In May 2012, a version of Edvard Munch’s The Scream, sold for a record USD$120 million at Sotheby’s in New York1 after a period of bidding lasting just 12 minutes. It joined one of only a handful of paintings that have exceeded the USD$100 million mark, including Picasso’s Nude, Green Leaves and Bust, which sold for USD$106 million.
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The world of collectibles thrives on such fairytales. Stories of investors who bought paintings, wine collections or antiques for a song and then sold them years later for millions abound in the popular media. In 2011, a painting by Roy Lichtenstein sold for almost USD$40 million. Thirteen years previously, its owner purchased the artwork for just USD$2 million2. Also in 2011, Gimcrack on Newmarket Heath by George Stubbs sold in London for GBP£22.4 million (USD$36 million), which was amongst the top five highest prices ever paid for an Old Master at auction. The painting had been previously purchased in 1951 for GBP£12,500 (USD$20,000)3.
These stories of exponential growth understandably stoke investor interest in the world of collectibles. With traditional financial markets still highly volatile and interest rates at record lows, the possibility that art, wine, antiques and other collectibles could earn handsome return that is uncorrelated with broader financial markets is certainly alluring. Add to that a post-crisis mistrust of esoteric financial instruments, and a perception that tangible, scarce and non-fungible investments could provide a stable store of value in uncertain times, and it is no wonder that a growing number of investors have increased their exposure to art, wine and other collectibles.
For today’s wealthy investor, acquiring and holding collectibles is akin to building a store of treasure. The rationale for accumulating this treasure can vary considerably. First and foremost, wealthy individuals acquire treasure because they enjoy it. It may give the man emotional or aesthetic pleasure, or be an interest that they want to share and discuss with friends. They maybe passionate and extremely knowledgeable about art, antiques or sculpture. They may enjoy exhibiting it in museums, or basking in the status that the ownership of a rare and beautiful item can bring. These are perfectly legitimate reasons for accumulating treasure, and these personal holdings can rightly form an important part of any individual’s total wealth.
Gaining access to the market for collectibles, or treasure assets, is now easier than ever. The Internet has opened up the auction process, enabling collectors more easily to bid for and acquire objects anywhere in the world. Collectibles now increasingly share the characteristics of broader financial markets. There are market indices and specialist funds, which enable individuals to invest in art, wine or other treasure assets indirectly. There are even asset-backed financing products that enable collectors to borrow against their treasure assets.
This combination of increased investor interest and more robust market infrastructure has led to a surge in activity across a wide range of different treasure assets. According to Art price, 2011 was the best ever year forsakes of art at auction. Auction house Christie’s had bumper year, with sales up 9% over the previous year to a record USD$5.7 billion4. Rival Sotheby’s did even better, with a 21% increase in annual sales to USD$5.8 billion5.
Boom times for auction houses however do not automatically translate into strong returns for investors. Collectibles markets are riddled with inefficiencies, are frequently opaque and illiquid, and are extremely volatile and risky. They involve high transaction, storage, insurance and appraisal costs. Appreciation in value can also incur a higher tax burden in some jurisdictions, such as the U.S.6 Some categories of treasure are also highly susceptible to vagaries in fashion, which can cause prices to fall as dramatically as they have risen. Of course, for many collectors the cost and financial risk of treasure are irrelevant given the intellectual stimulation and aesthetic pleasure it brings to them. But when acquiring such assets primarily for their financial benefits, extreme caution is essential. It has long been known that investors in equities and other financial asset classes can be susceptible to a host of cognitive biases that make it difficult for them to make rational decisions. With art, wine and other treasure assets, these biases can be even more pronounced. When buying a painting, for example, collectors can all too easily let their heart rule their head. The emotional and social attachment to treasure means that investors are extremely likely to make sub-optimal decisions about when to buy, sell or how much to pay.
In this report, we examine the financial and emotional motivations for holding treasure assets, and explore how they should be treated in the context of an individual’s total wealth. We look at recent trends in key collectibles markets, and assess the risks and behavioural biases associated with holding treasure as part of a broader financial portfolio. At a time when investors continue to be concerned about financial markets, tangible assets, such as art and antiques, hold strong appeal. But as we argue, they should primarily be held for the pleasure they bring, rather than any potential financial benefits.
6 Neither Barclays in the U.S. nor its Wealth and Investment Management employees in the U.S. render tax or legal advice. Please consult with your accountant, tax advisor and/or attorney for advice concerning your particular circumstances.