Art and Collectables as Alternative Asset Classes

Vilnius January 2010 Dr.Iain Robertson

Head of Art Business Studies

Sotheby’s Institute of Art

ART

Emotional assets of High Net Worth Individuals (HNWI)

Cap Gemini World Wealth Report (2007)

Cars/Yaughts

Art

Jewellery

Sports

Other Collectables

Travel

The problems with the value of art as an asset class

• Art and antiques are heterogeneous commodities• Art is monopolized by one owner• The price of art reacts to changes in taste

• Art does not have a long-term equilibrium price • The holding and transacting costs for art are very high• Art does not offer a monetary dividend

(Baumol 1986)

Caveats

• Data is based solely on auction house results.

• Survivorship bias. Works Bought In at auction are not recorded.

• Appraisal induced bias. Works of art at auction are estimated above zero and not allowed to sell at below an undisclosed reserve. Works of art are infrequently valued and subject to average price quotes

• The data bases do not calculate the changes in value over time of the individual objects

• Transaction costs are not impounded into final price.

• The art market indices are not investable

Average real returns 1975-2005

• Above trend inflation and growth (9.23%), art does the best

• Below trend inflation and below trend growth (7.54%), art does the worst

• Above trend inflation and below trend growth (-0.85%) art does the worst

• Above trend growth and below trend inflation (0.31%), art performs modestly in

(Barclays Capital, 2005)

Downside / Upside

Downside Protection

• Art market responded positively to extreme events on the stock market (R. Campbell, 2005)

• Art is pro-cyclical but with an approximately 18 month lag in the 1973 and 1987 stock market crashes

Upside Potential

• In bull markets with unexceptional performance

Downside market returns

• The Art Market consistently offers downside protection to the equity market.

• During periods when the S&P 500 Index was down, the Art 100 Index generated superior returns.

• The lowest monthly return by the S&P 500 is -21.54% in October 1987. During that same month, the art market was up +2.86%

Rising interest rates

• During periods of rising interest rates, art significantly outperformed both equity and bonds with lower risk.

• From 1978 to mid 1981, when interest rates rose from 6.70% to 19.10%, the Art 100 Index generated a 22.8% return vs. 15.6% for the S&P 500 and -1.4% for 10 Year Bonds.

• During the most recent period of rising interest rates, from 1999 to mid 2000, the Art 100 Index returned 13.0% vs. 11.4% for the S&P 500 and -0.7% for 10 Year Bonds.

Diversification (1978-2003)

• While the S&P 500 and UK FTSE 100 have strong correlations to each other, Art 100 has consistently low and even negative correlations to domestic and international equity.

• An asset with negative correlation is a hedge asset. Such assets, like art, are particularly effective in reducing a portfolio's total risk.

• In fact, in every period below, art's consistently low correlations to all other asset classes enable art to have a key differentiating characteristic: the lower the correlations and covariances, the lower the total portfolio risk.

Correlation: 1970-2005

» 12% UK Equity» -18% UK Bond» -5% UK Cash» 4% UK Linkers» 36% Commodities» 47% Property

• The correlation remains low when UK and US art markets, taken independently, are measured against US and UK equity markets

• The correlation is not significantly affected during bear and bull markets.

(R.Campbell, 2005)

Correlation Indices Full period: 1976-2009 (Deloitte, 2009) Much higher levels of correlation compared to previous analysis. AAI ranges from 10% over 20 year period to 45% over last two years. Modern and Contemporary is between 52% and 59%. Old Master is 0. Full period is from January 1976-end of March 2009. 20 year data from March 1989, 10 year data from March 1999, 5 year data from

March 2004, 2 yea data from March 2007, and 1 year data is from March 2008.

Art 100 with World Equity US Equity UK Equity

Full period 0.1383 0.1041 0.0800

20 year 0.1305 0.1123 0.1040

10 year 0.2275 0.2102 0.2028

5 year 0.2128 0.2239 0.1602

2 year 0.4574 0.4647 0.4580

1 year 0.4703 0.4709 0.4362

Contemporary

Art 100 with World Equity US Equity UK Equity

Full period - - -

20 year 0.0780 0.0410 0.0358

10 year 0.0737 0.0906 0.0804

5 year 0.1966 0.2498 0.1403

2 year 0.5422 0.5275 0.5504

1 year 0.5248 0.5277 0.4948

Emotional asset correlations

• Art, wine, English coins, flawless diamonds, Stamps, Clocks and watches, Atlases, Books, Jewellery and violins

• Books, watches, clocks and atlases have a high correlation to each other.

