Art tops equities, again

When new money finds old masterpieces the result is historic financial performance. As an atypical asset class, art has been steadily growing as a preferred haven for wealthy investors shunning wild swings in stock markets.

For the second year in a row, the art market outperformed equity markets, beating stocks by 9 percentage points in 2011, according to The Financial Times. Considered the largest lead since 2008, it was the result of growing demand for art among the new wealthy Chinese investors and hefty price tags for the works of popular artists.

This outperformance is nothing new to art investors who have seen the Mei Moses Fine Art Index beat the S&P 500 in six of the last 10 years, with an average annual return of 7.8%, far surpassing a modest 2.7% for the benchmark U.S. index.

New York-based Suzanne Gyorgy, head of art advisory and finance at Citi Private Bank says art has a low correlation with other assets or market volatility and thus may play a role in portfolio diversification.

“People find art has been an asset that’s held up very well; more people are looking to art as an alternative, as a place to hold or preserve your wealth,” says Gyorgy.

Interestingly, she asserts, most art investors tend not to book their profit when the value of their collection appreciates over time.

“People collect and over time the collection really increases in value. People that are entrepreneurial investors or business people use the collections as collateral for loans.”

Art is perceived as a very stable form of collateral because “it doesn’t have the market volatility of market financing and is a great way to get liquidity out of your collection.”

If one has been collecting for a number of years and suddenly the art has gone up in value, buyers look at their overall net worth and realize they are overweight art and decide to “[Take out] art loan—loan against the value of their masterpieces—to diversify their assets while still holding their art.”

In the U.S. “the federal tax on the sale of art is 28%; when you add state and local [taxes], you can be upwards of 40% quite quickly on the capital gains,” says Gyorgy.

Art markets are difficult to analyze because artworks are diverse and trading is infrequent.

“The desire to collect is pretty universal; if you’re looking at the high end of the collection where the big dollar volumes are coming from, the art market is an under regulated market,” she said.

Investors can start by getting a good advisor that can advise them on how to navigate the art market. Many art advisors quick to point out that art’s an illiquid asset, hence not a good investment if you’re only hoping to make a quick buck.

For a few quick pointers on art advice, click here.