Katalin Tóth 04. 23, 2007. Monday 11:09

Artworks can be an important part of an investment portfolio. They not only provide mid-term returns (5 to7 years) comparable to equity investments – as shown by
charts comparing the growth of Standard & Poor’s 500 equity index and the Mei/Moses Fine Art index – but can also stabilize the return of the portfolio.
Why? Because art has no correlation with the returns on stocks or bonds, says Katalin Gereben, CEO of Equilor Fine Art Kft, the art investment advisory arm of brokerage house Equilor
Zrt. “In fact in crisis situations, like military or political conflicts or economic depressions, the price of art increases while other investments lose most of their value,” she adds.
Art has performed strongly in periods when equity markets are down, says Hopewell Norwood, co-director of the largest European art investment fund, the London-based The Fine Art Fund.
Professor Michael Moses of New York University told the Economist that “owning both art and stocks can reduce the volatility of the portfolio by up to 20% while returning about the same
amount.”
Gereben points out that investing in art has its own peculiarities. For example, one must take into consideration the low liquidity of the market (auctions, where the highest prices can be
reached, are usually held only two or three times a year) and the high transaction costs of buying paintings or graphic art (the commission of an auction house is around 25%, and seeking
expert opinion is recommended, with significant costs for restoration, transportation and insurance).
Some people start collecting art mostly because of the high returns while others have a passion for it, but sooner or later every investor gets involved in collecting, Gereben said. But buying
art is becoming similar to other forms of investment. There are formulas that help investors plan their portfolios, and there are financial products based on art investments, for example art
funds that lower the high level of entry to the market and diversify the portfolio, or bank loans for owners of art collections who can use their portfolio of paintings as collateral.
Several art indexes provide a benchmark to measure the performance of a portfolio of paintings or graphic art, such as the Mei/Moses index or the Art Market Research (AMR) All Art 100
(measuring the performance of the 100 “blue chips” of the art market), or even specialized indexes such as the AMR Contemporary Art 100 index (measuring the yield of artworks created
from 1985 to the present). These indexes measure the auction prices of art sold in a given period.
This makes it possible to measure the exact value of an artist by comparing the price of his work with the art market as a whole, with comparison to other artists and forms of investments.
(The indexes do not include the prices of artworks sold in galleries or between private collectors, because the price is not known.)
Now it is possible to measure Hungarian artists, with an online database, www.mukincs.com, providing a Hungarian art market index and several other measurements. It measures, for
example, the average price of Béla Czóbel paintings against other Hungarian artists, the Hungarian art market, the index of the Budapest Stock Exchange (BUX) and the Hungarian bond
index MAX.
The value of works by Czóbel, for example, provided an average 547% growth between 1997 and 2006, while the BUX index grew less than 400% and the MAX index measuring the yield of
Hungarian bonds increased by about 300%. Website owner and art historian Lajos Golovics says his website provides auction prices for about 40,000 artworks in the past 10 years.
The financial performance of an artist can be seen on the website adjusted with inflation or using its original price. A ranking, for example, that shows the average price of the works of an
artist makes it possible to build a portfolio of the artist that suits the investor’s financial means, return expectations and willingness to take risks.
The index shows the average price of a square centimeter of the artist’s work, an odd concept initially but eliminating the fact that larger paintings by the same artist from the same period
usually sell for more.
This still might not be enough for investors to build up a portfolio as professionally as large funds do, due to the Hungarian collectors’ limited resources and the small size of the Hungarian art
market.
The managers of The Fine Art Fund, for example, offer a conservative investment strategy among the major fine art classes, investing 30%-35% in old masters, 10%-20% in impressionists,
15%-20% in modern art, 30%-40% in contemporary art I (1960-1985) and 5%-10% in the riskier contemporary art II (1985-present). They also offer a contemporary fund in which young
artists, who are a riskier investment, have a much higher weight.
Other formulas show the liquidity of the works of an artist, for instance the number that were offered for auction in a given year and the rate at which they sold.
The volatility of the prices for an artist can be measured using the website. For example, the lowest-priced 10% of József Rippl-Rónai paintings sold for an average Ft 1.13 million, and the
most expensive 10% sold for Ft 67.37 million. The numbers show how coherent the quality of the artist’s works is, according to the market. Paintings of artists that show large deviations are
of course riskier.
“The quantitative indicators cannot replace expert art historians when setting a fair value of a painting, but they make it possible for investors to decide well before an auction how far they
should [bid] for a work of an artist, so they do not have to make a decision in the heat of the moment,” Golovics said. To make such a decision easier, his portal provides a measurement of
how much the price of an artist has grown since a previous auction, the difference between the put-up price and the price at which the artworks were sold.
These calculations and charts are absolutely correct and internationally recognized in measuring the average price of an artist and setting a sensible average price, but they say nothing about
the current value of a particular piece.
The writings of art historians can help to show whether a painting or graphic is a known work by an artist – or possibly a previously unknown work– and can help place the particular painting
in the body of his work, and whether the period was his best period, often but not always the late period of his life when the most mature pieces were created.
“Béla Czóbel, for example, like several Hungarian artists in the 1920s and 1930s, lived and studied in Paris. The pictures he painted there were sold abroad and reach higher prices due to
higher valuation of the foreign markets and the rarity of the paintings from that period,” BÁV Zrt auction house director Beatrix Mélykúti said.
Formulas can tell whether the quality of an artist’s work was consistent, but it takes some research to see the rarity of the picture; how many similar works were made in that period. It also
takes research to see whether the specific painting was made to order and the artist did not take great care, or if it was an important work for the artist, embodying his artistic outlook on the
world.
Studies by an art historian introduce the resumé of the artist, listing the important events in his life and the important exhibitions in which he took part, which school he belonged to, when
where his creative periods, and description and analysis of his important works, illustrated with pictures and often interviews with the artist, and quotes from art historians.
Golovics adds a kind of “analyst report” in which he shows the historical valuations of the works of the artist supported by charts and mathematical models. These are similar to an equity
analyst report about a stock, but without a clear a buy, hold or sell recommendation. However, the data on the site can expand it into a fair value of the works of an artist.
Making art analysis even more sophisticated on the global market, there are already indicators of the expected price growth of young contemporary artists who have not sold at auction yet.
Under the Hammer is a column that offers a peek behind the curtain at developments taking place on the local art and auction scene.

The author can be contacted at Katalin.Toth@bbj.hu