The case for Art as an alternative investment strategy

Art has recently gained attention as an alternative investment option as investors look for ways to diversify their portfolios in the face of increasing economic threats and improve risk-adjusted returns.

Traditionally, investors have diversified their portfolios by allocating a portion to stocks, bonds, and cash. However, this approach has become less effective in recent years due to the increasing correlation between these asset classes and their sensitivity to factors such as interest rates and inflation. For example, during the sell-off at the beginning of 2022, there was a high correlation between equities, fixed income, and commodities, resulting in drawdowns between 15-25% (source: Bloomberg Finance).

In a volatile market environment, alternative asset classes such as real estate, hedge funds, private equity funds, venture capital funds, and fine art can be particularly helpful in improving a portfolio’s risk-adjusted returns. This is similar to building a house on shifting sand – equities, fixed income, and commodities are like the sand, constantly moving and unable to provide a stable foundation, while the alternative asset classes such as real estate, hedge funds, private equity funds, venture capital funds, and fine art are like the foundation, providing stability and protection. 

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Institutions allocate between 15-60% to alternative investments.

At the institutional level, we see four groups of major investors in alternatives: large public funds, endowments, growth-oriented sovereign wealth funds, and family offices. The most active of these are US university endowments, some with allocations as high as 60%. It is now the norm to see 40% to 60% allocations to alternatives in big endowments (Source: UBS Asset Management, Alternative Investments Report, December 2020). According to a recent survey, global family offices allocate an average of 37% to various alternatives. Mega funds like large public pension plans and sovereign wealth funds have also increased their alternative asset allocation. According to Blackrock Investment Management Research, global pension funds’ alternative asset allocation has increased from only 5% in 1996 to 26% as of 2019.

Increasing alternative asset allocation has also resulted in better overall risk-adjusted portfolio performance. According to BlackRock Investment Management Research, alternative investments contributed 10% of returns, with a 5% allocation in 1996. This figure has increased 5-fold by 2019. Despite having only 26% allocation, alternative investments contributed close to half of the portfolio’s returns.

Art is gaining traction as an alternative asset class.

The UBS Global Family Report 2020 found that family offices allocated 3% to art, on par with gold and other precious metals. Knight Frank’s The Wealth Report 2012 and Credit Suisse’s 2020 report noted a global average of 5% allocated to art and collectables. Also, an average of 23% of wealth managers surveyed in Knight Frank’s report saw an increase in their clients’ spending on tangible investments of passion during the pandemic, such as art and classic cars. A recent Citibank report also suggests a 3-5% allocation to art as an alternative asset class.

According to the Citibank Art Market Report, contemporary art has seen an annual return of 14% over the last 25 years versus 9.5% from the S&P 500, surpassing recent escalated inflation rates. This makes art a particularly attractive and lucrative asset class, as returns on contemporary art have consistently outpaced traditional investment options such as stocks and bonds.

Art investment may help improve the risk-adjusted returns of a portfolio.

Art investments can improve returns by providing portfolio diversification, which reduces risk and can improve overall returns. Art is largely uncorrelated with other asset classes, such as stocks and bonds. It presents a unique opportunity to add value to a portfolio while minimising risk. For instance, adding a small allocation of art investments to a portfolio of stocks and bonds can reduce the portfolio’s exposure to market volatility, providing a smoother return profile. This is similar to how a boat can stay afloat despite the strong winds and choppy waters; it can remain stable and ride out the storm, whereas the turbulent seas may capsize other vessels.

Art investments typically exhibit lower volatility and higher returns than liquid investments like stocks and bonds. This is largely due to the relative illiquidity of art investments, which serve as a buffer against market downturns. Additionally, the relative lack of investors in art markets means that prices remain relatively stable, and gains are more likely to be realised when there is an increase in demand. During 2020, and the first months of the pandemic, contemporary art outperformed all major asset classes, posting growth of 6.7%, whilst many others fell significantly.

A similar trend could be seen during the 2008 financial crash. On the day Lehman Brothers were declared bankrupt, Sotheby’s London held a two-day auction of the latest work by Damien Hirst, raising $198 million (£111 million) and setting a new world record for a single-artist auction. Along with most other markets, the art market contracted in 2009: Christie’s and Sotheby’s saw revenues plummet by 47% and 60%, respectively; the S&P 500 fell by 46.1% between October 2007 and March 2009. By 2010, the situation in the art market was very different. Only fourteen months after the financial crash, Alberto Giacometti’s L’homme qui marche sold for $104.3 million at Sotheby’s London (February 2010). Three months later, Pablo Picasso’s Nude, Green Leaves and Bust sold for $106.5 million at Christie’s New York. By the end of the year, the art market recovered to the pre-crash peak levels of 2007. The S&P 500 took until March 2013 to recover its losses, two years longer than the art market. (source: ArtPrice, Investopedia)

Mintus makes art investing hassle-free and transparent.

Mintus is a UK-based FCA-regulated investment manager that has taken an innovative approach to art investing by offering investors access to high-quality artworks through a diversified and actively-managed portfolio. Mintus provides investors with the benefits of art investing, such as low correlations with traditional financial assets and the potential for long-term capital appreciation, while minimising the risks and complexities typically associated with art investing.

Art investing can be risky due to the lack of liquidity and the subjective nature of valuations. It can also be time-consuming and costly to buy and sell individual artworks. Mintus’s portfolio is managed by a team of art industry experts who carefully select and curate the artworks, ensuring that each piece meets rigorous investment criteria. This helps to minimise the risks and complexities of art investing and provides investors with a more streamlined and cost-effective way to access the art market.

Mintus allows qualifying investors to buy shares and invest in high-value contemporary art, democratising access to a previously inaccessible asset class.

The Mintus team combines a blend of expertise spanning the technology and art worlds, including founder Tamer Ozmen, who ran Microsoft’s Advanced Consultancy Services in the UK, Chairman Maarten Slendebroek, former CEO at Jupiter Fund Management and Chief Curator Brett Gorvy, former global Chairman at Christie’s. Industry experts source art based on many criteria, including a sustained auction track record, historical price performance and international appeal. More than $150m worth of paintings will be on offer to Mintus investors over the next 12 months.

Art is increasingly recognised as a viable alternative investment option, particularly for investors looking to diversify their portfolios and improve risk-adjusted returns.

Vedat Mizrahi, CFO at Mintus

Vedat is the Chief Financial Officer at Mintus, an alternative investment platform aiming to democratize contemporary art ownership and investments.

https://www.linkedin.com/in/vedatmizrahi/