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musical instruments and other exotica
This page offers a perspective on art investment funds by
considering investment in musical instruments, Roman coins
and other exotica.
It covers -
introduction
It was perhaps inevitable that other cultural commodities
have attracted the interest of fund promoters, as in principle
there is little difference between a Ming vase or Rothko canvas
and a Guarneri cello, a unique Athenian gold coin or the ruby
slippers from The Wizard of Oz (US$666,000 in 2000).
All are objects of desire that are perceived as likely to
appreciate in value and to be saleable to a global audience
in a way that reaps substantial rewards for both the investor
and the fund manager.
In practice although exceptional coins, musical instruments,
have increased in value - and for a fortunate few have outpaced
basic stock indices, although not all shares - the past thirty
years have not seen the emergence of a large number of funds
that specialise in trading antiquities, 'old master' musical
instruments, classic cars, film memorabilia or similar artefacts.
instruments
Sales of particular items, such as the US$2.08 million paid
for John Lennon's upright Steinway piano, have gained media
attention but have not resulted in establishment of funds
that are run by professional managers and that attract substantial
capital from insurance companies, pension funds, institutions
and wealthy individuals seeking an alternative to investment
in real estate, hedge funds, bonds or shares.
Questions about the depth of the market (few players, few
sources of independent expertise, little definitive data about
trades) and liquidity mean that investment in musical instruments
is likely to remain a curiosity rather than a meaningful rival
to investment in financial instruments.
Prices paid at auction and in private sales for exceptional
instruments - in particular violins and cellos - have increased
sunstantially over the past forty years.
One observer thus noted that maestro Ruggiero Ricci for example
bought his Guarneri del Gesù violin for around US$35,000
in 1957 and sold it for US$3m in 1999. (Investing that US$35,000
in IBM or Xerox stock rather in the S&P 500 would of course
have produced a greater return, albeit less pleasure to the
ears of listeners.)
That increase has been attributed to the interaction of -
- scarcity
- Guarneri, Stradivari and their peers only made so many
instruments
- increased
demand - journalists and promoters for example make much
of supposed demand from China, although that nation does
not appear to have acquired 'old master' instruments on
a large scale
- status
- in some circles owning a unique instrument confers greater
mana than owning yet another yacht, sportscar or island
- perceptions
that prices will continue to increase and indeed soar.
It
has been reflected in media coverage that focuses on prices
received for exceptional items rather than all 'old master'
instruments, partly because some items are appreciating much
faster than others and partly because there is little independent
information about trade in items not associated with particular
masters.
Advocates of investment in instruments
thus typically point to sales of items from the Guarneri,
Amati and Stradivari family workshops, for example -
'Lady
Tennant' Stradivari violin - US$2.03m (2005)
'Kreutzer' Stradivari violin - US$1.58m (1998)
'Mendelssohn' Stradivari violin - US$1.78m (1990)
'Bonjour'
Stradivari cello - US$1.03m (1999)
One
US fund promoter announced that
For
the last forty years, the value of great violins has increased
dramatically. Being that they are 'tools of the trade',
they are not prone to the fluctuation experienced in the
fine arts market. This consistency makes the purchase of
great instruments historically one of the most secure of
art investments. Moreover, the use of one of these classic
treasures can change the course of a career. We encourage
individual and institutional investors to explore including
stringed musical instruments as a separate asset class in
investment portfolios to preserve the purchasing power of
scarce capital ...
A conservative estimate of the annual appreciation of a
great violin used to be between 5% and 10%. However, already
starting in the late 1970's, due to the globalization of
Western economies, the influence and activities of foreign
organizations and individuals in local markets have caused
violin prices to rise more rapidly. There has been a steady
increase in the rate of appreciation of great instruments.
Since examples set the standard in the market, Machold Rare
Violins looks to the sales prices of extraordinary violins
to evaluate the current rate of increase. Today, we put
the average annual percentage of appreciation between 10%
and 15%
In
responding to the question "Why should someone consider
an investment in a rare stringed instrument as a part of their
investment activities?" it argued -
-
Insurance. An investment in a rare stringed instrument can
be thought of as an insurance policy whose benefits include
a greater likelihood of capital value maintenance. The performance
return is likely to have a low correlation with other known
financial instruments such as stocks, bonds, gold, currency
or real estate.
-
Diversification. Investors currently investing in stocks,
bonds and real estate can achieve immediate diversification
of owned assets with the purchase of a portfolio of rare
stringed instruments without compromising financial returns.
-
Financial Rewards. The potential financial returns of rare
stringed instruments are compelling.
-
Social responsibility. Investment in quality rare stringed
musical instruments can encourage the development of musical
talent and finer cultural art by providing talented musicians
with access to otherwise prohibitively expensive instruments.
Such investments are socially responsible since they help
to ensure that rare stringed musical instruments remain
in active performance and accessible for public appreciation.
-
Insurability. Unlike stocks and bonds, investments in rare
stringed musical instruments are insured for their value
against loss caused by damage, fire, theft or destruction.
Insurance protection of rare stringed musical instruments
is similar to the protection provided on commercial and
residential real estate. However, insurance covers full
value of musical instruments while in real estate situations
land is often not insured. Generally, the par value of stocks
and bonds cannot be insured
In practice things are not quite that simple. There is little
independent evidence of a real investment market, particularly
in the short term. Tax regimes vary considerably but it appears
that individual investors are making most money by holding
instruments for around ten years and then donating them to
an institution, gaining both kudos as a visionary arts patron
and cashing in on appreciation in price of the instrument
over that period.
