The key to successfully investing in an art fund is doing our homework and asking the right questions. That is the view of US lawyer and finance commentator Jim Rickards, an art fund investor and author of the New York Times bestselling book, The Death of Money.
“There are some very well structured funds out there but there are some problem funds too,” he says. “I would personally be wary of the funds that are sponsored by dealers because there can be conflicts of interest where as an investor you end up financing dealer inventory. The dealer may favour a particular artist that may not be the right choice for the investors.”
He says the ideal choice is a fund that has no economic interest in the success of a particular artist, and that is run by someone who knows all the dealers but is not beholden to any one of them.
He adds that as an investor you should seek advice before committing to a particular fund and make sure the fund is well structured.
“Read the documents carefully, look for conflicts of interest,” he says. “You may not have a million dollars to buy a piece and hang on the wall but if you have a few hundred thousand, you can subscribe to a fund that, with the right management, will do some sound investing. It’s a good way to participate in the market at a different price point – and a bonus is that with some funds you do get to put the work on the wall for a period of time as part of the ‘rotation’ of pieces owned by the fund.”
Art is an asset with a proven track record for preserving wealth through extreme circumstances and over long periods of time, so Rickards believes it rewards the patient investor.
“In the short term you may be involved in equities or bonds or currencies or some other category but sooner or later they tend to crash and burn. Art remains valuable through all states of the world so it is a good asset class for part of your portfolio.
“It’s worth being patient: when you are at a party and your neighbours are talking about how much money they made in the stock market and you don’t really have those kind of visible gains, you just have to take some comfort from the fact that your wealth is preserved and the day will come when stocks are down 30% and your painting will still be worth quite a bit.”
When investing in an art fund it is worth understanding how the fund manager will take payment from the fund: some funds will have an appraisal of purchased works at the end of each year and if their value has gone up, the manager will take a fee based on that even though nothing has been sold.
“That might happen two or three years in a row and then all of a sudden one year the value will be down but somehow you don’t get your fee back,” says Rickards. “That’s the kind of thing I would refer to as a conflict and a problem.”
In contrast, he says the managers of a well-run fund will not take any performance fees until the art is actually sold.
“When they sell it and they have the cash, they send you your share and at that point they take their fee. There’s never a time when they’re getting a fee just on higher appraisal without actually turning it into cash.”
Rickards adds that it is important to consider the type of art being favoured by the art fund manager. Some trends come and go, and a fund that is narrowly focused on one such trend is in greater danger of underperforming.
“You’ll never go wrong with quality but there are some trends that become very hot; I don’t think the market as a whole is in a bubble but there are certain artists who might be in a bubble and one needs to try to avoid those.
“One of the attractions of a fund is that you can diversify across artists. That’s what a fund manager needs to be doing to avoid concentration risk.”