Phil Whittaker of Sotheby's Institute of Art explains the motivations behind why people invest in art, what they invest in, and some of the pitfalls and other considerations in the process.

Date: Apr 2012

Tags: Art, Asset allocation, Alternatives, Liquidity

• Some investors in Asia buy art specifically as an investment vehicle, whereas in the West, people tend to buy art to collect and for long-term interest
• Given that tangible art has high residual value, it is realistic to view art as an asset class – but it is a very risky asset class because of the variances of the market, high transaction costs, and its illiquidity
• Some of the biggest mistakes people make when trying to invest in art are that they lack knowledge in it, they tend to believe what they are told by gallery owners, and they associate high prices with quality

There are various reasons why people invest in art. According to Phil Whittaker in an interview, some investors in Asia do so specifically as an investment vehicle with art as an alternative asset class.

This is linked to the mindset of speculation on assets like equities and property, he explained, and given the rises in prices of contemporary art from 2004 to 2008, it has appeared to be a hot area in which to invest and make money.

In the West, people tend to buy art to collect and for long-term interest, said Whittaker, explaining that they enjoy owning it, whether this is for bragging rights or just for their own pleasure. While they also look to buy art which they think will appreciate in value in the future, this is not their primary motivation.

According to Whittaker, which art people invest in ranges from antique furniture to fine arts such as pictures, paintings and sculptures – which is the main market.

Contemporary art, which generally refers to art created in the last 30 years or so, is the focus because it is more volatile, he said.

Art as an asset class

Given that tangible art has high residual value, Whittaker said it is realistic to view art as an asset class.

And unlike properties and equities which can crash, art tends not to, he said, explaining that it provides a long term hedge.

On the downside, he said, it is a very risky asset class because of the variances of the market, high transaction costs, and its illiquidity.

Pitfalls with investing in art

One of the biggest mistakes people make when trying to invest in art is that they lack knowledge in it, and in the art world more generally, said Whittaker, yet they want to invest purely because they see other people making vast amounts of money.

As a result, investors have to rely on the experts in the art world to supply the information, he added.

However, it is the job of the gallery owners and auctioneers to sell art to make money, said Whittaker.

Plus, instead of investors checking the value of items, which they would normally do when buying an expensive asset, they tend to believe what they are told when it comes to art.

In addition, investors need to be aware of quality. In Asia, for example, prices have gone up in recent years, leading to people to deem certain pieces of art to be good quality. Yet this is not how the long-term art market values the various items.

As a result, potential investors should look at what Whittaker called “good” art. This means art from good artists, which are normally trained individuals from renowned art schools.

Buying art from someone who is self-taught is probably more risky than buying from an up-and-coming young artist from an established art school with a good track record of winning prizes and having exhibitions, he explained. Also, if that person is represented by a gallery, this is a further positive.