Art as an investment?

By Chan Quan Min

In the first of a three-part series on art as an investment, KiniBiz tracks the stunning appreciation of art prices and the expansion of the secondary market in recent years. Both factors have helped in dispelling the image of art as a risky and illiquid investment. Sensing that the Southeast Asian art market is ready for serious investors to dig in, a fund manager and art dealer team up to launch Malaysia’s first art investment fund of its size and scale, which is open to the public.

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In galleries and auction houses across the world, and in this country, art collectors are fast giving way to art investors, perhaps even art speculators.

A different breed of art buyer entirely, the art investor takes a calculated approach to buying and selling artwork, often with a view to cash in a handsome profit over a matter of a couple of years. The art investor may see art as a store of value and as a means to diversify investments away from the usual asset classes of stocks and bonds.

This year, the emergence of art as an asset class in its own right is set to take a big step forward with the formation of the country’s first art investment fund of its size and scale, which is also open to the public .

The aptly named Southeast Asia Art Capital fund spearheaded by a core team of three prominent Sabahans was launched just late last year. Fundraising for the fledgling art investment fund is in progress, with the eventual goal of a fund size of RM30 million.

A private equity fund for pooling investor funds to purchase works from Southeast Asian artists, Southeast Asia Art Capital is headed by Valentine Willie, a gallery owner and operator with regional reach until just recently, and Asgari Stephens, a prominent fund manager in both private and public equity investing. They are joined by Angie Ang, the managing principal of corporate advisory firm Affilion.

On the division of roles, Stephens told KiniBiz Willie would be calling the shots on investment decisions given his “fantastic access to artists” and “15 years of experience in the Southeast Asian art market.” Meanwhile, Stephens will concentrate on the corporate governance side of managing the fund, where his corporate expertise lies.

As well as his current role as the principal and founding member of venture capital firm Intelligent Capital Sdn Bhd, Stephens sits on the board of Maxis Communications. Back in 1998, Stephens was part of the communications team of the National Economic Action Council, the consultative body to the Cabinet during the dark days of the Asian Financial Crisis.

World’s first art investment fund returns 6% annually

Art investment funds, such as the Southeast Asian Art Capital fund, have become common in Europe and North America in the past decade.

The Fine Art Fund Group is often credited with setting up perhaps the world’s first art investment fund in 2004. In the time since, the London-based firm has set up four more such funds across different art periods.

As of June 2013 The Fine Art Fund Group managed approximately US$200 million (RM666.7 million) in assets, according to the firm’s website. Investors in the first fund have reportedly seen their initial investment grow 6% annually in real terms. If not for larger than expected administrative costs and foreign exchange losses, the returns would have been remarkable. Reported gross returns for the 2004 art fund is near 19%.

Experience with early art funds has taught investors to be a little more subdued in their enthusiasm. The art market can be temperamental. As Adriano Picinati di Torcello, director of Art & Finance at Deloitte Luxembourg puts it:

“The main characteristics usually used to define art markets can be summarised in the following way: high-risk investment, illiquid, opaque, unregulated, high transactions costs, at the mercy of erratic public taste and short-lived trends.

“Artworks do not generate any cash flows that can be discounted, except to the extent that income can be obtained through lending and incurring expenses in the form of storage, insurance and associated costs. The art markets are also currently virtually ‘unhedgeable’. This short description of the art markets might be enough to discourage many to look at it,” he added.

But Picinati di Torcello is more a proponent, not a detractor, of art-as-investment. In a report released in 2011, he found “good reasons to consider art as a new asset class.”

“External forces, such as globalisation, knowledge sharing, democratisation, increased cultural interest or new communication channels, support the growth of the fine art markets, transform it and push for its ‘financialisation’,” he said in the concluding statement of his report.

“Those phenomena have created discussions on art as new asset classes to unprecedented proportions, fuelled by an explosion of art prices, especially contemporary art prices, in terms of volume of sales and record prices having been reached,” he added.

Closer to home, the Southeast Asian contemporary art market has in recent years seen prices skyrocket.

“Right now, it might seem that things are particularly ‘hot’ in Malaysia, with the emergence of several auction houses and the popping up of new galleries and even art funds, but this is arguably more part of the logic of the development of a growing domestic market, than part of a general regional phenomenon,” Beverly Yong of RogueArt, a contemporary Southeast Asian art consultancy told KiniBiz.

“While we might not be experiencing the dramatic fluctuations, in the auction market especially, of the mid to late 2000s, seasoned collectors are still complaining that prices are rising too fast and putting coveted works out of their reach! But that’s something they’ve done historically.

“With known contemporary artists from the region really breaking into a more globalised market, with international gallery representation and so forth, the most successful are commanding pretty serious prices,” Yong said.

For a view on the prices Malaysian art is commanding of late, take for instance poet-painter Latiff Mohidin’s iconic oil paintings. In June 2011, his ‘Pago Pago Forms’ from his Pago Pago series (1960’s) transacted at RM572,000. Another iconic Latiff from the same series ‘Samarkhand 3’ sold at auction for a record RM605,000 in October 2012.

To give an idea of the wild appreciation in prices in Latiff’s work, KiniBiz scanned the National Art Gallery’s acquisition files and found an entry listing the purchase of a Latiff oil on canvas from the same Pago Pago series for a mere RM350 in 1965. National Art Gallery records also state the same work appreciated only modestly to RM1,329 in 1995.

‘Exciting exit options’

The Southeast Asia Art Capital fund in a prospectus document pitched “exciting exit options” as a key factor to consider investing in Southeast Asian art.

In order to realise investment gains past the art fund’s three-year investment period and fully divest at the end of the fund life of six years, the Southeast Asian Art Capital fund plans to “leverage on Valentine Willie’s relationships, network and knowledge to optimise exit outcome.”

“Valentine with his pioneering experience in the development of the Southeast Asian visual art market is uniquely placed as one of the most respected voices… by renowned art collectors and museums.

“Achieving the best returns possible is a function of both smart and informed buying and selling right to the appropriate buyer at the appropriate time and place through the appropriate channel,” the art fund prospectus sighted by KiniBiz stated, recognising the importance of a well thought-out exit strategy to any investment.

On art-as-investment, RogueArt’s Yong also took note of the inherent illiquid quality of art.

“While the art ‘industry’ has a form of infrastructure like other industries, artists aren’t factories, art is not a standardised, common product and there are very different motivations for acquiring art, influenced by very different forces.

“Appreciation in price is one thing, being able to divest is another, and again there are many factors involved here. Art acquisition, once you brush away the hype, can be very specific,” said RogueArt’s Yong.

But recent developments such as the expansion of the auction route for disposing of art has made headway in turning what was once an illiquid investment into a somewhat more commoditised investment vehicle.

Last year, 2013, some RM20 million worth of art was sold in Malaysian auction houses, according to sales figures gleaned from auction results published online from the four major art auction houses.

Malaysia’s secondary art market is thriving. Buying and selling transactions take place with greater ease and convenience than ever before creating just the right ‘time and place’ for an art fund to step in.

Tomorrow: The form and face of an art investment fund