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Book review: Art as an Investment?

Three weeks ago, we brought you the first in two part series of a review on the book, Art as an Alternative Asset?
Survey of Comparative Assets, written by market expert Melanie Gerlis. In this week’s concluding episode, we will start off with a brief summary of Gerlis’ views about the risks of art in comparison with several other assets like gold, property, wine and luxury goods.

She asserts, “Art has no intrinsic worth but unlike gold, is a market comprised of unique objects rather than supporting a product that can be commoditised.” She also posits that like property, it is a heterogeneous good, though property has an actual and economic utility. In the same vein, Gerlis writes that the luxury— goods industry requires confidence to build demand for its products, but unlike the art market, now has a massmarket audience to support harder times.

Crucially, she points out that depending on several factors outside the control of the investor, art can be a great hedge against inflation and a store of wealth and offers great influence when compared to other pedestrian of art include the aesthetic experience, as well as VIP access to exclusive social events—all of which are very real non-economic returns.

However, most investment decisions are based on an asset’s worth in relation to its price, and neither can be pinned down in the elusive art market. In spite of this, art as an investment portfolio seems to defy expert opinion, largely due to issues of transparency and regulation.

In her book, Gerlis also examines issues relating to the scant data available on the sales of art and the inconsistency of art indices, the limitations of art and wine funds, the exuberant costs of buying, selling and owning art, and the varying influences of the auction room including low capability of bidders.

Crucially, the author observes that it is the dealers who have the most information in the art market. They determine the prices; not the investors, who remain spectators. Significantly she highlights the fact that advances in technology and globalization only serve to force an increase in information flow which ironically is inimical to the art market, which thrives on an asymmetry of information. “Here, worth and price are known only to a few. “

Auction houses do not offer a level playing field as it is quite common for dealers to bid up work by artists they are party guarantors who bid up works in which they hold financial requests. She describes it as ‘a market that thrives on asymmetry of information’ and that ‘there is a large body of powerful players in whose interest it is to preserve the
opacity.’ Melanie Gerlis concludes that the lack of verifiable and meaningful data continue to underpin the art market and its illiquid status, warning collectors not to view art purely as an investment.

In the past, time was once an important leveler significantly, Gerlis points out that the investment strategy to buy art to hold for a generation is no longer tenable especially with regards to contemporary art. She continues that the market for investment grade art by deceased artists is dwindling and increasingly out of the reach of museums.

Perhaps a justification for significant holdings in art is based on its relationship with other assets in a portfolio. This is a core tenet of Modern Portfolio Theory (MPT) a term coined by Nobel Prize-winning professor, Harry Markowitz, and which mathematically underpins asset investment today. Markowitz has demonstrated that the best performing portfolio of assets is one that is diversified with both risk and  reward balanced out.

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