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Investing with passion

Investing with passion

Posted on: December 09, 2016
Author: Natalie Hewton-Waters, Business Coordinator, Alberta Private Client

Art and collectibles are making headlines. From record-breaking sales, including a Picasso sold in 2015 for over US$150 million to the over US$1 billion of art sold in a single week in New York, this sector is bringing big money, and is gaining notice in the finance industry. Even the Financial Times has added a Life & Arts section.

Today’s art collector, however, doesn’t follow their passion just to leave their money hanging on the wall or hiding in their wine cellar. Art collections have become dynamic assets, utilized as loan collateral and as part of investment portfolios.

The emergence of art and other collectibles as a new financial asset class alongside traditional assets like bonds, equities, real estate, or gold, has been building momentum for some time. In 2015, six out of eight global art markets experienced positive trends and a neutral-to-positive outlook for 2016, indicating art and collectibles may continue to remain an important part of the portfolios of high-net-worth individuals1.

The explosion of post-war and contemporary art prices and sales volumes, coupled with long-term positive trends in global wealth, have stimulated the emergence of new types of financial products and investment vehicles tied to the world of fine art and other rare collectible assets, such as fine wines, rare watches, precious stones, and stamps.

Though artworks and collectibles themselves do not generate cash flow, investors and collectors can take advantage of these new financial services in order to unlock the liquidity of their collections and diversify their investment portfolios.

Though very uncommon in the Canadian market, and currently not available at ATB (though interested parties should discuss alternatives with their advisor), it is interesting to note that art-secured lending is becoming more common, with the size of the overall art-secured lending market in the US estimated at between US$15 billion and US$19 billion in 20152.

Art-secured lending is primarily offered by specialized boutique firms, and can include services like term loans (borrowing against your art), acquisition financing, dealer inventory financing, and arranging loans to museums and exhibitions. Those interested in this type of financial product should request their art and other collectible assets be included in their wealth report. This will provide a more holistic view of their wealth and the worth of their collection in preparation for discussion regarding turning their collection into liquid assets through art-secured lending.

Art investment services, though still rare, are developing at a rapid pace and the amount of information available and opportunities related to art investment continue to grow. Art investment services can include art investment research, portfolio management, monitoring and selection of art funds, and art securitization.

Art investments have a historically low correlation to the financial markets of other asset classes, such as equities, bonds, and properties, and therefore provide an ideal hedge against inflation and an important opportunity for investors to positively diversify their portfolios.

A number of art indices, including those produced by Mei Moses®, are in existence, and a number of art investment funds have recently been established. The Fine Art Group, for example, was founded in 2001 by Philip Hoffman, a former finance director of Christie’s auction house. It has expanded from operating one long-term art investment fund to managing six funds. These privately offered funds generate returns through the acquisition and disposition of works of art.

Investors and collectors interested in realizing the financial benefits of art and collectible assets should speak to their financial and investment advisors. They should also seek art advisory services. According to a survey conducted by Deloitte in 2015, 72 percent of art collectors say they buy art for passion with an investment view3.

As with any asset class, passion investing requires careful consideration and expert advice. Art advisory services can include art research (regarding authenticity—collectors can also refer to The Art Loss register, a database of stolen art—as well as art markets, prices, etc.), representation of your interests during purchases and sales, art management (valuation, insurance, storage, collection advisory and management), consulting on tax implications (structuring and managing collections in a tax-efficient manner), and inheritance and philanthropic planning. There are a number of advisory firms that specialize in providing advice specifically targeted to collecting and passion investing.

Those interested in incorporating art financial products and investments into their financial strategy should be aware that art is not a short-term investment with big returns. However, with the right advice and planning, you can enjoy both the emotional and financial benefits of art and other collectibles.

1 Deloitte Luxembourg & ArtTactic Art & Finance Report 2016, 16.
2 Deloitte, 18.
3 Deloitte, 17.

This article was first published in Navigate, an ATB Investor Services publication that provides valuable insights for wealthy and institutional investors. To read the full issue, click here.

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