• There is a wider differentiation in price movements between art and wine

• Campbell, Koedijk, de Roon. 2008. Art Markets Symposium Maastricht University Chateau St. Gerlach, March 5-6 2008

• In a period of global crisis the benefits of diversification tend to disappear. Also, we can observe an increase in correlation when extreme market movements occur

(P4. Deloitte 2009)

Relative performance

• Recent underperformance of more traditional asset classes - for example, a 23.5% decline in the Dow Jones Industrials, a 37.6% decline in the S&P, and a 67.2% decline in the NASDAQ Composite from December 31, 1999 through December 31 2002

• Over the same period a decline of only 5.3% in the art market (using the Art Market Research Art 100 Index, middle 80% price bracket as a proxy for the art market)

Mei/Moses and S&P 500

12 Month moving averages.Annual Standard Deviation and Annual Average Return

(right) (Jan 1976-March 2009) (Deloitte, 2009)

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%

ASD AARMSCI

MSCI

MSCI US

MSCI UK

Art 100

Old Masters

Euro Impressionism

Modern Art 100

Contemporary Art 100

Performance of art relative to equities:1976-2009

• An increase across all art market categories of 3% on the previous analysis. From 1975-2004 art returned a total for period of 0.51% (6.1% annually)

• Driven by the Contemporary art category which rose 166% in 2007.

• All art categories peaked in October 2008. • Returns for 2008. • 100 index 8%• MSCI -42%

• Returns: January – March 2009• 100 index 0%• MSCI -12%

• Returns: End of March 2009 to Nov 2009 all sectors fell:

• Old Masters: -6% • 100Index -30% • Modern Art -30%• Contemporary Art -22%

(Deloitte 2009)

Portfolio weights (Art 2005) Those average returns after transaction costs would have to increase

considerably today (2009) in order for art to be included in an investment portfolio, because art is longer as good a diversification as it was. (B.C,2005)

• Horizon Risk Av Rtn Max Rtn Min • 5 year 0% 1.2% 5.8% 8.0%

3.0%

• 10 year 10% 0.6% 5.3% 6.0% 4.4%

• 20 year 10% 1.1% 5.4% 7.0% 3.5%

The British Rail Pension Fund 1970-1990

• Category Sold Return

• English silver Nov 1987 Cash IRR 15.7% pa

• Japanese prints Jul 1988 3x total purchase cost

• Oceanic art Jul 1988 Return below infla rate

• Bks and Manu Sep 1988 Cash IRR 8.7% pa

• Contin Porcelain Oct 1988 Cash IRR 11.4% pa

• Contin silver Nov 1988 Cash IRR 14.1% pa

• French furniture Nov 1988 Cash IRR 11.6% pa

• Imp & Mod art Apr 1999 Cash IRR 21.3% pa

• Chinese Porcelain May 1989 Cash IRR 15.4% pa

• African Tribal art Jul 1989 Cash IRR 15.8% pa

• Gold boxes and Vertu May 1990 Cash IRR 12.9% pa

• 19th c Contin Pictures Jun 1990 Cash IRR 14.6% pa

• 19th c Victorian Pictures Jun 1990 Cash IRR 17.6% pa

• IRR = The time-weighted cash return. Eckstein, J. in The Art Business, 2007 (Chong/Robertson)

The BRPF 1974-2000 data in summary

• Buying from 1974-1980 (2,400 items)

• £40 million

• 76% of portfolio in seven key sectors: Old Master paintings, drawings, Impressionists, Chinese art, Books and manuscripts, Antiquities, Medieval / Renaissance works

• By 2000 total income from sales £168m

• Cash IRR on sales 11.3% or 4.0% pa in real terms

• Last sales in late nineties (0.5% pa – 1.5% pa above inflation)

INVESTABLE ART / MODERNS & IMPRESSIONISTS

Vincent van Gogh (1853-1890)

• Portrait of Dr Gachet (1890)

• 66cms x 57cms

• $82.5 million

• (est: $40-50 million)

• Christie’s New York 15th May1990

• Ist version: 2nd version in Musee D’Orsay

• Sold for 300 francs in 1897 by Van Gogh sister in law

• Acquired by Goring

• Put up by the American Kramarsky family and acquired by Ryoei Saito

• Later sales shrouded in mystery

Auguste Renoir (1841-1919)

