How to Invest in Art?

Investing in art is increasingly attracting investors looking to diversify their portfolios. But why invest in art, and how to navigate this complex market to make a profitable investment while limiting risks? In this article, we will explore the different facets of artistic investment, drawing inspiration from current strategies and answering the crucial question: should one invest in art?

Why Invest in Art?

The Benefits of Investing in Art

Investing in art is not just a matter of aesthetics; it's a serious investment strategy offering various benefits:

• Portfolio Diversification: Art is generally uncorrelated with traditional financial markets, offering stability in times of economic turbulence and having its own dynamics.
• Long-term Capital Gains: Well-chosen artworks can appreciate significantly over time, as shown by the continuous growth of the art market with the Artprice index tracking the evolution of 100 artists' quotations.
• Tax Advantages: In some countries, investing in art offers lighter taxation, which can be beneficial. It is always essential to invest not for the tax advantages but for its performance and inherent risk limitation qualities.

Investing in Art: New Trends and Emerging Markets

The year 2023 sees the emergence of new trends, notably the increasing interest in contemporary art and the incorporation of digital technologies. Investing in emerging or already established artists can be a profitable strategy as they experience less volatility, trade more regularly, and appreciate continuously over time.

How to Invest in Art?

Which Artist to Choose for Investment?

The choice of artists, artworks, and their period is crucial. Indeed, the dynamics of price evolution, and therefore of the market, are not the same. Moreover, the work of valuation must be adapted to each period and each artist to be more effective.

• The Renaissance of Classical and Modern Art: Although contemporary art offers an infinity of new expressions and forms, there is a renewed interest in classical and modern art, often considered the foundation of any prestigious collection.
• The Emergence of Digital Art: NFTs and digital artworks have stormed the art world, offering innovative investment options. However, be careful of the extreme volatility of this form of art and not to confuse the artistic content with the certificate form which is the NFT.
• The Potential of Mid-Career Artists: An area often overlooked by traditional investors is that of mid-career artists, who can offer significant growth potential. Matis explores this space, providing in-depth analysis to discover emerging talents ready to make the leap to Blue Chip recognition.
• Blue-chip Artists: Major artists of the 20th century, particularly from the second half of the 20th century, recognized in museums as founders of movements, represented by leading galleries and having a broad base of collectors. Their works trade for values exceeding 500,000 euros. Artists like Warhol, Basquiat, Mitchell, Soulages, etc., are found here. It is through these artists and their works that one finds the most dynamic market, seeing its value increase with a scarcity of their offerings and better liquidity.

Education and Research

Successful investment begins with education and research. Understanding artistic movements, influential artists, and art history can lead to more informed investment decisions.

Building Relationships

Building relationships with galleries, auctioneers, and other collectors can provide insider information and pre-market buying opportunities.

Different Ways of Investing

• Direct Investing: Buying artworks at auctions, art fairs, or directly from galleries. This requires navigating between different offers and knowing enough about the artist's market to buy at the right price. Then, insure the artwork and have a horizon at the end of which one wishes to part with it despite the created sentimental value.
• Art Investment Funds: For those looking to invest without getting directly involved in choosing artworks, investment funds offer a strategic alternative. There are very few globally. This is due to several factors, including regulation, team composition (sometimes experts in arts but not in fund management or vice versa), or the very private nature some performers wish to maintain.
• Art Club Deals: Matis offers the opportunity to invest in major 20th-century artists' works (Andy Warhol, Yves Klein, Yayoi Kusama, etc.) simply by co-investing in club deals. The works are then entrusted to leading galleries for resale. Discover here how Matis works to learn more.

Investing in Art and Tax Benefits

In many countries, there are schemes to benefit from tax reductions for art purchases. It's crucial to research local laws and consult a tax advisor. It's never good to consider an investment primarily for its tax benefits.

Valuation of Artwork and Potential Risks

Investing in art is not without risk. Artworks can be difficult to resell, and the value of some artists, especially emerging artists, can be highly volatile.

Thorough due diligence at the time of acquisition and market knowledge are essential.

The Value of an Artwork

Artworks have been traded in the public and private markets for hundreds of years. Their value can vary significantly depending on the perspective. In a private sale, the price is set by the seller, professional or amateur, who determines the price they are willing to part with the item. The buyer either accepts or rejects this price, and if there is an agreement, then the sale price represents the new value of the sold artwork. In a public auction, the seller appoints an intermediary, the auction house, to publicly sell an artwork. The auction price plus sales fees represents the sale price of the artwork.

The sale values also vary depending on the market where the transaction took place and the quality of the sellers.

While gallery and/or dealer police books allow one to know the prices at which artworks are bought and sold on the private market, they are not public and therefore more difficult to access.

On the contrary, auction results are public. Previously accessible upon request from each French auction house, for over twenty years, databases (Artprice, Artnet, Auction.fr...) have provided access to all international auction results. The history of these results starts in the early 1980s, allowing a complete overview of more than forty years of auction results.

These results are commonly accepted as representing a convincing market value as they are the natural meeting of supply and demand.

Expertise of Artworks

Artworks are traded internationally by market professionals. Due to the legal obligation to publish auction results, platforms such as Artnet, Artprice, Auction.fr compile all these results.

Authenticity of Artworks

The verification of an artwork's authenticity depends on the period/era to which the artwork belongs.

For example, ancient art up to 19th-century art can raise significant issues regarding the confirmation of their authenticity. There are artists with multiple experts, such as Leonardo da Vinci, where critical catalogs are not always complete, and it can be difficult to add and recognize rediscovered artworks.

