April 14, 2013

How Do Art Returns Compare to the S&P?

To produce a healthy gain from an art sale, investors need to learn the ins and outs of the art market, experts say

Art-auction headlines tend to reflect sales prices and trends among the highest-valued artworks.

These multimillion-dollar transactions, though, don’t always reflect what’s really happening with overall art prices or prices for specific fine-art markets.

The Mei Moses Fine Art Indexes from Beautiful Asset Advisors, however, provide deeper insight into these markets, because the indexes track repeat sales at Christie’s and Sotheby’s.

For example, if a painting sold at auction in 1995 and didn’t change hands again until 2012, Mei Moses would add the object and the two prices to its database in 2012.

That information allows the firm to calculate a compound average rate of return for this particular piece for the period between transactions. The firm says this approach allowed the firm to add almost 3,100 objects to its database last year.

The results can be surprising--as shown by a major-piece example highlighted in the firm’s recent analysis of 2012’s sales.

Picasso’s Nature Morte Aux Tulipes sold for $41.5 million in November 2012. The previous transaction price was $28.6 million in 2000, which Mei Moses calculates produced a 3.0% compound annual return for the seller.

“This painting was bought at a major peak in the art market for a significant price and thus the modest return is not a surprise… It is also true that the owner had the opportunity of enjoying this painting and would not have been better served by investing in the S&P 500 total return index, except for transaction costs, for the same period of time,” according to the firm.

The roughly 3,100 sale-pairs Mei Moses identified in 2012 generated an average compound annual return of 6.7% versus 6.8% for the S&P 500 total return index for the same holding periods.

“This is a positive result for the owners of the art since they achieved relatively similar returns, before transaction costs, and obtained the enjoyment from viewing the art for free or at the cost of the transaction,” the Mei Moses report concludes.

The report includes other interesting observations on last year’s transactions:

  • The average price tracked was $518,910, but the median price was only $63,718. That means half the transactions were for less than the lower figure, implying that high-quality art is accessible to more buyers than the headline sales imply.
  • Less expensive art generated better returns but with more variation. Sales for less than $50,000 provided mean returns of 7.48% with a standard deviation of 17.23%.
  • Returns for more expensive objects were lower but their standard deviations were also lower.
  • Sales between $500,000 and $1 million, in contrast, generated returns of 5.51% with a standard deviation of 10.93%.
  • Excess expectations can result in a no-sale.

Mei Moses also examined 1,487 repeat sales pairs for artworks that were offered but did not sell in 2011 and 2012. Although many of the price statistics between sold and unsold objects were similar, the firm notes that a key difference in the pre-sale price ranges.

“However when you come to the average expectation of the two owner groups (sold and unsold), we see that the works that did not sell had a mean return expectation three times that of the works that did sell,” the firm says in a recent report.  “Therefore on average setting a return expectation too high reduces the likelihood of a positive outcome for the owner of the art.  This is a fact that is replicated in our full database.”

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