Last month was stellar for art sales crowned by the $104 million sale of Giacometti’s sculpture “Walking Man I,” which sold for four times Sotheby’s asking price. Other big sales included a Gustav Klimt painting for $43 million and works by Cezanne, Matisse and Egon Schiele, bringing Sotheby’s total sales for the week of the auction to $236 million, much more than anticipated. Christie’s brought in $150 million for impressionist and modern art paintings including two paintings by Picasso.
What does this mean? Is the art world recovering faster than the equity markets? Just what kind of investment is art and how does one assess it as part of a portfolio? Of course that all depends on the art in question, but in a world where there is an index for everything, there is also an index for art that can be compared with the S&P 500. The Mei Moses All Art Index, created by two former NYU professors Michael Moses and Jian Mei, compares the art market to equities dating back to 1875. (They were able to find art catalogues with prices dating back that far.)
To cut to the chase: stocks did better, returning a compound annual return (CAR) of 8.7% versus 4.5% for art. However, this trend shifted in the mid 1950s, when art pretty much matched, and in some categories outdid, stocks. In the last 50 years returns were very close, with art achieving a CAR of 8.9 versus 9.4% for stocks. Moses believes that’s because before the 1950s there was more art than money around to buy it. Art buying was largely the domain of the robber barons. Subsequently the growth of high net worth wealth has increased substantially while the supply of established or mature art has remained constant or decreased.
“The art market hit bottom in the middle of last year and didn’t recover that much,” says Michael Moses, who is now retired but still maintains an office at NYU. “It was off about 24.5% by year end, trailing the market. But there were some decent sales in November. It seems like it’s starting to turn.”
The index breaks out five art markets: old masters and 19th century, impressionist and modern, post war and contemporary, America before 1950 and Latin American. While equities have outperformed art from 1875 to the end of 2009, since 1984, post war and contemporary art and Latin American art have beat out other types of art.
According to Moses, art is poorly correlated with the stock market, a good thing for portfolio diversification. Correlations between the All Art Index and the stock market are negative 0.02 and 0.09 for the past 50 and 25 years respectively. “We find very low correlation between these two indexes on an annual basis,” says Moses. “I think the reason is that you often can have a bear market in six months, and since we only look at things annually, we wouldn’t even track it.”
Nonetheless, it turns out that the art market experiences similar bubbles to the stock market. For example, the art market soared in 1985 to 1990, when the CAR of the art market was 30%. It subsequently tanked in 1991-1995, losing 65% of its value. Art experienced another bubble in 2003 through 2007, during which the art index had at CAR of 20%. This bubble too burst with the collapse of the stock market 23.5%. For the past 10 and five years however, the Moses Mei All Art Index outperformed the stock market, returning a CAR of 5.5% and 3.3% respectively, compared with stock returns of -1.3% and -0.1%.
The All Art Index uses a similar methodology to the Standard & Poor’s Case Schiller residential index. It calculates changes in price of the same piece of art from one sale to the next in the transparent market of New York auction houses. They use that difference to calculate the compound annual return of a work of art. Currently the index has 15,000 sale pairs and adds approximately 1,000 new pairs a year.
The founders of the index are currently working on a paper about how financial advisors and wealth managers can use the art index. “Once you have an index, you can use it for asset allocation,” says Moses. “Most managers shy away from giving clients advice because they don’t know about art, but for someone who owns art, optimal portfolios can be generated and then the wealth manager can incorporate the art in the decision making. If they own art and you exclude it from their allocation, you expose them to more risk than by including it given its good return over 50 years and low correlation.”
Futhermore, he says, unlike gold, for example, which may hold mining stocks as well as bullion and may even hold other kinds of metals, art is a pure and independent alternative asset class.