5 Questions on Collector vs Investor
Mar 16, 2017
As the art market becomes bigger, faster and more complex, acquiring the services of an art advisor is a great way to navigate the murky waters with confidence. Javier Lumbreras, CEO of Artemundi Management, shares his expertise on collecting for passion and investment, and the increase in demand for art investment products.
What is the difference between collectors vs. investors?
Art collecting is an insatiable passion. It is also a reflection of personality, taste, satisfaction or naïveté. On the other hand, art investors buy with the expectation that an artwork will be revalued as time passes. Investing in art is a one-of-a-kind way to invest in something that’s both portable and personally gratifying. It is also a good hedge against inflationary periods as currency fluctuations are a good asset protection tool. When investing in art, each discipline has its own strategies and each strategy is a collection of different interests and budgets along with varying ways to look at given investments over time. You can also focus on a single artist in relation to others of a particular artistic movement, but in this case, the personal taste doesn't influence the decision during the acquisition process.
What is your response to those who say that reducing art to a transaction misses "the point" of collecting?
“The important part of collecting art is the education modality, and it is this that drives the transactional modality.” Why deny it? Art collecting is an insatiable passion. Each piece is unique, a sought-after, hard-to-find prize. Being dedicated to collecting can be so satisfying that is can become an individual’s very reason for being. Nevertheless, one must differentiate passion that predominates in art collecting against the rational investment focus dominating in art funds.
From a rational objective perspective, art funds are investment channels conceived as a hedge against inflation, unstable economies, stock market breakdowns and currency fluctuations, while simultaneously producing effective investment returns. They converge each transaction, not only to add portfolio balance (risk diversification), but also to maximize the Sharpe Ratio (return/risk) and to achieve the right combination between short term and long-term liquidity. That is why Deloitte’s and ArtTactic Art and Finance Report 2016 presented that 27% of the wealth managers considered that they have noticed an increase in demand for art investment products from their clients (up from 20% in 2014).
Should lack of liquidity compared to most other traditional financial vehicles be a concern for investors?
It is a natural concern for any investor allocating capital in art to consider its relative illiquidity when compared to most traditional financial vehicles. However, art’s qualities as an investable asset overcome any liquidity matters because of overall long-term benefits in an investment portfolio. Art is an illiquid asset because selling an artwork is not an immediate process and usually involves a complex process to complete a transaction between a buyer and seller. It is precisely its illiquidity that makes it a safe and lowly volatile investment vehicle when compared to traditional investment instruments. This specific characteristic is what makes art such an attractive asset to portfolio managers because of the low correlation with financial instruments. Moreover, in the art market there is a practical impossibility of a collective panic situation, as opposed to stocks that can suffer from a double-digit decline in a single session. For example, we can recall art’s stability was demonstrated during the 2008 recession, when art indexes dropped 4.5%, while the S&P abruptly dropped 37.5%, not to mention that the art market also recovered faster than the stock market. In 2010 the All Art Index increased by 22.6%. In 2011, it grew 10.2% compared to 9.1% for equities.
What is the role of the art market in the current economy? How are art funds performing?
Art funds are a natural market evolution that leads to greater market efficiency and transparency. Funds apportion and reduce the risks of investing in art, unlike what occurs with an independent collector, by way of conforming a diversified portfolio. Funds are also efficient, as they reduce the transactional costs associated with the asset and achieve important economies of scale. Art funds, as an institutionalized art-investment vehicle, brings transparency to the market through rigorous due diligence, arm’s length transactions, and fiduciary duty like no other professional in the art industry.
Furthermore, art collectors see a benefit in art investment funds as a way of gaining broader exposure to the art market. A well-diversified art portfolio, covering works from the Renaissance to contemporary, generates an interesting risk-return balance. Each period has its own characteristics and a different investment profile. For instance, ancient painting has a slow but solid growth, while contemporary art might have a rapid but risky growth. In sum, funds apportion reduce the risks of investing in art, unlike what occurs with an independent collector, by way of conforming a diversified portfolio. In making investments, Artemundi maintains a diversified portfolio to be held for long-term price appreciation, as well as a limited inventory for short-term trading. Proper market analysis also helps to significantly reduce investment risk through the power of expertise and knowledge.
What’s your final tip for those interested in investing in an art fund for the first time?
As the art market becomes bigger, faster and complex, the potential investor should search for a more institutionalized third-party with proven track record and an impeccable reputation such as Artemundi. Reliable and professional art advisory enables fresh consumers to navigate the murky waters with more confidence. Connoisseurship is developed by seeing as much art as possible, both the good and bad. It involves a tremendous effort to keep moving around the world through the art fairs, auctions, museum and gallery exhibitions to keep up with the market and keep sharpening your connoisseurship. The more you see, the sharper your eye becomes, the deeper your understanding develops and the easier it gets to identify the best trustworthy opportunities. Art connoisseurship eventually becomes not just a profession, but a way of life.
Looking for a reputable art advisory? Contact Artemundi.
Few people can be said to have successfully launched a new category of capital investment. Mr. Lumbreras is one of those few who can put forth such a claim. His rich background in art and finance hails from a lineage of art collectors that started in Spain in 1883. He has served as consultant to selected private collectors, guest lecturer at museums, universities, banks and at leading media...