Appreciation has not been standard. A 1999 study by Kristin
Suess suggested that investment in violins during 1960 would
have outpaced Treasury bonds and the S&P 500 by 1996.
As noted above, prescient investment in particular high tech
stocks would have generated better returns and major gains
are now more difficult because instruments are no longer under-valued.
High prices mean that only the most commercially successful
artists can afford to buy particular instruments. Many have
accordingly relied, as in the past, on items loaned by individual
patrons, foundations, orchestras and even government 'instrument
banks'. Performers typically pay insurance (usually around
1-2% of the item's value) and maintenance. They are usually
also required to undertake a certain number of public/private
performances. Use of the instrument is essentially at the
owner's discretion.
rare coins
Some sense of potential problems with exotica is provided
by unhappiness in the rare coin sector.
During 1986 Merrill Lynch, the largest US brokerage firm,
established the Athena Fund in conjunction with high profile
Beverly Hills dealer Numismatic Fine Arts. That investment
vehicle, subsequently badged as Athena Fund I, was promoted
as a limited partnership fund for "managed investments
in ancient coins and antiquities". It raised some US$7.3
million and, amid upbeat media coverage, was followed in 1988
by the Athena Fund II (deploying some US$30 million).
Emulation saw competitor Kidder, Peabody offer shares in a
similar fund centred on rare US coins, with claims that a
family of Kidder funds would draw in over US $40 million capital.
Kidder envisaged that its fund would be able to
make
large purchases without having to delay in order to raise
the necessary sums and will have financial resources of
a magnitude to attract numerous proposals for major transactions
and
that like the Merrill Lynch funds it would have a "market-making
capacity" through active trading in the short term to
support a longer "buy and hold strategy".
The Athena funds were promoted as multi-layered, with substantial
returns to investors mid-way through a seven or eight year
period and at the end of that time. During the initial three
years fund managers would emphasise short-term trading, purchasing
items for sale within two years. The aim was to generate profits
for immediate distribution to the investors. During the fourth
year, badged as a "transition period", the remaining
"trading assets" would be sold. The residual assets
would be sold the remaining three years: the "liquidation
period." That sale would include "major public auctions,
direct public sales and private transactions". After
two and a half years the managers reported a 36% net gain.
However, confidence was shaken by claims of mismanagement.
Items valued at US$3.3 million disappeared from one fund,
with an investigation by the FBI, and valuations were contested.
Manager Bruce McNall, whose misadventures are described in
his Fun While it Lasted: My Rise and Fall in the Land
of Fame & Fortune (New York: Hyperion 2003), filed
for bankruptcy owing a reported US$121 million to Credit Lyonnais,
US$40 million to the Bank of America and US$37 million to
Merrill Lynch. Faced by class action on the part of outraged
investors, Merrill offered some US$30 million compensation.
Kidder shuttered its fund; competitor Shearson Lehman Hutton
downplayed marketing of coins to 3 million customers through
its 11,000 brokers.
Undeterred, Avarae Global Coins listed on the UK version of
Nasdaq in 2006 as a publicly-quoted coin investment fund managed
by managed by Noble Investments (UK) plc, a UK coin dealer.
It gained £5.4 million to achieve long term capital
growth through purchase, holding and sale of high quality
and rare coins. It will purchase coins for short-term trading
opportunities and in the longer retention. The fund managers
receive an annual fee of 1.5% plus a performance fee of 20%
on returns greater than 10%. Merrill Lynch had a 14.1% stake
in Avarae as of late 2006, acquired for £1.1 million.
The Averae portfolio comprised over 600 coins at a cost of
some £2.5 million. The fund is domiciled in the Isle
of Man for tax minimisation.
Unhappiness with bits of shiny metal was evident after 2001,
after the Ohio Bureau of Workers' Compensation, bravely invested
US$50 million in rare coins chosen by Thomas Noe Inc. That
investment looked less precient after the manager was embroiled
in controversy over money laundering (resulting in a federal
prison sentence), over US$3 million of coins disappeared and
Noe was ordered to repay US$13.7 million.
other items
Given the prices paid for furniture, stamps, 'classic cars'
and contemporary memorabilia
(and even murderabilia)
such as Audrey Hepburn's iconic little black dress (£467,200),
1931 Bugatti Coupe (US$8.7m), 1847 Mauritius Blue stamp (US$3.8m),
Lennon's piano (US$2.08m) and Eric Clapton's Stratocaster
guitar (US$0.95m) we assume that enthusiasts will continue
to attempt to launch investment funds that specialise in a
particular class of collectibles.
In the UK and US wine investment funds aim to buy and hold
premium wines for five to seven years, with investors being
rewarded through sale of the holdings at that time. They have
been claimed to offer growth of around 12% pa, tax advantages
(because wine as a 'wasting asset' is free of UK capital gains
tax), and the consolation of being able to drink the asset
if prices fall. Critics however note that such 'liquid investment'
often has high costs. One fund for example features initial
fees of 5%, a 1.25% annual charge and 20% of the overall gain
in excess of 50% growth.
Funds for investment in exotica will encounter the same difficulties
experienced by fine art fund. In practice most trading is
likely to involve small private consortia rather than commercially-managed
funds whose capital is provided by institutions, superannuation
trustees, insurance companies and banks.
Enthusiasts can always indulge in personal acquisition of
exotica: one reader kindly pointed us to a site promoting
"investment quality" snakes (presumably just the
thing if your name is Gomez or Mortisha but not the thing
for us, particularly given maintenance requirements such as
provision of live rats for the python's dinner).
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