The Very Subtle Art of Investing in Artwork
Most people buy art because they love to look at it, but there's always the hope that the payoff will go beyond aesthetics. The prices of photographer Cindy Sherman's works have risen 11-fold in 15 years, according to Artnet, while Gerhard Richter's paintings are 37 times more expensive. Damien Hirst's works are up 22-fold, while works by Jean-Michel Basquiat and Andy Warhol have both risen 19-fold.
Investing in the right artist, however, can be a crapshoot, and owning artwork can involve substantial hassles. Many collectors must worry about insurance premiums, art dealers, thieves, taxes and most of all, the fickleness of the art world.
Dorit Straus knows all about these complications from three decades working with collectors at the Chubb Group of Insurance Companies, where she is now the insurer’s worldwide fine art manager. Bloomberg.com’s Ben Steverman spoke with Straus, an archaeologist by training, about the challenges of owning art. Edited excerpts of their interview follow.
Q: Is art an asset class like stocks and bonds?
A: There is some merit to that line of thought. A lot of people have a large portion of their assets in their art collections and they may not know it. It’s certainly important for financial planners to discuss this issue.
There are lots of downsides to art as investment. There are costs of maintaining art. The physical condition of your stock or fund doesn’t matter, but you have to make sure your work of art is in pristine condition, particularly in today’s economy.
My advice to most people: Art is not a commodity. It's an aesthetic object. If it turns out that you have made money on your initial investment, that’s great, but the most important thing is your appreciation of the art. I know that's kind of corny.
Q: I imagine it's difficult to predict which artworks are going to increase in value.
A: Correct, because there’s no one art market. It’s a question of fashion. That’s not to say people haven’t made a lot of money on art. I see it every day looking at the collections we insure.
Whether you're buying for investment or aesthetic purposes, I recommend people get the advice of art advisers. The art market is capricious and you have to find the right buyer at the right time. A lot of our clients -- major collectors -- put works up for sale and they don’t sell. These are good works of art.
Art advisers and art dealers do establish a market. I don’t know about the idea that people, on their own, are discovering new artists in the hope those artists will turn into the next Damien Hirst. You may not be able to unload it at all.
Q: What do art collectors need to know when it comes to protecting their works?
A: Insurance is not all about price. It’s about terms and conditions. Look at the financial strength of the companies. What is the track record of that insurance company and how do they pay claims?
The insurance company can be very helpful to you. We have as much of an interest in protecting the art as the owner. It’s good for the client to have the company come in and look at how the art is protected in your home.
Also, when you’re moving art between homes or selling it, improper packing can result in damage. We’d rather help you deal with that by directing people to the right packers and shippers.
[Chubb and other insurers sell special art policies because basic homeowners' insurance usually covers just $1,000 to $2,000 in art, with added coverage available for up to $200,000 per item, according to the Insurance Information Institute. Homeowners' policies generally won't provide extra services offered in special policies, including advice on storage, coverage of appreciation or loss in value of the art, and damage caused by earthquakes, floods and transportation of pieces.]
Water damage is something most people don't think of. You read a lot about heists. What you don’t read in the paper is when a penthouse roof is inundated with water, which seeps into the walls and a beautiful painting is turned into mush. You have all sorts of situations involving weather. The climate has changed. Fires are a big cause of loss. We have a special program for wildfire protection.
Q: How have the economic disruptions of the last few years affected the art market?
A: In 2009 and most of 2010, people were not buying and selling in the open market. People were afraid to put things up for auction because if it didn’t sell, it would mar the salability of the item. A lot of these deals were done more privately.
Eventually things did turn around. The contemporary art market is rebounding at the top level. You’ve had an international influx of people with a lot of money -- the Russians, the Chinese and other Far Eastern people.
There are still a lot of things that are not selling. The middle and lower market is still tough.
Q: Owning art can complicate estate planning. Do you have any advice?
A: I would suggest a really good inventory. Bring in an outside expert like an appraiser. Valuations may fluctuate. You may have three children that have gotten paintings of unequal value, and that might create a dispute within the family.
The tax implications are definitely something to think about. Art is not taxed at the [low] 15 percent capital gains rate, so I'd suggest one find an estate attorney that knows about tax rules and art. See whether it's important to set up some sort of foundation or trust.
The other thing to think about is whether any philanthropy should be included in the estate planning. Understand that every cultural institution has a different mission. Your painting may not be what that institution wants.