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Building a Better Art Index

Building a Better Art Index

Artnet has just launched a new art pricing index that it claims will demystify art investing. It covers more ground than the benchmark Mei Moses, but is that a good thing? Art world advisers say successful art investing will continue to resist formulas and equations.

You may have noticed the art market is on a bit of a tear. Two weeks ago, Edvard Munch’s “The Scream” broke the record for most expensive artwork ever sold at auction with its purchase price of $119.9 million. The previous record was set in 2010, when Picasso’s “Nude, Green Leaves, and Bust” sold for $106.5 million. Meanwhile, the broader “art market” kicked up a nice return last year while the equity market was volatile and sluggish. The widely followed Mei Moses All Art Index rose 10.2 percent for 2011, compared to a virtually flat S&P 500. In addition the most recent ten and five year compound annual returns for art, 4.6 percent and 7.7 percent, exceed S&P 500 returns of 0.0 percent and 2.9 percent, respectively, according to Mei Moses data.

You might think all of this would make art investing a pretty appealing prospect. But no. Investing successfully in art has always been a bit of a quagmire: opaque, inscrutable, unpredictable, ruled by passionate collectors and secretive insiders, a dangerous game for amateurs.

One veteran of the art world, Artnet, wants to change all that—to a certain extent. Artnet is hoping to make art investing a little more approachable and transparent with something it’s calling the Bloomberg terminal of the art market. Last week, the firm launched a new set of auction pricing analytics and a new index, which users can then slice up in a dizzying number of ways. In part, the firm says this new index will help financial advisors benchmark and monitor a client’s portfolio of art works much like they monitor the client’s other investments. Instead of keeping any talk of your client’s collection of Lucian Freud and Peter Doig paintings out of the office, you could actually integrate them into his full financial picture.

“This is a phenomenal market, it’s extremely active, there’s a lot of money in it,” says Artnet director of analytics Thomas Galbraith. “At the moment, asset managers have no way of knowing how their clients’ art is performing against their other allocations and that’s what we’ve tried to change.” He continues, “What we’ve been trying to do over the course of Artnet’s life is bring transparency to the market. Some people argue that part of the reason the past 20 to 30 years has seen such an increase in interest and activity in the art market is because that opaque market is starting to get a little bit clearer and a little bit clearer and we are part of that process.”

Artnet has long provided pricing data to industry participants and it monitors 700 auction houses around the world, 2,000 galleries and 8 million works of art, with some price data going back to the 1980s. (Artprice and artinfo also provide art data online.) With Artnet’s new analytics and index, users can track prices across three art genres—impressionism, modern and contemporary—but the firm is in the process of creating sub-indices that would track contemporary Chinese, contemporary photography, pop art and surrealist works.

Users can also track a single artist, a series of works by that artist, a single work of art, or they can create a custom index that represents a particular collector’s holdings, with each artist weighted according to his or her representation in the collection. Artnet’s new program also generates reports that examine other market variables like price volatility and liquidity. For example, you can compare average sales price to expert price estimates, the percent of lots that are sold below and above the average price, as well as sell-through rates (the number of pieces that sell in a year versus the number that don’t sell) and buy-in rates (the number of pieces that sell at auction versus those that go to auction but fail to sell).

So why does the art world need another index when it’s got Mei Moses? Artnet says it offers far greater volume of data, all of these additional metrics for measuring sales rates and pricing trends, and it provides complete transparency on its methodology. Mei Moses, says Galbraith, only measures pricing at Sotheby’s and Christie’s auctions, which creates selection bias. Artnet also claims that its methodology is better. Whereas the Mei Moses tracks prices of individual works using repeat sales data, Artnet uses the Us government guidelines that appraisers use when they price a work (called USPAP), pulling together pricing of like works, which gives them a greater volume of data to work with.

Mei Moses

Mike Moses, retired NYU Stern School of Business professor and co-founder of the much followed Mei Moses index, not surprisingly, has a few things to say in retort. For one, he argues that prior sales price is the best way to predict how much a work of art will sell for at auction because appraising works is so difficult. “No one can predict the value of an individual work of art,” he says. “Sothebys and Christies have the experts to do that—they offer high and low estimates in the catalog, and yet two-thirds of the works sold fall outside of these estimates. Who knows who’s in the sales room at the day and how much they want the painting?”