• Au Moulin de la Galette (1876)

• $78.1million

• 78cms x 114cms

• ($40-50million)

• Larger version in Musee D’Orsay

• Sold by widow of John Hay Whitney for $78million to Ryoei Saito in 1990 at Sotheby’s New York

Claude Monet (1840-1926)Paul Cezanne (1839-1906)

0

50

100

150

200

250

300

Monetindex

0

50

100

150

200

250

Cezanne index

Auguste Renoir (1841-1919)Pablo Picasso (1881-1973)

0

20

40

60

80

100

120

140

160

180

RenoirIndex

0

50

100

150

200

250

PicassoIndex

Vincent van Gogh (1853-1890)

• Portrait de l’artist sans barbe (1889)

• 41cms x 32.5cms

• $71.5 million

• Christie’s New York, 1998

Pablo Picasso (1881-1973)

• Femme aux bras croises (1901-1902)

• 81.5cms x 58.5cms

• $55million

• Est: $20-30million • Christie’s New York 2000

Pablo Picasso (1881-1973)

• Garcon a la pipe (1905)

• 99.7-81cms

• $104million

• Consigned by the John Hay Whitney collection

• Sotheby’s, New York 2004

Picasso’s turnover 2004-2008

0

50

100

150

200

250

300

350

2004 2005 2006 2007 2008

millions $

INVESTABLE ART / CHINESE CERAMICS / GUAN, YUAN DYNASTY

1975/6 355,000 1.31m

130,000 460,000

1988/9 1.75m

385,000 616,000

992,000 1.67m

1993/4 1.75m

971,000 1.3m

616,000

1.16m 1.59m

2005/6 27.6m 5.2m 17.2m 12.8m 6.05m 4.7m 15.6m

US$ Price in Black

2006 Equivalent $ Price in Red

Yuan blue and white 1-6 All prices adjusted

• 1. Minor crack in side – CL05 $27.6m

• 2. Crack in neck, firing cracks- STP06 $5.2m

• 3. Restoration on neck-long cracks- SL75 $1.31m

• 4. Restoration on rim, long cracks- SHK $1.3m

• 5. Large restoration on rim (polished) SHK $6.05m

• 6. Perfect condition – SNY06 $4.72m

Basket Index 1992-2006

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50

100

150

200

250

300

350

400

1990 1995 2000 2005 2010

Year

Ind

ex

Basket

GeneralBasket

MasterpieceBasket

INVESTABLE ART / CONTEMPORARY

ZHANG Xiaogang, Family and friends in 1999 when his canvases were selling from $20,000-$30,000

Chen Yifei 1946-2005

‘Four Graces’Guardian, Beijing (Oct 1997)2.3million RMB($278,985)

Artists price Work of art Auction house

Hirst, Damien £ 9.2million Golden Calf (2008) 15/09/08 SL

Hirst, Damien £ 8.5million The Kingdom (2008) 15/09/08 SL

Basquiat J.M. $12million The Boxer(1982) 12/11/08 CNY

Hirst, Damien £6.6million Fragments of Paradise (2008)

15/09/08 SL

Basquiat J.M. £4.5million Untitled (1982/3) 01/07/08 SL

Prince, Richard £3.8million Overseas Nurse (2002) 01/07/08 SL

Chen Yifei 36.1million RMB

3.8million Euros

29/05/09 Poly Int Auction Co

Basquiat, J.M. $5.1million Master (1982) 13/05/09 C/NY

Currin, John $4.8million Nice ‘N Easy (1999) 05/14/08 S/NY

Prince, Richard £2.8million Dude Ranch Nurse 2

2002-2003

19/10/08 C/L

ZHANG Xiaogang b. 1958

• Contemporary Art Asia: China Japan Korea

(March 31, 2006 NY)

• LOT 119 BLOODLINE SERIES: COMRADE NO. 120

• 74 3/4 by 59 in.//190 by 150 cm.• signed in Chinese and dated 1998• oil on canvas

Est. $250,000—$350,000 HP + BP:   $979,200

• WORLD RECORD FOR THE ARTIST

Chen Yifei (1946-2005) Eulogy of the Yellow River

143.5cmsx297cmsGuardian, Beijing2007 $4,694,400

Contemporary art index 1998- July 2009

0

50

100

150

200

250

98 2000 2002 2004 2006 2008

dateline

dateline

The facts about the contemporary art index

• 85% rise from January 2002 – January 2008

• In 2005 contemporary art represented 8% of works above $100,000. In 2008 it was 19.5%

• Works sold above Euros 1 million increased by 620% between 2005 and 2006

• Between July 2005 and June 2006, 7 artists generated 18 auction results above this line.

