Art Investment Funds: Models

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This page considers specific fine art investment funds and questions about practice in Japan.

It covers -

introduction
BRPF - questions about the protype investment fund and the BNP Paribas fund
Fernwood & Co - comments on some contemporary funds
Japan - problems with speculative lending, investment and excess during the 1980s Japanese land bubble
elsewhere - funds in India and other countries

     introduction

As Eileen Chanin notes, "investing in art" is not an easy risk-free way to make large amounts of money, any more than "investing in shares" or "investing in property".

Outside of Japan, where the 1980s property bubble fuelled giddy speculation, it has also not proved to be an easy way to raise money. As noted in the preceding page, that is one reason why art investment funds have not proliferated.

Proposals for funds have received considerable media attention but only a handful of publicly identifiable funds have moved from concept to ongoing operation. The British Rail Pension Fund's foray into fine art and other high end collectibles remains an anomaly, an exercise that is much cited but little emulated.

Issues can be illustrated by looking at the fortunes of particular investment exercises.

     the BRPF

Historians have pointed to pre-1900 exercises such as the Peau de L'ours art club, ignoring the failure of Matisse and some German contemporaries in efforts to establish similar schemes. In practice the precursor of the contemporary art investment funds is the British Rail Pension Fund (BRPF), responsible for handling superannuation investments of what was then one of the largest employers in the UK.

In 1974 - amid forecasts of inflation and substantial appreciation in the price of paintings, sculpture, antiques and other auction house fodder such as incunabula - the BPRF trustees decided invest a small portion of the Fund's capital in works of art. That investment would be for what was characterised as the "long term" (ie more than ten years, rather than month by month or weekly trading) and involve purchasing items at auction or from dealers specifically for future sale.

The trustees, drawing on advice from the Fund's managers, justified the £40 million investment as a visionary but realistic diversification of the BRPF portfolio. Sotheby's was retained as the BRPF advisor, a decision that now might provoke some disquiet, given perceptions of potential conflict of interest and criticism by regulators of misbehaviour of the leading auction houses.

In 1980 the Fund announced that it was not making further art purchases, having acquired some 2,500 objects. (Some items, such as a US$105,600 manuscript sold by the Folger Shakespeare Library, were bought after that date to "round out the collection".) Its holdings included Impressionist and Modern paintings, silver, furniture, manuscripts and oriental ceramics. The BRPF progressively liquidated the holdings during the 1980s, reflecting personnel changes among the Fund's managers, rising prices and criticism that investing in art was inappropriate.

Initial sales of some 1,000 items raised an aggregate US$24 million. That represented a return of around 11% per annum, less than received from share trading. However, in 1989 at the height of that decade's art boom the BRPF sold 25 Impressionist and Modern works through Sotheby's, for £34.8 million. That handful of items, such as Monet's 1908 Santa Maria della Salute et le Grand Canal, Venice, accounted for 20% of the Fund's overall sales of £170 million and provided a 20% pa return. The remaining holdings were sold during the next decade, providing an aggregate return of 11.3% compound from 1974 to 1999.

Critics have noted that most items did not provide exceptional returns and that timing was important. Monet's Santa Maria della Salute at £6.1 million provided an excellent return on its 1979 purchase price of £253,000. However comparable Monets did not show major increases in the decade after the 1989 sale and it appears that retention of the overall collection into the 1990s would have produced disappointing returns relative to investment in other areas.

That is consistent with failure of the Chase Art Fund (managed by Chase Art Investors, an arm of Chase Manhattan) to secure its target of US$300 million in 1989 and the disastrous foray into art investment by the BNP Paribas Fund (BNPPF). That fund, under the auspices of the Conseil Investissement Art arm of major French bank BNP Paribas, reportedly lost over 40% of its US$8 million investment in art. The unpleasantness has been attributed to paying too much for works in the collection and failure to accommodate market conditions when planning sales.

     Fernwood & Co

The turn of the millennium saw over 50 proposals for establishment of discrete art investment funds or provision of art investment services to individual clients of major banks.

Those proposals appear to have originated in -

perceptions that it would be easy to replicate the claimed success of the BRPF
art as the "new investment class", of interest to a new generation of wealthy individuals and managers in financial institutions whose sophistication encouraged provision of capital to private equity funds and other investment opportunities beyond traditional bonds, shares and real estate
emulation of hedge funds and media coverage of hedge fund managers as the latest "masters of the universe"

Promotion of funds echoed suggestions that consumers should buy individual works for investment rather than pleasure. One enthusiast thus announced that

singles can use artwork to diversify their investment portfolio while lowering the volatility of traditional securities (stocks, bonds, currencies, derivatives). The long-term performance of your portfolio, enhanced with art-related investments, can be impressive. Further, adding art to your portfolio (instead of buying a Maybach to impress your date) may increase the overall return of your investment portfolio.