He also scoffs at the idea that his index exhibits selection bias. Christie’s and Sotheby’s account for the vast majority of major art works sold around the world, and his index is meant to track mature, important art, not pieces that sell for $1,000 a pop. It’s the S&P 500 of art, he says. In addition, smaller auction houses tend not to list the provenance of their works, making it impossible to get repeat sale information.

The Mei Moses index, which tracks a database of 30,000 repeat sales, has been widely accepted in economic peer review journals, he adds. It has worked well for Case-Shiller when it comes to real estate, which like the Mei Moses tracks a heterogeneous asset class: every piece is different.

“There are 300 million people in the U.S.,” says Moses. “You don’t need to know the height of each one of them to estimate the height of the population. Also, we’re looking at returns, how much was made on a work of art over time. Is art an asset class? And if so, what are its returns? We want to be able to compare it to other asset classes.”

The Art of Buying Art

Artnet is not claiming that a collector or financial advisor can use its index or reports alone to make smart investing decisions. “We offer the data but ultimately you need advisers when you are making buying and selling decisions,” says Galbraith. “Because there is additional information to what we provide that will be pertinent. We don’t’ advise making buying and selling decision purely on the index. You always need to have additional advice.”

Still, veteran art world advisers bristle at the suggestion that this index will allow art investors or their financial advisors to get a real handle on the market.

“These indices are a very useful guide, once a year, to see what’s happening, what the volumes and how the market is compared to last year as a general guide,” says Philip Hoffman, chief executive of the Fine Art Fund Group, an investment manager specializing in art with about $100 million under management. “What Artnet hasn’t a clue about is whether a work has been offered by the dealers before the auction, whether it’s damaged, whether it’s been repainted, whether it’s been on the market privately recently and it’s a distressed sale, whether there are 10 of the same picture on the market at the same time, whether there is going to be a museum show coming up some time in the future, or whether some oligarch went mad and paid $8 million for a picture today but tomorrow doesn’t want to enter the market. So it’s fine when you’re looking at Warhol prints or multiples, but for an investment house like ours, when you’re spending hundreds of millions of dollars, it’s not really a useful investment tool.”

David Kusin, founder and president of Kusin & Co. Dallas-based research firm focused on fine art, decorative art and antiquities, which purchases art for hedge funds and has its own proprietary analytical frameworks, says he has some serious quibbles with Artnet’s methodology, despite a high regard for its raw data. (Kusin and Galbraith appear to disagree on how to best model pricing, but there isn't room to get into the details here.) Kusin’s practice, which uses Artnet’s data for its own analysis, gets seriously technical about its art buying. “For instance if one of our clients has a portfolio of German single a and double a rated corporate bonds and they want to hedge their financial risk we’ll do an analysis of all art that’s been sold in the world since 1988 and come up with a very precise subset, for instance, 18th century English case furniture, that appears to have run totally counter to asset values of these bonds,” he says. “Then we’ll go into the market and buy $100 million worth of this stuff over a two-year period. So we have a very precise mandate from our clients.”

Renee Vara, art adviser and collection manager with Vara Fine Arts in New York, who also teaches at New York University and at Sotheby’s, says she’s noticed a change in the way people approach the art market. “It gives you a sense of what’s coming. There’s something very palpable that’s changing. The art market has always been an area where business people wanted to get into it for business purposes but the bedrock of most art moves is art and understanding economics. The underpinnings of it as a market is very difficult and that is largely because the market is split 50-50 between public auctions and private transactions. Traditionally people my generation and more seasoned generations, the object drives the market, and the data backs it up. When I teach classes, students are asking, ‘Are you looking at graphs? Do you use these graphs?’”

Will that shift toward a business approach make Artnet’s index more useful? Perhaps. Artnet says the company has been approached by a number of financial institutions to develop related products, which could take the shape of ETFs, ETNs or future market products. “Various firms that we’re in touch with are examining how our indices correlate to other asset classes to determine the best vehicle for it,” said Galbraith. The firm says it is also in discussions with some “very old” private banks who want to create custom indices for their clients’ art collections.

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