Art Investments: Asset or Asset Class?
Given their potential for appreciation, many investors view art collectibles as part of their investment portfolio. Wealth managers, however, prefer to take a broader view. To provide clarity, Northern Trust’s Central Region President Mac MacLellan recently sat down with Director of Goals Driven Investing Deiken Maloney to discuss art as an investment and an asset.
MacLellan: Many of our clients have a passion for art, but as wealth managers, we regularly wrestle with how to classify art within an estate. Is a work of art an asset or part of an asset class? How do you recommend clients view art?
Maloney: Admittedly, it’s a difficult question to answer. We know many clients view artwork as an investment and think of it as a component of their portfolio.
Through our Goals Driven Investing process, which includes a discussion of all client assets, we’re hearing more about art. While we often know about clients with more significant collections, we’re finding many other clients have collections that simply didn’t come up in past conversations. In both cases, it’s an opportunity to learn more about what they own and help them evaluate the collection in the context of the bigger picture.
In general, we consider an art collection to be an asset, much like a second home, a private business or a real estate investment. It could be an important part of their total portfolio, in that everything they own is part of their portfolio, but we don’t consider art to be an asset class that adds diversification to an investment portfolio in the traditional sense.
MacLellan: Yet given the appreciation we’ve seen in some corners of the art world, we’ve seen growing interest to incorporate art as part of an investment portfolio.
Maloney: I think any time you see an asset performing well, there’s going to be a behavioral response of wanting to get in on the action, whether it’s stocks, real estate or works of art. It’s also important to emphasize what you just stated: some corners of the art world. While overall sales are up, there are huge variations between different artistic periods and artists within these periods.
I see similarities with venture capital investing, in that every startup company is unique. No two are the same, very similar to art. Some have a track record of success, just like certain artists are seen more frequently than others in secondary market sales. However, there are a lot of startups — and pieces of artwork — in the middle, prone to the whims of the market. It’s the individual interpretation and unique viewpoints on works of art that drive passionate collectors, but that subjectivity is also why it’s difficult to think of art as an asset class. Unlike startups, there are no balance sheets, cash flows or earnings to evaluate with art.
MacLellan: That may be, but art is a type of asset that saw more than $60 billion in sales in 2014, a 67 percent increase from 2009 sales totals. While that’s an impressive sales figure, it’s not the resale value that investors may interpret it as.
Maloney: Those figures can definitely be misleading, and I think headlines like that are fueling increased interest in purchasing art.
For clients actively looking to acquire a piece of art, it’s important to think about its purpose today as well as in the future.
The secondary market for artwork is very limited, and if it’s not a piece from a “blue chip” artist, anything can happen. It’s also important to understand some of the complex planning considerations when acquiring art. For example, there can be challenges around wealth transfer of art or philanthropic giving of art.
Also, before you calculate any windfall, remember the Internal Revenue Service considers art as a collectible, and the tax rate on gains is up to 28 percent. Add that to the fees associated with selling a piece of art, and you may net only 55 percent to 60 percent of the sale price.
MacLellan: Backing away from the finances, though, the value of a piece of art or collection of artwork can be so much more than an appraisal number, can’t it?
Maloney: Definitely. Given the wide spectrum of results that could come from investing in art, I’d focus on these non-financial items first. I would view any financial gain as simply an additional benefit rather than an expected outcome. If your goal is to acquire art as an investment, especially if you are new to collecting, you’ll likely want to work with an experienced art advisor.
MacLellan: I also think the story around a piece of art and its creator can add a lot of personal value. What’s the history of the piece? Did the artist come from unique circumstances? What other influences on the artist are evident in the piece or a collection of pieces created over time?
Maloney: Absolutely. I’ve worked with clients where the full collection is thought to be worth more than the sum of the parts. This adds another layer of complexity in valuing the collection. When it comes to the history of the piece or the artist’s background, I think it is another opportunity for an art advisor to discuss whether value is enhanced."By determining a client's goals, and how he or she will meet those goals, we can help determine how the art collection factors into the calculation."
MacLellan: That holistic perspective is also evident in our Goals Driven Investing approach. By determining a client’s goals, and how he or she will meet those goals, we can help determine how the art collection factors into the calculation.
Maloney: That’s right. We look at the client’s investment assets, future cash flows and other tangible assets, such as art collections, to help evaluate decisions they can make today, as well as decisions they might need to make in the future to fulfill the underlying purpose of their wealth.
For some, that may entail using the art collection to fund goals, either through future sales or using the artwork as collateral for a loan. Others may be looking to add to their collection, with a vision of the collection being a legacy gift to future generations or supporting philanthropic causes.
Regardless of the level of wealth, Goals Driven Investing allows us to identify key decision points for clients to consider, whether it’s about achieving goals or identifying potential estate values to minimize taxes and optimize wealth transfer strategies.
For example, one individual owned a significant and important collection that was very hard to value. He estimated the collection was worth $35 million and was looking to sell it to support his extended family and philanthropic interests. Through our discussions, we determined that fulfilling this lifetime of goals would require about $25 million, which provided context around what was needed at a minimum from these difficult-to-value assets.
Of course, conditions and priorities change over time, and it’s important to conduct regular reviews. Recently, an older client shared that he had a substantial collection including works from some A-list artists. He believed these would go to his children, but his 20-year-old trust document clearly stated they would be gifted to various charities and museums. He may not have thought about the pieces going to his children when he created the trust, but today, with a better understanding of what he owns, he is set on achieving his goals, which have changed over time.
MacLellan: Those are great examples that really illustrate the importance of goals. Ultimately some people view art as an investment, but as with any other type of asset, there are so many behavioral factors involved. As humans, we’re programmed to want to get in on something that’s doing well, and the art market is no different. That’s an important factor to consider, but at the end of the day, we want our clients to think about the purpose that art serves in their lives.
Mac MacLellan is the president of the Central Region for Northern Trust Wealth Management.
Deiken Maloney is a vice president and senior portfolio manager at Northern Trust.