The HIGH Risks of Investment into Modern Art

I was recently asked my opinion on investment into modern art, and I thought I’d share my view on this controversial subject with my LinkedIn network. But, before I get into modern art specifically, I like to give a quick, impartial review of the risks and potential benefits of investing into art in general.

Art (at least, in the investment sense) includes drawings, paintings, and sculptures. It can grow in value in excess of inflation, but unless you’re charging people to view it, it produces no income and actually costs money to store, transport, and insure. It can be expensive to buy and sell due to the fees/commission charged by professional art dealers. It is often highly illiquid, with a very small market of specialist collectors available to sell to – hence the need for professional art dealers!

CGT is charged on disposals of works of art greater than ￡6,000 at the usual rates of 10% (basic rate) and 20% (higher rate). You can’t hold artwork in an ISA or investment bond, and it’s taxable property within your pension. However, that’s not to say there aren’t some tax planning opportunities with art investments. In fact, collectors and galleries in the modern art community in particular have been accused by some of conspiring to inflate the value of modern artworks, specifically in order to allow people in the community to avoid tax by donating something valued at millions, that’s actually worth nothing, to an art gallery.

From an investment perspective, art is very difficult to value. Once you accept that something is only worth what someone else is willing to pay for it, and that these are one-off pieces with very small markets of wealthy collectors, and that art is so often sold at auction, it becomes practically impossible to value day-to-day. Its market value – what other collectors are willing to pay for it – could fluctuate wildly with changes in the market. Evolving trends and fashions in the art market provide the potential for enormous volatility – huge capital gains or losses, which could be significantly exaggerated by gearing.

Artwork is not generally covered by the Financial Services Compensation Scheme, as the purchase and sale of art is not a regulated activity.

Artwork can be difficult to authenticate, with high profile cases of investors paying thousands, or even millions, for a piece of art only to discover later it could be fake. In 2006, an art lover bought a painting bought for ￡165,000, thought to have been painted by British artist Sir William Nicholson, discovered in 2018 it could be practically worthless after an art expert cast doubt on its authenticity.

In 2017, some in the art community called into question the authenticity of a $450m Leonardo Da Vinci painting, although experts believe it is real. But, real or not, it is objectively beautiful. It’s amazing. The detail, the realism, everything.

It’s something I could look at for hours, in the most intimate of detail. It inspires me. It is something I could never even dream of creating myself.

The $450m selling price at auction was a record. This was the crown jewel of the auction. What you may have missed at the auction, however, is this:

In case you’re wondering what this is, it’s a plain blue canvas with a white line down the middle. Now, at the risk of sounding uncultured, this is not what I would personally consider to be “art”. It’s a plain blue canvas with a white line down the middle. To my untrained eyes, anyone could’ve painted this. However, the art community (and the Guardian newspaper) evidently disagrees with me, as some bloke paid a whopping $43.8m for it, with the Guardian calling it “a bargain at any price… [it sold for] a fraction of its true value.”

The Guardian continues, describing the work as: “A powerful example of [the artist’s] ineffable style at its height of confidence and magic… A single white line divides a flat expanse of blue: it seems to rip open the universe, a crack in space and time”.

This piece isn’t alone. There are plenty of examples of very simple designs (and some of no design whatsoever – just a plain coloured canvas) selling for thousands, or even millions, accompanied by very eloquent monologues and reviews by art experts exalting them as works of genius.

The point is that, while Da Vinci’s painting is objectively a masterpiece given the technical skill required to produce it, the “plain blue canvas with a line down the middle” is not objectively a masterpiece, although it may be considered by some art experts to be so. This could easily change over time.

Add to this the fact that the value of many pieces of modern art is effectively decided by a small group of rich modern art experts, this could create enormous volatility as fashions and trends change.

Some modern artists argue that artists have moved away from objective realism, and are instead painting more abstract works like the blue canvas with the white line down the middle, because the invention of photography has effectively superseded objectively realistic art. As such, artists now need to look beyond objective realism into the more abstract.

While it is undeniable that over the last 100 years or so there has been a shift towards the notion and culture in the art world of “anything can be art”, recent art industry press indicates falling visitor numbers and falling values at auction for impressionist and modern artwork.

In conclusion, something that has no objective intrinsic value – something that, theoretically, anyone could produce, and where its monetary value lies in the subjective opinion of a small number of millionaire elite modern art specialists about the artist's expression – is not generally a good investment.

An asset that is expensive, illiquid, where there is authenticity risk, doesn’t just “not pay income”, but actually costs you money to store, transport, and insure, with a subjective value decided by a handful of art experts which will fluctuate wildly with changing industry trends, is highly unlikely to deliver a stronger risk-adjusted return than, say, a diversified equity portfolio.

If you like modern art, brilliant. Go buy as much as you like to hang it on your wall. But, generally, there may be better investment opportunities available to meet your financial needs and objectives over the long-term.

As part of a balanced multi-asset portfolio? Perhaps, but the high cost of modern art makes it potentially unsuitable for all but the highest value portfolios.

Always consult a qualified, regulated financial adviser before making any investment decisions.