Paint by the Numbers
At some point last year I'm sure I had art on my to-do list. Pick up the dry cleaning, a bag of Caff Verona, peanut butter and, oh yeah, a couple of Picassos. How did I forget it? I bought every other asset class last year--small caps, big caps, bond indexes, foreign stock indexes and gold funds--and it all came to naught. That is, the S&P index had a total return of total crap in 2011, although not without extreme volatility, thanks to our friends in Europe.
Instead, art was the place to be. According to the Mei Moses World All Art Index (MMAI), which tracks art sales across several categories, art returned 10.2% in 2011, crushing the S&P's 0%. (That's massive: a difference of 2 percentage points is significant.) The index, which tracks data back to 1810, reached an all-time high; Impressionist and modern art outperformed old masters, returning 14% vs. 4.8%. Christie's top sale last year was Pop-art master Roy Lichtenstein's I Can See the Whole Room! ... And There's Nobody in It!, which traded hands for $43.2 million, including commission. "It's clear that the demand for art has increased exponentially," says Christie's CEO Steven Murphy, whose auction house enjoyed a record year in sales in 2011. "People with money are choosing to spend on art collecting and investing."
Since Wall Street had such a lousy 2011, you would think there'd be less money available to chase art. But there's typically a 16-to-18-month lag between the S&P and the MMAI, which nonetheless move in tandem, according to Michael Moses, a retired New York University business professor and co-founder of Beautiful Assets Advisors, the company that created the index. In other words, Wall Street earns the money first and later buys art with it.
But just like a painting viewed from different angles, art as an asset gets more interesting depending on the investment horizon. In the past 10 years, art has pitched a shutout against the S&P, with a compound annual return (CAR) of 4.6% vs. 0%; over the past 25 years, though, the S&P has won, with a CAR of 9.3% vs. 6.5% for art. Go to a 50-year time frame and it's a draw, so to speak: art has about the same return and the same risk as equities, but they are not correlated. "If you look at the two graphs, the trends are similar, but they beat to a different drummer," says Moses. Because art prices don't necessarily correlate with stock prices, the wealthy view art as a wealth preserver.
What's driving the interest today? For Murphy, a former publishing executive, it's the same revolution that shook his old industry. "There's been an incredibly important expansion in information and the ability to display images," he says. "Anybody can see anything that's available all the time." In other words, the shop window has gotten huge. In many industries, transparency lowered prices because we could discover more information about what went into them. But in art, that's been offset by the increase in potential buyers. It also helps, says Moses, that the supply of rich people has increased dramatically since 1950. The real froth in the market, unsurprisingly, is being created by Chinese collectors who are throwing money at both traditional and modern Chinese art (and at French estate wine, but that's another story). Still, Murphy says half the new buyers last year were non-Asian and all the newbies bought 30% of the total.