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Unconventional wealth management products have been in the news for some time now. Retail investors are starting to look beyond exchange-traded funds and the bond market as they try to be smarter with their money, investing in alternative asset classes as a way to hedge their bets. One avenue that’s proven particularly attractive for those looking to diversify their portfolios is the fine art market.
Much like high-end stocks, blue-chip artwork tends to hold onto its value even in a highly speculative market. Though buying fine art might sound like a very unusual way to invest, it’s got a great deal in common with more conventional financial products. By 2021, the art market was already worth over £50 billion, and there’s no reason to suspect that value is going to plummet anytime soon.
Individual retail shareholders who want to break into the market might find it hard to do so because of the inflated price structure, but fractional art investment is helping to change the landscape. Non-fungible tokens as well as online platforms like Masterworks are helping to make it possible to break into the market regardless of the size of your initial contribution.
Enterprising investment groups have put together fractional ownership arrangements that make it possible for smaller investors to purchase a portion of the ownership stake in a piece of art without having to buy it outright. Paintings and sculptures created by the field’s most famous historical personages tend to sell for millions of pounds. That makes it difficult for any single buyer to purchase them without the support of an outside organisation.
Fractional ownership models help to reduce overall trading risk and provide individuals with the freedom to invest any amount of money, which is a big part of what has made NFTs so popular with buyers.
Digital artwork collections quickly became so overvalued that few people were capable of buying some of the most expensive pieces, so they started to instead purchase ownership tokens that essentially represented a single computer file’s worth of material. Fractional NFT shares have also risen in popularity as a result of these dynamics.
Unfortunately, digital assets have a tendency to fluctuate wildly based on how much interest people have in them on any given day. Platforms like Masterworks seek to solve this issue by instead purchasing authentic physical paintings that could be worth a substantial amount more in the near future. They then sell shares in the paintings in much the same way that conventional exchanges sell shares of stock that represent an ownership stake in a much larger company.
For retail investors who are dissatisfied with the current state of affairs in conventional investments, this could represent a major opportunity.
Visual artists working in the current art scene are usually relative unknowns, at least at first, which makes it likely that they would initially sell their work for a small amount. As they become more popular, these works can enjoy far greater margins than even those of the world’s most famous painters. The production of additional works by these artists will help to further fuel the amount of publicity they receive, which in turn can boost the potential profits investors might see from them.
Contemporary art from artists proven to command millions is perhaps the most profitable of all art investment categories, even in an inflationary period. Representatives from Masterworks have seen annualized net returns of 32% for works by Banksy. Some works from artists like Simone Leigh were purchased so inexpensively that they returned more than 300% for investors.
While some in the industry have claimed that blue-chip art is the exception that proves the rule, average annual returns from the art market as a whole are somewhere around 7.6%, which just about mirrors traditional financial markets. There are never any guarantees when it comes to investing, but this does seem to suggest that investors who purchase a number of shares in a piece of art stand a roughly equivalent chance at appreciation as those who purchase speculative funds.
Newer investors might be inclined to try out NFTs, due in no small part to the power of media hype around this asset class. While it’s true that promotional considerations have forced the price of some NFT cards through the roof, this has also led many of them to prove somewhat dangerous for newer investors.
Many believe that signing up for a platform like Masterworks might be the best way for individuals to buy a small piece of the market. Ironically, doing so may be a great way to take advantage of sudden periods of promotional interest.
Past performance is never a foolproof indicator of future gains, so it’s important to keep in mind that there’s no one single way individual investors can pick winners in the art market. It does make sense to pay attention to artists that are getting a great deal of coverage in the media, however.
Nara Yoshitomo is an excellent example. The 63-year-old artist provided the cover art for rock groups like R.E.M. before bursting onto the contemporary art scene in earnest. There he started to get so much attention that representatives from Masterworks took interest and predicted that his 2014 painting entitled Wounded is likely to attract a great deal of interest.
That’s precisely why it was selected for use as a fractional investment product. Since real artwork is tangible, it should always hold onto at least some of its value regardless of how fast money inflates. That’s perhaps the biggest difference between investing in physical non-traditional assets and investing in digital artwork. Due to the fact that the sale of paintings long predated the current explosion of Internet commerce, there’s even a pre-existing legal framework designed to protect consumers.
Situations that might negatively impact the mainstream securities market shouldn’t have as big an impact on the art market as a result. Investors are always encouraged to research everything they put money in, but it does seem like the blue-chip art market is quickly becoming a more democratic place to grow one’s wealth.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.