ART& AUCTION Magazine, April 2003

ART REPORT

Does your portfolio have the right balance of mutual funds, real estate investment trusts (REIT's) and art funds? It should, says Michael Moses at NYU’s Stern School of Business, who with professor Jainping Mei created the Mei/Moses Fine Art Index (www.meimosesfineartindex.org). Although outwardly characterizing art as an investment vehicle is a no-no in the art world, it is only a matter of time before such art-based funds become commonplace according to Moses. Along with publishing papers with titles such as "Art as an Investment and the Underperformance of Masterpieces" and "Art, Wars and Recessions," the maverick academics have created a series of indexes tracking key categories of art (American, Impressionism and Old Masters) against the Treasuries and the S&P 500.

Previously, they found that fine art trailed the S&P 500 over the long haul, though barely. That is not the case any longer. Their latest, yet-to-be-published study shows that the art market has outperformed the stock market for the last 40 years, and dramatically outpaced it over the last five years, when art brought an average 12.9 percent return, and stock, zilch. Plus, the duo concludes, collecting art offers more by way of glamour than piling up stocks and bonds. In the words of Moses (Mike, that is), "Art may serve to humanize the barbarians, but the barbarians will never admit to its investment value since that would negate its non-barbarian status." Translation: art for art’s sake is a surprisingly good investment.

As if touting art works as an investment wasn’t seditious enough; the findings of Mei/Moses are even more eye-popping and contradictory to previous beliefs. Namely, that masterpieces under-perform the market, as opposed to typical art dealer advice to buy the very best (i.e. most expensive) artworks a client can afford. Mei/Moses determined that it was not clear that the highest quality art has the highest financial returns. Another finding of note is that the art market does not correlate to the stock market (but probably does mirror the real estate market to an extent) and is not as volatile as previously thought—thus the key benefit of art can be for purposes of diversification.

Strangely enough, Moses comes to this economically reductive way of analyzing art through the traditional transcendental notion that art can change a person’s outlook of the world, and that certain images stay with the viewer for life. But, before you log on to the Art Index to gauge the future performance of your budding art portfolio, Mei/Moses are not quite ready to prophesize the next (inevitable?) downturn, not yet, anyway!

An interesting historical note on the art and investment front was the case of the British Railways Pension Fund which undertook an unorthodox foray into the art market in the mid-1970’s. In an effort to combat high inflation, a faltering London Stock Market, weak property levels and a high dollar, the Railways Pension Fund invested in art and other collectibles seeking portfolio diversification, long-term captial appreciation, and profits. To consider such a scenario today for what is essentially a public trust seems unthinkable. Yet the fund which invested in Old Masters, Impressionist, Chinese, and European art (and antiquities) did remarkably well over the course of a twenty year period. The initial cash outlay of 40 million pounds reached 168 million by the end of the project in the late 90’s, which equaled an 11.3% cash rate of return or 4.0% per year above the movement of the Retail Price Index. Strangely, in 1999 after the successful run of the Railway Pension Fund’s experience with art, it was determined to invest in other vehicles such as equities rather than re-invest in art. Looking back a couple of years later from hindsight, British Railways would be wise to dip back into the art market and get back on track!