• In 2008 25 artists and 120 sales exceed Euros 1 million

• In first half 2009 19 artists achieved 72 sales over Euros 1 million

under 5000 E

5000-49,999 E

50,000-499,999 E

500,000 E

Contemporary art sold at auction according to price range in 2008

Artist

2008

nationality Turnover in Euros

Lots HP in Euros

Jeff Koons. 1955 US 81,320,082 91 14,536,000

J.M Basquiat. 1960-1988

US 63,678,955 82 7,747,060

Damien Hirst. 1965 UK 53,618,722 233 6,015,660

Richard Prince 1949 US 38,779,852 105 4,268,880

Zhang Xiaogang 1958

CN 38,596,196 109 3,449,698

Zeng Fanzhi 1964 CN 33,247,544 75 5,452,460

Yue Minjun 1962 CN 33,189,462 63 3,906,239

Takashi Murakami 1962

Japan 18,551,301 189 8,706,150

Wang Guangyi 1957 CN 14,018,995 78 2,578,140

Liu Xiaodong 1963 CN 13,073,121 31` 4,663,950

Cai Guoqiang 1957 CN 12,098,050 60 5,721,540

Yan Pei-ming 1960 CN 11,903,476 46 1,112,320

Chen Yifei 1946-2005

CN 11,597,274 57 2,033,900

Fang Lijun 1963 CN 11,469,122 43 2,469,240

Liu Ye CN 10,599,527 40 859,080

The Zhang Xiaogang, Yue Min-jun and Fang Lijun markets soften at Sotheby’s and Christie’s in London in 2008

col 1, NS col 2 Res, col 3, LE, col 4 ME, col 5 AE

Zhang Xiao-gang (1958)

• Bloodline: Big Family 2• 180x230cms• Christie’s Hong Kong• 30th November 2008• HK$ 23million• $2,346,000

• Big family 3 sold for

• Euros 3.44m in April 2008

HK Modern and Contemporary Asian Art sales, October 2008

• Only 40% of Asian contemporary art sold at Sotheby’s 4th Oct sale in HK with major works by:

• Zhang Xiaogang, • Zeng Fanzhi• Yue Minjun• Fang Lijun ……… failing to sell

• The new markets were for emigree Chinese artists like • Cai Guo Qiang and South East Asians like I Nyoman Masriadi

Artist

2009

nationality Turnover in Euros

Lots HP in Euros

Damien Hirst 1965 UK 134,738, 980 381 11,606,720

J.M Basquiat. 1960-1988

US 31,711,998 47 9,450,000

Richard Prince 1949 US 24,259,378 61 4,763,395

Jeff Koons 1955 US 23,029,764 110 3,525,600

Peter Doig 1959 UK (19) 12,286,070 41 3,116,400

Zeng Fanzhi 1964 CN 11,079,290 42 1,044,560

Zhang Xiaogang 1958

CN 10,063,748 39 2,346,000

Takashi Murakami 1962

Japan 8,122,040 271 2,362,500

Anish Kapoor 1954 UK/India (18) 6,795,240 31 2,173,220

Chen Yifei 1946-2005

CN 6,658,129 21` 3,815,770

Yue Minjun 1962 CN 5,863,104 33 1,018,000

Subodh Gupta 1964 India (24) 5,770,707 20 679,582

Anthony Gormley 1950

UK (140) 4,795,667 20 2,552,270

Zhou Chunya 1955 CN (17) 4,493,420 51 641,700

Cai Guoqiang 1957 CN 4,419,905 37 1,395,750

The state of the Chinese contemporary art market and its young blood at the end of 2009

China

US

UK

France

Russia

Korea

Japan

Others

Tobias Meyer in the process of selling Peter Doig’s ‘White Canoe’ for £5.7million (est: £800-£1.2) in 2007

The rise and rise of Peter Doig (b.1959)

• 1994: $1,000 a piece

• 1999: Doig exhibited beside Chris Ofili at Gavin Brown gallery – Top price $172,245

• 2000: Collector, Charles Saatchi buys Doig and price leaps to $400,000

• 2004: Prices stall – no work at auction breaks $100,000

And rise of Peter Doig

• 2005: Auction prices soar. MoMA commissions Doig and a new auction record of $650,000 achieved

• 2006: Doig’s work is exhibited at the Whitney. Sotheby’s bought six other works by Peter Doig, in addition to ‘White Canoe’ from Saatchi prior to the sale for €9million

• 2007: White canoe sells at Sotheby’s London for £5.7million against an estimate of $1.5m-2.5m.