Netherlands banking giant ABN Amro foreshadowed establishment of an inhouse fine art funds (and large scale contribution to independent funds) under the umbrella of ABN Amro Holding NV, aimed at institutional and wealthy individual investors. Its plans leveraged the bank's art advisory unit, which provided services to high net worth clients in competition with other financiers (eg the Art Advisory Service formed by Citigroup Private Banking in 1979, Deutsche Bank's service and UBS' service) and the major auction houses (Christie's and Sotheby's for example having expanded into real estate marketing).

Enthusiasm within ABN Amro and competitors such as JP Morgan Chase faded as it became evident that individuals were satisfied with existing services and that institutional investors were wary of proposed independent funds, whether because few funds were operating or because adequate returns were provided by other areas.

ArtVest, launched in 2004 by art dealer Daniella Luxembourg, established offices in New York and London to solicit capital from a small number of wealthy investors, claiming to operate "like an art club".

Competitor Fine Art Fund (FAF), based in London, was established by former Christie's finance director Philip Hoffman and aimed at institutional investors. FAF reportedly planned to secure US$350 million for "blue chip art" and to offer "dividend income" by leasing works from its portfolio. One Hoffman backer commented that "the idea was to capitalize on the dot-com money that was driving up art prices" in 2000. Hoffman indicated in 2006 that FAF's "compound profit on assets bought and sold is forty percent", with most works valued between US$500,000 and US$2 million. One work was "priced at eight million dollars".

The China Fund, headed by former Sotheby's executive Julian Thompson, specialises in oriental art (particularly Chinese ceramics). The Art Collectors Fund, based in Switzerland, reportedly planned to raise US$200 million but subsequently wound that target back to US$50 million.Russian fund Aurora, managed by Vladimir Voronchenko, aimed for US$100 million.

Most proposals appear to have expired because investors were unimpressed by the authors (an ABN Amro consultant sniffed that they were "not professional money people, lacking expertise in both art and money management") and/or the concept. High profile antiquarian map and book dealer Graham Arader for example apparently failed to secure US$200 million for a fund specialising in US paintings, being reported as commenting "the idea is still very foreign to them". He had more tartly claimed

Art dealers have a terrible reputation. Would you rather have your daughter marry a plumber or an art dealer?

Disquiet presumably contributed to - and was reinforced by - the very public demise of New York-based Fernwood Art Investments, founded by Bruce Taub. It was promoted as

the first independent investment adviser to develop a comprehensive array of art-focused investment research, advice, financial products, and, services for sophisticated investors and collectors

and

the first company to provide investors with art-focused investment opportunities, offering two art-focused services; one, art holdings from the fine art market, i.e. Old Masters to Contemporary Art, the other component includes art partnerships, financing galleries, and, art auction deals.

Fernwood indicated that it aimed to raise US$150 million. It gained attention through high profile sponsorship of contemporary art events such as Art Basil Miami and the Brooklyn Museum's Basquiat exhibition, along with awards through the Fernwood Art Foundation to US museums. One visitor to Fernwood's offices on the 35th floor of the Fuller building enthused

You could see all of New York. There was a beautiful library. Contemporary photographs. Everything was so well done, and new, and crisp. They had just had their furniture delivered the week before. And it just seemed like they were on their way to great, great things.

Alas, despite claims that Fernwood would "democratise investment in art" through a "forward looking predictive tool" and partnership with dealers, the specialists left the building in 2005 before the fund took off.

elsewhere

The art investment fund bug has infected other countries, with financial advisers and journalists promoting investment in art per se and hyping proposals for investment funds.

One Indian site features enthusiasm about "Cash for Canvas" -

why should you be interested in something as esoteric as art? Well, you should be because you redeem your reason for your visiting the equity market again and again: the art mart often allows you to make bigger killings and aim for the jackpot of your life. Here is no notional paper game but a physical asset. Unlike a lottery or the casino, it is backed by physical security. If nothing else, you can flaunt it as proof of your having arrived, making a safe landing, with good taste thrown in

Oh for an Indian Max Weber or Thorstein Veblen! One promoter claimed a one-year return of 38.5% net of all costs. Another claimed that its US$22m fund (under the auspices of a leading auction house) grew by 4.1% in the first two months

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