What’s the allure of fine art investments with the Masterworks platform? As we’ll see, it all comes down to two factors: portfolio diversification and fractionalized shares.
Investing in stocks, government bonds and mutual funds is generally a reliable, if somewhat slow and steady way to build your wealth. But we’d all like our investment portfolios to grow a little faster.
This urge can be irresistible to many investors, and so they’re constantly on the lookout for promising new investments and assets that have the potential to grow at a faster clip. But venturing outside of traditional assets can be a very risky business, with numerous instances of people falling victim to the “fear of missing out,” or FOMO, which causes them to act too hastily.
While many have gotten richer through speculative investments, many more have paid a heavy price for doing so, discovering the hard way that a rapid rise to riches is far from guaranteed.
But there are somewhat more reliable investment assets that have shown a historical tendency to grow faster than traditional stocks and shares, irrespective of how the wider economy performs. One such asset is fine art, which has proven its ability to grow steadily over time, independent of traditional asset price movements.
Art Is Historically A Solid Performer
There is strong evidence that shows the performance of art investments is uncorrelated to the global economy and traditional stock market. In 2022, CitiBank calculated that the correlation between art and other asset classes is close to zero, while other data highlights the reliable growth in value of most artworks.
Most impressive, though, is the performance of art as an investment class. CitiBank’s report illustrates how investments in contemporary art have consistently outperformed the S&P 500 Index over the last 25 years, providing an average yearly return of 14% versus the latter’s 9.5% annual return.
Investors should always remember that past performance is no guarantee of future success, however the numbers are attractive enough to entice many investors to take a closer look at this sector. But how can the average retail investor get involved? Contemporary art produced by famous artists can cost thousands, if not millions of dollars, and for that reason it has always been seen as an exclusive asset class.
Art Investing For The Masses
One option for budding art investors who don’t have so much cash to splash is the platform offered by the Masterworks startup.
This platform provides a more affordable way for investors to get involved in the sector. It makes art more accessible by fractionalizing ownership of blue-chip artworks, allowing retail investors to buy shares of world-renowned paintings from leading artists, such as Jean-Michel Basquiat and Andy Warhol, for as little as a few hundred dollars. Let’s take a look at how it works.
Masterworks has a team of art experts that scour the world for promising investments, with the focus being on identifying works of art that are likely to appreciate in value over the long term. To do this, Masterworks relies on the in-depth knowledge of its experts, and combines this with an extensive proprietary database that helps to determine artists with significant momentum.
Once an artwork has been identified and purchased, Masterworks securitizes that piece with the U.S. Securities and Exchange Commission, which is the key step that allows it to legally offer shares to its customer base.
Masterworks is continuously adding new artworks to its offerings, but the process of identifying and qualifying new works is a slow one. With its platform tools, investors can monitor the performance of each artwork, and sell their investment at any time on the platform’s secondary market – or otherwise wait until Masterworks itself decides to offload the painting at what it deems to be the best possible time for individual shareholders.
On average, Masterworks says it aims to hold onto each artwork it buys for three to ten years, before ideally selling it for a sizable profit.
Is Masterworks Profitable?
There are a few rules to consider when investing in Masterworks’ assets. For one thing, there’s a vetting process for every new investor, and each artwork sold on its platform has a minimum investment requirement, which varies from piece to piece. Another restriction is that no single investor can own more than 10% of any individual artwork.
Investors are required to pay an annual management fee of 1.5% of the value of their portfolio, and the company itself takes a 20% cut of any profits made on the artworks it sells. These fees are more or less in line with those charged by most hedge funds, but they are notably higher than traditional investment tools, such as a market-tracking index fund. However, investors may consider it worthwhile, given the strong returns art has generated in the recent past.
Ultimately, it’s down to the individual to decide if Masterworks is offering a good deal, but we can look at some numbers to help investors decide.
CNBC recently published a deep dive into Masterworks, showing that if someone invests $1,000 in a work of art that averages a 20% annual gain over 10 years, their initial investment would grow to $6,191 over that period.
However, when we apply the annual management fees, Masterworks’ 20% cut, and possible auction fees that could vary between 10% and 25%, that investment is reduced to just $4,211. Perhaps not quite so enticing anymore, but it still represents a compound annual gain of 15.5% over the 10-year period, which is far better than most traditional assets and indices.
As such, the profitability of Masterworks as an investment platform is dependent on the performance of the individual artworks. There appears to be a fairly thin line between success and disappointment. If an artwork only delivers a return of 10%, the above calculations would leave the investor with just $2,006 following its sale and the fee deductions. That represents a compound annual growth rate of just 7.5%, more or less in-line with the stock market’s historical average.
Worth A Look
No investment is guaranteed, but the promise of Masterworks has enticed more than 800,000 individual investors to sign up and diversify their portfolios so far. Since it was founded five years ago, it has performed well, with average annualized returns of 45% on its 16 exits to date.
Admittedly, with so few exits, the data cannot be considered totally authoritative, but then again it is still a promising rate of return. Looking around Masterworks’ website, we can see there is a history of both minor and major gains on its platform, but overall the number of investments with significant performance appears to outweigh the others.
Just remember that art is a highly subjective asset, and this makes it difficult to pin a value on most works. But, as with stocks, shares and bonds, diversifying into several different assets can help to hedge against any risk. All told, Masterworks is an interesting platform. If you’re hoping to grow your investment portfolio a little faster, it might just be worth taking a closer look.