Art Price Indices: Op Ed

November 16, 2015

Note from the editors: The subject of art investment and art as an alternative asset is of great interest to the regulators creators and collectors. Center for Art Law has published writing on related subjects before and we are delighted to be bringing an opinion on the subject of art indices from a seasoned art dealer and educator, Carole Pinto.

For additional readings on the subject of art markets, visit http://www.hec.edu/Knowledge/Strategy-Management/Micro-economics/The-Art-Market-Understanding-Changes-in-Prices

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By Carole Pinto

The boom in prices of artwork sold at auction since the financial meltdown of 2008 has led to the proliferation of articles written by people who attempt to apply the tools used to interpret the financial markets to the art market.  Much of the data provided by art dealers, advisers, consultants and fund managers, among others, is often used as a means to promote their inventory, while more objective data, such as the Mei Moses Indices and the Art Market Research, do not comprise a broad enough base to reflect significant and data driven movements (meaning in the art market).

A multitude of private equity art funds, including Philip Hoffman Fine Art Fund, The Collectors Fund and the Art Fund Association and a myriad of art advisory firms as well as advisors in the personal banking departments of financial institutions such as Bank of America, Citibank, Deutsche Bank, HSBC, JP Morgan Chase and Goldman Sachs regularly consult with high net worth clients on the advantages of including artwork in the long-term portion of their portfolio, underlining the positive aspects, but often disregarding risk of erosion of asset value over time.  The pleasure of admiring a work of great beauty combined with a potential appreciation in value over a fairly lengthy period of time has to be weighed against the illiquidity of the art market, the possibility of not recuperating the purchase price due to the high cost of getting in and out of the market (commissions of auction houses, for buyers and sellers, on average 25%), the impact that fashion and trends have on the value of a work of art, currency fluctuations and factors such as the geopolitical climate and world economic conditions.

What is the purpose of art market indices? The benefits? What analytical financial data is currently available to the public? One must keep in mind that less than 50% of all artwork sold worldwide is done so publicly, so any market data that is available is drastically skewed because it is based on publicly shared data.  To begin with, it is important to realize that the art market is not one big market, but a series of smaller markets representing over $66 billion in recorded sales annually, according to the most recent Bloomberg Business Report.  It is the largest unregulated market in the world. Contrary to the heavy regulation and transparency of the financial markets, the art market has almost no regulatory oversight. Art assets acquired by funds are not subject to the same level of investor protection measures as securities and other financial instruments. Aside from anti-fraud provisions, auction regulations, cultural property laws, and general consumer protection and contract law, there is little regulation and the art market can be used for money laundering and tax avoidance purposes.

The difficulty of regulating the market lies not only in the resistance of dealers to imposed rules, but also in the fact that works of art are not fungible, and that their value is impossible to calculate against any independent measure at any given point in time.  Two works by the same artist, executed in the same year, with the same subject matter, with comparable dimensions, in the same condition can command vastly different prices due to the quality of the work which unfortunately is not quantifiable.  

There are also major differences between collecting and investing in art – one is a passion and the other profit.  Typically, investors in the stock market are advised to diversify their portfolio in order to mitigate risk, since some stocks prices rise while others tend to underperform.  Even though many art collectors have eclectic tastes, their approach is not to buy a basket of artwork – a few Impressionist paintings, some old Masters, Chinese porcelain, etc.–but to concentrate on a few artists or types of art that appeal to them.  

The increase in sheer wealth of the top .01% of the world’s population in India, China, Russia, and North and South America has created a bifurcation in the market, resulting in a widening spread between ‘blue chip’ artwork by well-known artists and the rest of the market. Many of these active players ‘invest’ in art in the same way they invest in other hard assets such as precious stones and metals, as well as real estate, reducing their exposure to currency and political or economic risk. Exponential growth in the market means a lot more players in the field, with a greater risk for mistakes where provenance, ownership and authenticity are concerned. In addition, there are more middlemen in the market today, leading to a diffusion of responsibility when it comes to authentication of a work of art.

In light of the aforementioned caveats, there are a number of specific factors that have to be taken into careful consideration when contemplating art as an investment vehicle:

Artwork traditionally has to be held for a minimum of 10 to 15 years before realizing potential profits. The notion of flipping art for a quick profit is highly risky and is reserved for a select group of savvy dealers. Additional costs associated with buying art include storage, transportation and insurance, appraisal for tax purposes, and buyer and seller premiums.

