Art After the Fall: A More Rational Strategy


Sameer Reddy | July 08, 2009

The art market, while bruised, still serves as an appealing target for shrewd and newly sober investors willing to take a more conservative approach.

The art market, while bruised, still serves as an appealing target for shrewd and newly sober investors willing to take a more conservative approach.

BERLIN — In September of 2008, Damien Hirst, the art world’s ultimate marketing master, pulled off a historic Sotheby’s auction, bypassing the gallery system and selling off 200 of his pieces for a total in excess of £111 million ($183 million). Hirst’s flashy creations and high-profile transactions are the perfect symbols of the boom-time mentality that has dominated the art world in recent years, a period when, according to influential research group Art Economics, the global market grew 95% between 2002 and 2006, hitting €48.1 billion ($67.6 billion).

Then came the downturn last year and the attendant plunge in stock markets. A mere month after Hirst’s record-breaking sale, the art world was in the midst of a collective panic attack, preparing for the sky to fall. Nine months later, the outlook remains unclear, but there’s no denying that a correction is in full effect. The Mei Moses Index, devised to track the value of international marketable art works, showed that in the first quarter of 2009, art prices plunged 35%, after having held up relatively well in 2008. Post-sale reports reveal that the net totals for Christie’s and Sotheby’s recent contemporary art auctions, approximately $93.7 million and $47 million respectively, were far below those of six months ago ($113.6 million and $125 million) and of one year back ($348 million and $348 million).

The news isn’t all bad, however. Gallery, art fair and auction sales haven’t been as dire as pessimists feared, and during May’s contemporary art sales, Christie’s reported a 91% sell-through rate, while Sotheby’s achieved 81%. The current market landscape is marked by a number of highly distressed sellers, creating an opportunity to capitalise on the downturn by means of strategic acquisitions. The picture that emerges is one of a market that, while bruised, still serves as an appealing target for shrewd and newly sober investors willing to take a more conservative approach.

During the boom, many high net-worth individuals became interested in art as a status symbol, which, unlike most luxury goods, has the benefit of being a potentially lucrative investment. Stories were traded over dinner parties and cocktail soirees of the crazy returns the market was delivering. As with the dotcom boom of the mid-90s, it appeared that almost anyone with the right entrée and a big enough bank balance could take advantage of this opportunity while simultaneously telegraphing their sophistication to their social circle. The problem with this picture is that it was fuelled by a collective fantasy – art can certainly be profitable, but even with blue-chip artists prices don’t always move in the expected direction.

In the current market, prices are even less dependable. While some sellers are holding on to their best pieces until values rebound, other cash-strapped collectors, many of Madoff’s victims among them, are being forced to unload without an eye to price. One dealer, who requested anonymity, cited the example of a client who had lost over $7 billion with Madoff, and as a result was clearing out her stellar collection in a fire sale. This dynamic creates real opportunities that informed luxury consumers would be well-advised to exploit.

Auctioneers at work at the Sotheby’s auction of Damien Hirst works.

Anna Erickson, an associate director of Yvon Lambert’s Manhattan gallery, formerly of the Gagosian where she focused on sales of Damien Hirst, observes that, “It’s the moment of the collector [now]. They have power and control over negotiating – a lot of those speculator clients who would pay immediately are gone, so now the more serious collector has more selection, more choice, and more time to consider their purchase and more negotiating power.” In addition to a correction in prices, the balance of power has tilted towards the buyer who is able to command discounts that, a mere 12 months ago, would have been unheard of – the equivalent of walking into Chanel and naming your price for a handbag.

Collectors are also shifting away from their recent emphasis on Contemporary art, causing the category’s prices to contract, and scaring off many nascent collectors who had been attracted by more accessible prices and a seductive image. Serious investors, however, have been able to take the shift in stride, recalibrating their acquisition strategy to the current climate, favouring artists who haven’t been overexposed in recent years. Andrea Fiuczynski, President of Christie’s LA, observes that “established artists are always a more sure-fire example than someone who is a young art hero but doesn’t have an established track record. We don’t know how that artist’s work will perform in five or ten years.”

Art stands a cut above other coveted goods such as haute couture, automobiles or jewellery, because, while these objects embody the highest levels of handicraft and elevate status, they cannot compete with the perceived significance to which fine art lays claim in the hierarchy of culture. What is more, when compared to the stock market, art can also be a sound investment. The Mei Moses Index demonstrates that, over the last fifty years, stocks (as represented by the S&P; 500) returned 10.9% annually, while the art index returned a comparable 10.5%. And in the five years between 2001 and 2005, art trounced stocks. Then again, in the past fifty years, the volatility of the American art index for example (one of the best performers in recent years) was rated at 38.4% compared to only 16.5% for the S&P; 500 – demonstrating that greater potential rewards for art come with greater risks.

In addition to the Mei Moses Index, collectors are increasingly taking advantage of other information resources in order to wisely plan acquisitions, echoing the shift away from the histrionic compulsive spending sprees that marked the entire luxury landscape over the past five years. Gone are the days when hungry clients in emerging markets would clean out a Vuitton store’s handbag stock, and in a similar vein auctions are no longer the site of breathless bidding frenzies, nor are gallery shows selling out before they open. The buzzword of “value” that has become gospel for the fashion and luxury world has caught on in art circles as well, as collectors judge potential acquisitions less on impulse and more on criteria such as pedigree, historic performance and a piece’s relevance within an artist’s larger oeuvre.

Post-auction results bulletins from houses such as Christie’s, Sotheby’s and Phillips de Pury are principal indicators of market health, studied by collectors similarly to how investors view quarterly corporate results – they upgrade or downgrade artists and contextualize potential purchases in upcoming sales. Artnet’s online sales reports comprehensively track prices across the market, not just of a particular auction house. Collectors comfortable with the internet have been able to benefit greatly from this market breakdown and the resource promises to be of growing importance for a younger generation of tech-savvy collectors.

By shifting away from an emotional approach to art investment and returning to a numbers-driven conservative acquisition strategy, collectors are able to insulate themselves better from market vagaries. Those who put these tools to service in identifying “deals” arising from the downturn will see significant returns as the market regains its footing. Art investment at the moment is best characterised as a blue-chip stock portfolio, focusing on dependable, consistent performers and passing on unpredictable talent without any proven track record. And while speculators are unlikely to see the kind of rabid run-up the market experienced over the past five years, for more serious, long-term investors this is welcome news. The downside of all bubbles is that, eventually, they burst.

Sameer Reddy is Editor at Large