Castlestone Management, a boutique New York and London asset manager, has published research from a University of Maastricht professor showing that art is an investable asset class.
Castlestone Management, a boutique New York and London asset manager, has published research from a University of Maastricht professor showing that art is an investable asset class.
The firm asked market researcher Dr. R.A.J. Campbell of Maastricht University’s Faculty of Economics and Business Administration to investigate whether art really represented an analyzable and investable asset class.
Her research shows that real assets, including art, have outperformed financial assets in certain decades, especially during periods of inflation. If, as many fear, the global policy of printing money leads inevitably to high inflation, art fund investing could help to shelter portfolios from the inflation storm. Castlestone says this could well be the case for the next decade as value of money continues to decrease.
According to the research, art delivered an average annual return of 7.7 per cent a year between 1875 and 2000, compared to a return of just 6.6 per cent from equities. Art, like gold, is an unleveraged, irreplaceable real asset, which many investors turn to as a safe haven in times of economic uncertainty. Art and gold have historically shown similar characteristics and performance, especially over the last decade.
Art, in the same way as gold, has traditionally been used to hedge against inflation. Many commentators and economists see inflation as an inevitable outcome of dramatic increases in money supply that have resulted from the monetary policies being pursued by central banks in the wake of the credit crunch. In such an environment, the value of money falls. When the value of money declines, the value of real assets-unleveraged, irreplaceable assets such as art-rises. In recognition of this fact financial intuitions have already begun to allocate to art.
The Harvard and Yale University Endowments have already considered this development by allocating a great share of its investments to real assets. Brandeis University and Deutsche Bank among other institutions have also invested in real assets and specifically in art over the past years and doing so built respectable art portfolios
Investing in art gives an investor the opportunity to diversify their portfolios away from traditional financial assets, says Castlestone. Adding art to a well-diversified portfolio can improve its efficient frontier-that is, the lowest possible level of risk for the highest possible level of return-providing superior risk-adjusted returns. Research shows an 18.47 per cent allocation to art increases the annual returns to nine per cent from 8.6 per cent while decreasing risk by one per cent.
The report says art prices did slide along with other assets during the late 2008 to early 2009 period, which may provide a buying opportunity for those seeking to diversify into art ahead of the expected upturn in inflation and recovery in art prices.
Castlestone says that if the value of money falls as much as the growth in money supply implies, those holding real assets should emerge in much better shape than those who do not.
