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Institutional Investors Poised To Gain Access To Contemporary Art Market

Finance magnates and the contemporary art world have long been cosy bedfellows; for institutional investors like pension funds, insurance companies, foundations and endowments, whose allocations to investment products like hedge funds and private equity funds help propel these investment managers to significant wealth, not so much.

The reason is simple: getting exposure to contemporary art at present is difficult. To do so, institutions would need to do their own research, go to an auction, buy an entire painting, insure it, store it, protect it, and then cross their fingers that the price appreciates enough and that a buyer awaits them on the other end.

New York-based Masterworks is changing that. The firm buys art and securitises it by offering shares to investors – either accredited or retail – which means that they can get access to the upside opportunity in art without having to own the entire work. Masterworks recently sold a painting by British street artist Banksy; Mona Lisa was acquired in June 2019, securitised in October 2019 at a value of $1.039mn and sold in October 2020 for $1.5mn for an annualised return of 32% to investors, net of fees.

Masterworks founder Scott Lynn is an avid art collector and says that, alongside the wealthy individuals that already use Masterworks’ platform, he’s beginning to see interest from institutional investors in the asset class.

“Most institutional investors – actually, most people – have anecdotally heard that art appreciates over time,” he said. “So, that’s not a revelation. But for an institutional investor, there really hasn’t been a way to get access to the asset class. We’re now having serious conversations with these organisations about why contemporary art should be considered as part of a strategic asset allocation model.”

Masterworks has built a proprietary database of art works and prices with data that goes back 70 years and, off the back of that, constructed an index – the Masterworks Contemporary Art Index – which acts as a proxy for the price level of the contemporary art market. The correlation statistics in the past 35 years – 0.16 to the S&P500, 0.28 to the 10 Year U.S. Treasury Bond, 0.07 to the U.S. Residential Real Estate market – support contemporary art a diversifying investment in an institutional investors’ portfolio. Structural idiosyncrasies of the contemporary art market further support Lynn’s view.

“In the art world, you have continuous declining supply. It’s rare that museums sell paintings, and when an art owner dies, they often donate their collection or pieces of their collection to museums. Once some kind of cultural significance of an artist is established, it doesn’t go away. All this contributes to prices going up,” he said.

Masterworks is buying a painting every 7-10 days on average, with a price range of $1-$10mn. The firms’ clients – mainly individual investors - build their own portfolios of investments on Masterworks’ platform. Each painting is securitised individually at present, but the firm is considering launching a fund product to better serve the institutions with which it is currently speaking.

“Institutions obviously need to be diversified in any asset class that they allocate to, and going this route means that we will be able to offer that to them in one vehicle as opposed to now where they would need to buy shares in each painting that they would want in their portfolio,” said Lynn.

The value of art and collectibles held by ultra-high net worth individuals is $1.74trn, according to The Global Art Market: Drivers of Evolution, a report published by Citi in December 2019. Masterworks says that, based on a 3-year investment horizon, the Masterworks Contemporary Art Index exceeded a 5% annual return 86% of the time and results in a negative return only 5% of the time. Masterworks says that it has seen a six-fold increase in investors on its platform in the past twelve months, and Lynn says that it’s only a matter of time before institutions jump in.

“To me, it seems like the most obvious thing in the world that the art market be securitised,” said Lynn. “To be honest, I’m surprised that it hadn’t been done before we did it. It’s an asset class that offers diversification that institutions need, it’s not correlated to major asset classes and it provides genuine alpha. It’s just not really been available to institutions before. We’re going to make that happen.”


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