The Economy

Investing in Oils

Indulging your passion for the finer things in life may help you collect handsome returns.
Alix StuartApril 1, 2007

Twenty-five years ago as a nearly broke graduate student, Walter Manninen gazed upon a dreamy vision of four courtesans and knew he had to have them. So the aspiring banker borrowed $2,000 and purchased a 1914 Theresa Bernstein oil painting entitled Lilies of the Field.

Thus began a lifelong love affair with art that has yielded both aesthetic and financial rewards. Today, Lilies of the Field is worth an estimated $150,000 and is one of approximately 150 paintings in Manninen’s collection. Manninen, the former CFO of publishing company CXO Media, spends between $25,000 and $50,000 annually on art and estimates that it accounts for some 40 percent of his net worth. At any given time about 60 of his paintings hang on the walls of his home north of Boston, with the surplus carefully racked in a climate-controlled room. Each week he rotates different paintings into view.

“My art assets have outperformed everything else over the past 25 years,” including individual stocks, bonds, property, and other collectibles, says Manninen. Across his entire portfolio, he has seen 11 to 12 percent annualized growth, in large part thanks to his art. Some of his recent acquisitions have nearly doubled in value in just 5 years.

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Parlaying a love of art into financial success is not easy. You need a keen eye, hours of research, and perhaps a savvy adviser or two to discern good values. Art is a fairly illiquid investment that may require ongoing maintenance. Should you manage to sell it, you will likely sacrifice 20 percent or more of the proceeds to brokers’ fees, and any profit will be subject to a 28 percent federal capital-gains tax. But while art is “not a traditional asset class and probably won’t be one for some time,” says Stephen Horan, head of private wealth for the CFA Institute, it is gaining ground. One key selling point: returns from art generally boast a zero to slightly negative correlation with returns from other asset classes, says Horan, making art a great portfolio diversifier. And considering the eye-popping returns that some art categories have yielded, buying beautiful objects may offer a very appealing safety net.

Visions of high returns owe much to Web-based sources of information, which shed light on what was once a specialist’s realm. David Darst, chief investment strategist for Morgan Stanley’s global wealth management group, says the abundance of available data has helped more people get comfortable with the idea of art as an investment. Manninen, for one, swears by, a subscription-based site that offers auction prices for works by more than 50,000 artists.

Broad art indexes also give would-be investors a useful tool. One developed by two New York University professors, Jianping Mei and Michael Moses, tracks prices for artworks in four basic categories that have sold multiple times at auctions, and compares those results with the performance of financial indexes. According to the midyear 2006 data, art produced a one-year return of 22 percent, handily beating the 8.3 percent increase in the S&P 500 Total Return Index. Moses says the data “has consistently shown that art is very democratic.” For example, New York sales in 2006 showed lower-priced art (“low” in this case meaning as low as $25,000 and up to $500,000) producing the highest returns (12 percent), while art purchased for more than $500,000 saw an 8 percent compound annual return.

Canaletto vs. Enron

Serious investors, such as hedge funds, often turn to more-customized indexes. David Kusin, president of Kusin & Co., codifies art into five orders (fine art, decorative art, antiquities, other discrete disciplines, and collectibles), 33 families, 100 global submarkets, and many more species and subspecies. A typical project would entail helping an investor find a narrow submarket that has no correlation with his or her other holdings — using 18th-century English case furniture to hedge double-A corporate bonds, for example. Kusin’s firm will also buy the furniture and store it in a bonded warehouse in an untaxed jurisdiction.

Kusin works on retainer and says his services are “not something anyone with a liquid net worth below $20 million should even consider.” But Darst and others predict that art will eventually become more accessible to average investors through something like an exchange-traded fund or mutual fund, where many people can buy a share in a collection held by a manager.

This idea has been tried before, with spotty success. The London-based Fine Art Fund, run by former Christie’s finance director Philip Hoffman, appears to be doing quite well: it has yielded annualized returns of nearly 60 percent on the art it has sold. With fewer than 100 investors, each of whom pony up a minimum of $250,000, Hoffman says the fund is suitable for those with a net worth of at least $5 million. The art is generally stored in a warehouse, although clients can pay a fee if they wish to display it for a time. Hoffman admits that the value of art “can go down as well as up,” but says the breadth of the collection provides some stability. And, he adds, “the value of a Canaletto will never fall to zero, like an Enron.”

While you don’t need to be ultra-rich to begin collecting, most experts say that art or other collectibles should make up no more than 1 percent to 10 percent of a portfolio. Given the entry costs, that translates into having a net worth of at least $1 million. More important, be prepared to hold the art for at least 5 to 10 years, much like a private-equity investment. That allows for appreciation to outpace transaction costs and market fluctuations.

And unless you hire an adviser, you’ll have to do your homework. Manninen says he spends 5 to 10 hours a week reading auction catalogs, going to galleries, and perusing periodicals. Such information can be a huge advantage when attending an auction with few or poorly informed buyers, or when encountering a gallery that’s trying to move old inventory. It may also save you from buying a fake or, more egregious, a piece of looted art. Many heirs of families whose art was seized in wars are now initiating lawsuits, says Paul Frimmer, an attorney who specializes in art law at Irell & Manella LLP.

Ironically, one thing that isn’t required for successful investing in art is a passion for it. Unlike Manninen, “I’m not really interested in art; I got into it by accident,” says Hoffman, who claims to spend “no more than a couple of minutes” gazing at many of the million-dollar objects his firm buys. Kusin frames it another way: “How you regard what you’re collecting is of no relevance — art is just oil futures in another form.”

Alix Nyberg Stuart is senior writer at CFO.

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