Table of Contents

• How Investing in Fine Art Works 

• Fine Art Investing: Risk & Reward 

• Is Now the Time for Fine Art?

Good morning everybody. CJ here. I hope you are enjoying your weekend whewrever you are all over the world.

Today I will be talking about fine Art as an acid class and as an alternative investment. My personal story with fine art starts 45 years ago when my mother would regularly go to the Park Bernet (now Sothebys) auction house in New York City to teach herself about fine art, furniture and design. She quickly learned that fine art, any type, was as much about value and worth as it was about beauty and aesthetic. So let’s dive into Fine Art as an Alternative Investment.

Artwork can look great on your wall – but could it also look great in your portfolio? Larry Gagosian, biggest art dealer in the world once said, “art is money on the wall.” And what he meant is to reinforce its status as an excellent asset to be included in any diversified investment portfolio. It is one of the best assets to preserve (and to grow) wealth in the history of the world.

The uber-wealthy have been investing in fine art for for decades; check out these collectors and their art portfolio value:

…but it’s only in recent years that this asset class has become accessible to everyday investors.

In fact, accessibility (or the lack thereof) was a prime motivator in creating our Noyack Fine Art.01 alternative investment fund, which features just a $500 minimum investment.

Most fine art investments don’t generate income, although there will be funds in the near future that will generate income from lending to collectors. Even so, there’s enormous return potential in the appreciating value of artwork itself. 

Take the example of The Red Vineyard by Vincent Van Gogh.

While Van Gogh is known today as one of the greatest painters of all time, The Red Vineyard is the only painting he managed to sell during his lifetime – for 400 francs, a price equivalent to around $3,000 in today’s money.

But 17 years later, the buyer (an art collector named Anna Bosch) managed to flip the painting for 10,000 francs, resulting in an annualized return of almost 21%. 

Today, Van Goghs easily sell for tens of millions of dollars. 

While The Red Vineyard is currently held at a museum in Moscow, the painting’s story demonstrates the astounding potential of a small investment in the right work. 

In this edition of Noyack Wealth Weekly, I’m going to break down the basics of investing in fine art, taking a look at:

• Why auctions aren’t the best way to buy art

• The rewards (and risks!) of investing in art

• And why now might be the right time to explore art investing

How Investing in Fine Art Works 

If you picture what investing in fine art looks like, you might imagine an auction house filled with bidders competing to buy different works. 

Bidding at auctions is definitely one way to start investing in art – but if you do so, you’ll probably end up overpaying. 

Here’s why: artwork really has two prices, depending on who you buy it from:

Primary Market: This is where an artwork is sold for the first time, often through galleries that represent the artist. Collectors can also buy directly from artists or through advisors, supporting the creators directly. This is always the best price when an artist is in high demand. Access to primary prices from the artist or their gallery is essential for successful fine art investing.

Secondary Market: This involves reselling artwork, influenced by factors like previous prices and provenance. Methods include auctions, dealer consignments, and private sales.

As you might expect, secondary prices tend to be significantly higher than primary prices.

Not only does bidding tend to drive up prices to unreasonable levels (a phenomenon known as the winner’s curse), but whoever is selling the piece wants to earn a profit themselves – meaning they’re usually unwilling to part with the work for less than they paid on the primary market.

But primary markets have an access problem…

While you can often get better deals by buying directly from artists, the primary art market has its own challenges—mainly access. Gallerists act as gatekeepers, deciding who gets to buy these artworks to keep prices stable and fair. This control helps ensure the artist's work doesn't fluctuate wildly in value, which can be good for long-term investments.

For many new collectors and investors, gaining access to these sought-after pieces can be tough without the right connections. As a result, they turn to auctions, where artworks are sold at higher prices, and buyers have to pay an extra 22% auction fee. This makes it harder to see a good return on investment.

Buying art at auction should be a last resort, more for the love of art than for investment success. This is where primary market fine art funds come in handy. Even though you might pay management fees, these funds give you access to better-priced artworks, leading to better returns on your investments. This approach is more effective than platforms like Masterworks, which often buy art at higher secondary market prices, making it harder to see profitable returns.

THE PRIMARY ART MARKET IS NOT A FREE MARKET.

Fine Art Investing: Risk & Reward 

Don’t be fooled by stereotypes like the starving artist. There’s plenty of money to be made in the arts – you just need to know where to look.

