Do works of art provide a good return compared to equities, or do they carry an aesthetic discount? Can investors use art to hedge equities? In their July 2009 paper entitled “Art as an Investment: the Top 500 Artists”, Roman Kraeussl and Jonathan Lee employ public auction prices from Artnet.com to construct and analyze a Top 500 Art Market index based on historical prices of artworks by the top 500 artists in the world (as ranked by Artprice.com). They relate art returns to those for commodities, corporate bonds, 10-year U.S. Treasury notes, hedge funds, private equity, real estate, global stocks and U.S. Treasury bills. Using prices for nearly 100,000 art transactions and contemporaneous quarterly levels of indexes for other asset classes over the period January 1985 through March 2009 (as available), they conclude that:
- In 2007, the total value of art at public auctions was $9.2 billion.
- Medium, auction house, size, signature, availability of an estimated price, artist living/deceased status and artist reputation are significant indicators of price for individual artworks.
- Art in aggregate has an annualized (geometric mean) return of 7.3% over the sample period, third among the asset classes considered, with the highest volatility.
- Art in aggregate has a beta of +0.70 relative to the MSCI World Equity index, with return correlation +0.25, indicating that art is uninteresting as a hedge for equities.
- In broader asset allocation context, art in aggregate exhibits diversification benefits and merits inclusion in an optimal portfolio. Weighting of art diminishes as investor risk aversion rises.
The following chart, taken from the paper, plots the end-of-quarter Top 500 Art Market index over the entire sample period, starting at 100 for the
first quarter of 1985 (1985:Q1). A high index volatility is evident. The lowest (highest) index value of 83.1 (1226.3) occurred in 1986:Q1 (2007:Q4).
In summary, evidence indicates that art in aggregate: (1) has delivered a competitive mean return, but with extremely high volatility, over the past 24 years; (2) is not a good hedge for stocks; and, (3) generally offers diversification benefits to a portfolio of asset classes.
