says. “Do some research, talk to the experts and if you find an artwork that you like and you can afford, buy it.”
He cautions, however, that the art world can be difficult for the novice, with auctioneer and intermediary commissions adding to the price. “Take those commissions into consideration, and also find out about the insurance you will have to pay on the piece. It will cost you to protect it and keep it in a safe environment.”
In it for the long haul
Art is a long-term investment that does not yield dividends or interest. It’s also not a liquid investment and to make money from your purchase, you have to hold onto it until you find the right buyer in the right market.
“Do not take a loan to buy an artwork,” says Janse van Vuuren, explaining that it’s difficult to define a price range for the investor. “For some people, R10 000 is a lot of money. It really is about what you can afford. Being forced to sell something because you over-extended yourself can result in major losses.” We also advise buying one really good piece as opposed to three or four mediocre works.”
Where does an investment in art fit in to a wealth management portfolio? “Always remember that art is an alternative asset,” says Janse van Vuuren. “Look at your investment risk profile and make sure that you have invested sufficiently in wealth preservation first, in products like retirement annuities and equities. The best time to buy art is when you have sufficient funds in a liquid environment. If you have a bond of R1 million, for example, it would not make sense to put your cash into a painting.”
Tips for the Art Buyer
- Discover the art world and explore the vast variety of art that’s available for sale, respond to it, and begin to focus in on your preferences.
- Define what you like and learn how to describe the art you like most in terms that help dealers and other fine arts professionals pinpoint your tastes.
- Know who says what. The art world is loaded with opinions about how to collect, who’s hot, who’s not, what to buy, where to buy it, and how much to pay.
- Locate and compare the various establishments that sell your favourite art.
- Finding the best art means learning who the best most qualified dealers are, and understanding how to interact, communicate, and negotiate with them.