According to the AMR All Art Index, fine art has generated returns of just under 9% per year since 2000. 

In comparison, the S&P 500 has seen total annualized returns of about 7.5% over that timeframe. 

Certain subsets of the art market, meanwhile, have performed even better. 

The current popularity of contemporary art, like the works of Jean-Michel Basquiat, has led to double-digit returns for this category in the past few years.

And while high returns are definitely a big draw, investing in art comes with another crucial benefit – diversification.

Although it’s true that art’s value is influenced by broader economic factors, this asset class remains structurally uncorrelated with traditional investments like stocks or bonds.

Contemporary art, for instance, registered a correlation of just .06 with U.S. stocks between 1995 and 2020 - almost nothing.

As mentioned above, the low correlation between contemporary art and other asset classes is a result of the underlying driving forces of art market appreciation, which are growth in the purchasing power of the ultra-high-net-worth community, the diminishing supply of available artwork, and the international marketability of the asset.

For example, annual performance by select years highlights the lack of correlation between art and traditional asset classes. As discussed above, the driving forces of art market value are somewhat unique to the asset class, allowing our prices to perform well in years like 2008 and 2018 when most traditional asset classes lost money

Additionally, funds offer better opportunities for diversification within the art asset class compared to buying fractional shares of individual artworks. Investing in a fund allows you to spread your investment across multiple pieces, reducing the risk. If one artwork doesn't perform well, it doesn't significantly impact your overall investment.

In contrast, platforms like Masterworks focus on fractional ownership of single artworks, which requires luck to pick the right piece that will appreciate. If that one artwork fails, your entire investment could be lost. Diversification in a fund minimizes this risk and increases the likelihood of positive returns.

But fine art is not without risks…

Despite high returns and low correlation, risks do remain in the idiosyncratic art market:

• Poor liquidity. If you purchase individual pieces, it can be hard to resell them when the time comes. While investing in funds can improve this, share redemption isn’t always easy. 

• Murky data. Because artwork isn’t traded on an exchange, it can be challenging to determine how the art market is performing – let alone your individual investments.

• Subjective value. While the value of all financial assets is subjective to some extent, art is a unique case. A great painting to one investor can be an ugly mess to another.

Is Now the Time for Fine Art?

The art market is extremely stable which means attempting to wait for a better tie to buy aka market timing, will not lead to any benefit and may cost you the time needed to achieve investment appreciation

Price stability and of course, the accompanying low volatility are the two primary reasons fine art is extremmely suitable for long term family financial planning As a tangible asset with a history of appreciating value, it not only enhances portfolio diversification but also aligns well with long-term, goal-based investing.

Here are a few more reasons there’s never a better time than the present to buy a vaulable artwork as my Mother always said:

• Inflation risks. Because artwork is a physical asset, its value tends to appreciate along with broader prices. For that reason, fine art is a historically strong performer during inflationary periods.  

• Rise of the global rich. The number of global millionaires jumped by 5.1% last year. More global wealth translates into more demand for the finer things in life – like art.

• Shifting artistic taste. The art market is currently undergoing a seismic shift in taste, with works created by artists from underrepresented communities increasingly centered in galleries. Changes like this create opportunities for investors with well-positioned portfolios.

As you consider investing in fine art, I want to invite you to explore our Noyack Fine Art.01 fund, which is building a thematically focused portfolio in direct collaboration with artists.

And as a Reg CF fund, we’re open to all investors, not just the wealthy. This is why our tagline is AccessGranted™

Curious about learning more? Send an email to Jovan Santos at [email protected]  and let’s set up a meeting!

📺 WHAT WE'RE WATCHING

In this brief video from the Wall Street Journal, a specialist from auction house Christie’s speaks to some of the finer details of investing in art, including the importance of buying pieces you love.

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👂 WHAT WE’RE LISTENING TO

This episode of Motley Fool podcast Rule Breaker Investing interviews two experienced gallerists, exploring the importance of trends and how to discover hidden value.

Motley Fool: Investing in Art with Tonya Turner Carroll and Michael Carroll

📖 WHAT WE’RE READING

The Art Market 2024 presents the findings of research on the global art and antiques market in 2023 created by Dr. Clare McAndrews

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