Art Not Just for Art's Sake

Following a week that saw a Brett Whiteley painting – the 1976 canvas My Armchair – fetch $3.9 million at auction (a record for the artist), it’s surely apposite to look at art as an investment.

As long as it is envisaged in the investment strategy, a self-managed super fund (SMSF) is perfectly entitled to own artworks – within limitations. The prime one of these is that under the ‘sole purpose’ test set out in the superannuation legislation, the trustees of a SMSF must ensure that the fund is maintained for the sole purpose of providing retirement benefits to members – and that the assets owned by the fund serve this purpose.

Art can do this, firstly by appreciating in value and generating capital gain; also, it can generate income for the fund.

But if your fund owns art, it can’t be stored at your home or the residence of a related party of the fund; it can’t be leased to a related party of the fund; it must be insured; and it must be purchased or sold at market price as verified by an independent valuer.

It is also a good idea to have regular valuations of the art, keeping in mind that there are really two values for an artwork at any time: one, the insurance as this is the insurance (replacement) value of the artwork should it be lost through fire, flood or theft; and two, the realisable price if the artwork were to be sold through auction. The latter is like the value of your house: you don’t know what it is worth until it is sold, and the buyer and vendor agree on a price.

The insurance valuation and the expected realisable value can be very different numbers: art can be hard to sell, and owners cannot expect anything approaching the expected realisable value if they sell the art. Like houses, they could get more on the day, and they could get less.

But in the right circumstances, art can be a perfectly sound and valid investment for an SMSF, says Raj Nanda, chief executive officer of Sydney-based art gallery and investment advisory firm Art Equity. “Fine art is a genuine alternative asset class with a proven track record,” says Nanda. “It is a ‘real’ asset, a very sound diversifier in a well-constructed portfolio, and has potential for excellent growth, and a very good inflation hedge, too.”

"Fine art is a genuine alternative asset class with a proven
track record," Art Equity’s Raj Nanda.

Nanda says the key is that art is a truly uncorrelated asset, the valuation of which does not move in concert with the traded investment markets of shares, bonds, property or derivatives. “Art’s very low correlation with the traditional assets makes it an excellent tool for portfolio diversification. Art valuations tend to move in slow and long-term cycles, and most of the studies show that performance tends to match if not slightly out-perform equities, for example, over the long term, but with significantly less volatility (that is, the standard deviation of annual returns).

“But as with any asset class, it is absolutely critical to do your research and know what you’re buying,” he says. “How well you do really depends on what you buy.”

Nanda says the art investment side is about 60% of Art Equity’s business. “We create portfolios for our clients, and depending on how comfortable we are with it, we will underwrite a return on that portfolio for two to three years. It might be 6%–7% a year for two years. Then we take that portfolio, which the client owns, and hopefully place it into the corporate market, to go on display.

“That way, it complies with the conditions of SMSF use, which is that the fund trustees and related parties do not derive any personal use of the asset, and all investment attributes accrue at arm’s length. For example, if you go to City Tattersall’s Club in Sydney, you’ll see about 35 pieces of art that we have hung in there. Our clients own those pieces. City Tatt’s Club pays us an annual fee, we make sure the art is hung properly, it is insured, and we do all the admin, we get a certificate of currency every year, they give us a return and we give a return to our clients. Any capital appreciation in those pieces is to the benefit of our clients’ SMSFs.”

As with any asset portfolio, Nanda says an art portfolio must be diverse, representing several sectors and stratas of the market. “If I buy an emerging artist, I’m taking a pretty big risk, in the sense that I don’t know if that artist is a long-term successful proposition. That’s different to an artist like Del Kathryn Barton, for example, who has recently won awards, and is in the right collections, and is getting a lot of media coverage.

“Then there’s mid-career, they have an auction record, maybe not a strong record, but they’ve won the prizes, they’re recognized – like Ben Quilty. They may say, ‘I only want blue-chip artists,’ which makes it almost impossible, but the thing about the blue-chip artists – for example, John Olsen – is that they also produce works on paper. They’re still originals, they’re still signed, but they’re not oils on canvas or acrylic on canvas, so the price points are much lower. They should go up if the artist’s work in general is going up, unless of course, it doesn’t represent their best work.”

Then there are the sectors, indigenous art, Chinese art, and so on. “There are all sorts of sectors coming in and out of fashion, and it really requires some expert advice. People ask us to create a portfolio for $5,000, but you’re not going to get much diversification for that. I would say that an art investment needs at least $10,000 if you’re looking at some kind of diversification, but $15,000-$20,000 is a much better figure,” says Nanda.

The fact that art is not traded very often can be a positive attribute, he says. “Even that inertia in an asset has some attraction when the rest of your portfolio is being valued daily. That is one thing we really stress, and that’s why art makes so much sense in a SMSF, is that it is a long-term hold: you can’t expect to buy something today and sell it in two years’ time, even five years’ time, for a big profit.

“John Olsen is in his late 80’s, he is one of the most important artists in the last 100 years of Australian art history. With over 3000 trades in the secondary market and an auction record of $1.09 million, there is a solid probability that there will be a surge in his prices as his long career draws to a close,” he says.

Nanda says art investment is all about understanding what you’re investing in, doing your research and determining your risk profile. “You can’t just jump in: even the indigenous market, it’s so big, and there’s so many artists, you’ve got to choose correctly within it. That’s why it is so important to do your research, to speak to people like us, go to galleries, get second opinions." The Australian Art Sales Digest website at www.aasd.com.au and www.artprice.com are very handy: you can track artists and their works, again predominantly auction records, how they’re doing and what prices they’ve achieved, which helps you make a decision.