How to hedge your portfolio against inflation with art

Buying a Rembrandt or a Picasso isn’t the first thing average investors think about when inflation bites. Amid gold’s gravitational pull, fine art flies under the radar of most traders, who generally view it as a “subjective” rather than a “safe” asset. Yet when it comes to the economic value of fine works of art, it’s worth looking at the big picture.

Analysts at the Masterworks trading platform say fine art outperforms gold during peak inflation, citing data from 1973 to 1981, when inflation in the United States was around 9% each year. Gold recorded an average annualized growth of 31.1% during this period, while the art market recorded an average appreciation of 33.2% per calendar year.


More recently, from 2000 to 2018, the “Artprice 100” (the first index of the 100 best artists on the market) recorded an annual growth of 8.9%, while the S&P 500 posted an average of 3.4%.

Great feedback – if you can get it. For decades, the art market remained beyond the reach of most retail investors. Considered the preserve of well-heeled collectors, it has been shrouded in the mystique of stuffy auction houses, elusive aesthetic trends, and insider knowledge.

The good news for those on Main Street is that Masterworks is breaking down barriers to entry to this exclusive market and democratizing access to its outsized returns.

Masterworks is an art investment fund that buys works of art on behalf of a group of investors. In this way, it perpetuates ancient art holdings, such as La Peau de l’Ours (The Skin of the Bear), in early 20th century France that promoted artists like Picasso, Matisse and Gauguin.

Yet, as a digital platform, Masterworks can further subdivide collective ownership into fractional percentages. This means regular buyers can now buy part of the artwork like shares in a company, significantly lowering the barriers to entry.

The Masterworks research team scours its database to analyze recent art market sales returns and identify promising artists.

The fund then selects specific works of art and purchases the originals in their physical form. They then securitize the asset through a filing with the SEC (Securities and Exchange Commission) and then list it on their platform for users to purchase shares.

Investors can then wait several years until the artwork is resold and then receive their share of the proceeds (after Masterworks takes a 20% cut on top of the 1.5% annual fee). Otherwise, they can sell their shares on the secondary market of Masterworks, which acts as a stock market. Although due to the lower frequency of transactions than on the stock exchange, the liquidation of the work cannot always be done quickly.

In 2019, Citi took data compiled by Masterworks on sales from auction houses like Sotheby’s, Christie’s and Phillips and found that between 1985 and 2018, art easily outpaced inflation and is “an excellent store of wealth over all periods”.

So why does art resist inflation?

This is partly because art is generally insulated from the volatility of other markets.

The report indicates that while other types of investments (commodities, real estate, etc.) are vulnerable to ripple effects from other sectors of our highly interconnected economy, the performance of art is much more isolated from these highs and lows.

It’s “the most attractive investment grade in long-term art,” Citi wrote.

In other words, these timeless masterpieces are truly in a class (asset) of their own.

This does not mean, however, that the art market itself is not subject to strong price fluctuations.

Although the average annual rate of return appears solid over the long term, there is significant year-to-year volatility. This is particularly true for contemporary art, according to Citi, which recalls that the annual volatility of this category, measured by deviation from the mean, was 25.8%.

These price fluctuations may be too great for some retail investors. However, they also evoke another unpredictable but visually stimulating asset class.

The silent disruption of art trading by Masterworks parallels the meteoric rise of non-fungible tokens (NFTs), which has prompted comparisons between the two.

“It looks like Masterworks is looking to create a platform that’s very similar to the NFT space, except with legit artwork,” Chad Budy, senior investment advisor at Aptus Wealth Management, told Wealth of Geeks. .

“I think an app like Masterworks will appeal to a different audience than the NFT space and rare art collectors. In terms of age, it will appeal to the over 50s and those who are somewhat tech-savvy but also appreciate the fine arts.”

In a recent interview, the company’s chief investment officer, Allen Sukholitsky, said there is some distance between NFTs and what Masterworks does. The main difference is that its platform invests in top-notch artwork that exists physically, whereas NFTs are primarily for digital art.

Still, that doesn’t mean the platform has shut down NFTs forever.

“But our business is always ready to evolve. I mean, who knows? Maybe one day later, we will consider the NFT market as part of it,” he added.

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