The lack of liquidity in the art market makes it difficult to unload a work of art for quick cash. One must keep in mind the high cost of entry and exit from the auction market, with a commission of 25% for both buyer and seller, means a work of art has to increase by at least 50% before profits can be realized. Fashion and trends cause tremendous fluctuations in the valuation of works of art. What was considered ‘hot’ ten years ago might have fallen out of fashion, and collectors have to sometimes wait years before the item they want to sell becomes popular once again. It is difficult to assess the value of a work of art at any point in time given the impossibility of obtaining sales data from an important segment of the market, private dealers. This lack of data (price information is available for less than half of all artwork sold) combined with a lack of transparency of the market impacts the validity of any market data analysis.  

There are a few tools that have been made available to the public that try to analyze trends in the art market. Art indices provide a limited tool, and as such it is important to understand what data they include and what they leave out. Art indices are informal records of prices for a select group of works sold at auction, and are not subject to any kind of external scrutiny or regulation.  As an exercise demonstrating this, one only has to subscribe to any number of companies that compile data obtained from the public market, and carefully read the information pertaining to what the numbers actually reflect.  

Art indices also fail to include works that do not sell at auction, which reflects a number of art works that could exceed 50% of those presented at auction. Indices tend to track only the most successful art sales, and do not take into account artwork that is ‘not considered valuable enough’ to be resold.

The Mei Moses Family of Fine Arts Indices, named after two New York University professors, Jianping Mei and Michael Moses, has high name recognition, a long history and a broad base that covers over 30,000 repeat sales. They publish a World All Art Index as well as seven indices representing different categories of collecting. The information is updated annually, though Mei Moses recently indicated that a semi-annual update for the World Wide Art Index will soon be made available according to online information. Quarterly tracking estimates for these indices based on this year’s results are also available. It is noteworthy that the Mei Moses indices do not take into account transaction costs (shipping, insurance, sales tax, buyer/seller premiums), and they only reflect the prices of artwork that has turned around twice in the marketplace.  The source of information is data from Sotheby’s and Christie’s, but does not include online sales.  Furthermore, access to the Mei Moses indices is subscription based, costing anywhere from $100 to $250 year.

Another source, Art Market Research, which has existed since 1985, publishes 500 indices covering a variety of categories including vintage wine, Old Masters, jewelry, etc. Some of the data is published in the Wall Street Journal, the Financial Times, BusinessWeek and the Economist, but a complete listing is available to online subscribers. Here too, sale prices that result from online purchases are not made available, meaning the data are less representative of the broader market than prior to online transactions. The existence of online sites limits the information available to collectors in their quest for asset valuations, and combined with a growing number of private sales (both by dealers and auction houses playing the role of dealers) means price comparison is becoming more difficult and less meaningful for understanding market trends.

Artnet indices, again only available to subscribers, cover Contemporary, Impressionist and Modern art. Subscribers can also access artist-specific indices or indices devoted to a subset of an artist’s work. Citadel Art Price Index includes the results from seven auction houses, but given the multitude of smaller auction houses around the world, the results appear to reflect a very limited dataset.

Sites such as Art Price and Art Net rarely indicate whether a work of art was offered privately before coming to auction and therefore is not fresh to the market, which puts downward pressure on the price. They do not indicate whether or not a dealer is cornering the market, therefore pushing prices up. It is imperative to know key players in the market in order to understand why certain prices are obtained for specific artworks. Price guarantees made by auction houses to sellers are also not indicated, nor are factors such as the geopolitical climate or world economic conditions, all of which have an impact on the art market.

Historically auction houses and other private entities have maintained indices for internal use, which are not available to the public at large. For example, in the mid 1970’s, Sotheby’s auction house attempted to create such an internal index, which was used as a marketing tool to entice clients to purchase art sold there. Then as now, data available was limited to public sales and sales conducted by Sotheby’s in private transactions.

An integral part of data missing from the indices is how important the aesthetic quality, the intrinsic beauty of a work, is to its valuation. Financial and statistical tools overlook art history–the period in the artist’s life during which a work was created, the social, political and artistic movements that influenced its creation, or factors impacting the artist’s personal life–all of which contribute to the artistic creation and works reception in the marketplace. Those choosing a brand name artist without reference to the quality of the work and advice from dealers and experts in the field are exposing themselves to additional risks.   

In the opinion of this author, art should be purchased for the purpose of pleasing the eye, as food for the soul. The great art collector Paul Mellon once described collecting art as “an investment in pleasure, a treasure for the eye.” Those who believe that price charts and tabulated data alone can serve as a fireproof guideline for investors could benefit from considering art for both its financial and cultural capital.

About the Author: Carole Pinto is a private dealer and art advisor who teaches a course on the Art Market at Hunter College. She is a regular contributor to the Fine Art Connoisseur magazine. Her work experience includes curatorial work at the Metropolitan Museum of Art and Brooklyn Museums, art investment at Sotheby’s, Corporate Finance at Salomon Brothers and consulting at the New York State Council on the Arts.