• 2008: Doig enjoys a one person show at the Tate

Sotheby’s made back this amount after the sale of ‘White Canoe’Saatchi held onto the best Doig works and the inventory value rose accordingly

Peter Doig: Night Playground (1997-1998) £2.65million, against a high estimate of £2million (Highest price since White Canoe)

Christie’s< New York November 2009

Peter Doig: Night Fishing (1993) 200cmsx250cms $4.1 million(£2,697,800). Est: $3-4million. Christie’s New York May 2009

How Record prices affect future estimates

• Van Gogh ‘Deux Crabes’ £5.57million

• Average estimate in 2009: £2.18million• Consistently valued at between £1.75 and £4million• Tendil,L 2009

• A ‘flat Ru dish’ (17.5cms wide) • with some damage sold 1992 $1.54million

(adj: $2.29million)• Estimate in 2005 $4.5million• Robertson/Chong 2008

Fine wines

• Wines with a Parker index of over 90 are considered an investment

• Fine wines have fallen in value in line with declining City and wall Street bonuses

• Berry Bros and Rudd have reduced the value of their wine

by up to 40% from last year

Bordeaux and the grands crus classes – premier – cinquieme the 1855 Official Classification of Bordeaux

Pomerol St-Emilion GravesMedocSauternesTwo subs

Mouton –Rothschild (1973)First growth Lafite, Mouton,

Margaux, Haut-Brion and Latour SuperTuscans

Late 1980s

CalifornianCult wines

Napa Valley

Burgundy

How to invest in fine wines

• Wine is classified by IR as a ‘Wasting Asset’. No Capital Gains.• Buy:

• 1. En primeur (futures) receive 18months later (cheapest price)• 2. Two or three years after vintage• 3. Ten years before it is ready to drink

• Sauternes last of investment wines

• Store in bonded warehouse. (purchase is ex-VAT and ex-UK duty)

Ten tips to buying

• Deal with reputable merchants• Buy in bond• Buy unmixed sealed cases in original wood• Invest over 5 years• Buy as close to opening price as possible• Invest at least £5,000• Do not just buy big names• Listen to wine merchant• Ensure that you know provenance and storage history• Take out insurance to cover market price of your wine

Between 1988 and Summer 2008 (peak of market) the index had risen 183%

• Post Bear Sterns the top Bordeaux first growths from the top five estates were selling at $10,000 a case

• A wine like Petrus was making £45,000 a case

• The 2000 Lafite returned 437% in 2008

Plunging markets

• Between June and December liv-ex plunged 22%

• Petrus fell to $30,000 a case

• First growths are now around £6,000 a case

• This spring the en-primeur (last years vintage before bottling) will be priced. 2008 unlike 2005 is not an investment grade vintage.

• The Euro is also strong

• Has the bottom been reached? (Liv-Ex up 1% in Jan). Berry Bros sales good in January.

Growth in demand for wine from HK and China

• Duty on wine in Hong Kong was abolished last year

• Wine imports rose 88% to HK

• 360% since 2005 into China

Bibliography

• Campbell,R.2005. Art as an Alternative Asset Class. University of Maastricht.

• Campbell,R. 2004. The ‘Art’ of Portfolio Diversification. University of Maastricht.

• Campbell, R and Picinati di Torcello, A. 2009. Performance and correlation of art as an alternative asset class during the current financial crisis. Deloitte Research Report.

• Campbell,R, Koedijk, K, de Roon,F 2008. Emotional Assets. Maastricht.

• Kochugovindan.S. 2005. Stocks, bonds…or art? Barclays Capital.

• London Development Agency. 2008.The Cultural Audit .London Development Report LDA.

• McAndrew, C. 2008. The European Fine Art Fair Report. TEFAF.

• Robertson,I.A. 2005. The Current and future value of art. (pps 229-259) Understanding International Art Markets and Management. (Routledge)

• Robertson,I.A. 2008. Price Before Value. (pps 29-54) The Art Business (Routledge)

Art data sites

• ArtFacts German• Art Price French• Art Net British• Art Market Report British• Mei/Moses (Beautiful Asset Management) American• Artron Chinese• Saffron Indian