Contemporary artworks raise few issues regarding the confirmation of their authenticity for several reasons. From the 20th century, artists took great care to archive or have their production archived by their gallery. Most artists issued certificates for artworks during their lifetime or passed the responsibility to their rights holders or foundation, such as the Calder Foundation or the Niki de Saint Phalle Foundation.

Confirmation of an artwork's authenticity is accessible via critical catalogs or their foundation/committee.

Without confirmation of authenticity from the artist, if still alive, or the physical or legal person representing them (foundation, rights holders, critical catalogs...), the artwork will not be acquired.

Data Study

The market value of an artwork can be studied based on various criteria:

• The artist's name
• The artwork:

• Subject
• Quality
• Creation date
• Technique

Format

These details are basic and easily found for Impressionist, modern, and contemporary art. Criteria related to the authenticity of artworks are not considered in the valuation, as no artwork not already authenticated (by the auction company or an expert) can be included in investment projects.

During the database study, a comparative process is established. The artwork is studied concerning the artist's total production, according to the aforementioned criteria - technique, date, and dimensions. The extensive production of targeted artists makes this comparative study very precise. Artists like Andy Warhol and Pablo Picasso produced about 70,000 artworks during their careers.

For example, the artist Yves Klein (1928-1962) created between 1955 and 1962, 196 monochromes, with a variety of supports, formats, and textures, which he reduced to the color blue from 1957. Since 2010, many of Klein's monochromes have been auctioned. These results allow us to know the market value of a work for an artwork of approximately 21 x 18 cm.

All artists work by subject/series, so it is possible to apply this same comparative model to all artists to know the price per cm 2 of the artworks.

Following the study of these criteria, other information will be considered for a more detailed estimation.

Detailed Valuation

Although an initial study of value based on the main criteria is crucial, it's necessary to add additional expertise based on specific criteria such as the condition of the artwork, its provenance, bibliography, and the exhibitions in which the artwork has been featured. This allows for an adjustment of the estimation, either upward or downward.

The value can also vary depending on the location of the sale. Artists operate in a defined geographic area. While the artists we aim to position ourselves with are internationally recognized, it's acknowledged that some marketplaces and auction houses have greater communication power and a larger client portfolio. For instance, Yves Klein's works are generally marketed and auctioned at their market and best prices in Paris, London, and New York. Their sale is more unusual in Sweden or Italy, which can lead to a lower result. Similarly, the work of an American artist put up for auction in a small auction house in Asia might not be the best marketplace for that artist. The work could therefore be undervalued by the seller and sold at a price lower than its market average.

The Valuation Process

The valuation of acquired works can be assessed through a precise process: firstly, the acquisition price of the artwork, then the market price of the work, which must be updated annually.

Acquisition Price

The targeted artwork acquired for an investment project enters the inventory at its acquisition price. This price can be either the auction bid price plus buyer's fees in the case of an auction purchase or the net amount negotiated or non-negotiated from a dealer, broker, gallery, or individual.

To obtain the cost price of the artwork, it's necessary to add to the acquisition price of the artwork, the ancillary costs related to the acquisition and valuation of the artwork, which may include transport, definitive importation, restoration, and framing.

Market Price

The market price of the artwork is determined by internal valuation which can be subject to control by an external expert (auctioneer, judicial or accredited expert).

This market price is defined by studying similar works by the artist and considering the artwork's unique characteristics. This price would have been defined prior to acquisition during the study of the investment file to ensure the acquisition is made at an amount allowing for capital gain.

This market price must be adjusted annually based on the latest sales results.

Artwork Logistics: Transport, Restoration, and Framing

Artworks are traded worldwide and are often transported and handled by many art market professionals as well as individuals. All art market professionals, including transporters, restorers, framers, are insured, and as a client, it is possible to request proof of insurance before deposit.

Art transport meets very specific requirements called "Fine Art". This term includes handling with white gloves and meets specific criteria in terms of materials used in constructing crates and packaging, recruitment of specialized transporters who have undergone specific training, and security in handling and conserving artworks.

The storage of artworks is carried out by particular companies that offer services of handling with white gloves, as well as particular conservation rooms according to the technique and materials of the artworks to prevent any alteration.

Restorers are professionals who have received specific training. They can be generalists or specialists. Depending on the materials and technique of the artwork, it is possible to entrust the artwork to a particular restorer. There are also designated restorers for certain artists, such as Pauline Helou de la Grandière, the official restorer of Pierre Soulages' works.

Framers are professionals who have received specific training in handling artworks.

Artwork Insurance

As a professional in the art market, the company will be insured in terms of professional liability, storage, transport, and stay at third parties.

There are many insurers in the market, such as AXA, HISCOX, which cover all insurance needs.

Artworks are insured either within a stock for a global amount or individually. The price of the artwork is defined at its cost price or at its value prior to damage. To determine this, insurance companies call upon accredited experts or auctioneers. Depending on the damage, insurance covers the restoration of the artwork if possible and/or pays compensation corresponding to the depreciation of the artwork.

According to insurers, the biggest risks artworks face are water damage and fire, which are risks more concerning to individuals and against which professionals protect themselves.

Conclusion

Investing in art is an experience, offering aesthetic, cultural, and financial benefits. Whether you are passionate about contemporary art or attracted by the performance that art can generate, a well-informed and cautiously executed strategy can lead to a successful investment. At Matis, our goal is to share the expertise and practice of the investment team to enable our clients to understand the mechanics of the art market and how we generate performance.

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