The Sotheby Parke Bernet Art Market Report, a new publication devoted to the financial -- as opposed to the aesthetic -- appreciation of artistic masterpieces, is scheduled to appear early next year.
Long accustomed to offering informal counsel to wealthy connoisseurs, the New York division of the London-based auction house now plans to sell more detailed information to investment advisers serving pension funds, trusts and limited partnerships. It also has begun to hold seminars on the art market for securities analysts around the country.
Sotheby Parke Bernet developed its new services for institutional investors in response to a growing interest in tangible objects as hedges against inflation. The "European disease," whose principal symptom is a lack of faith in paper money, has spread to the United States. Americans who once laughed at Frenchmen storing gold under their mattresses are now heeding advice to keep at least 10 percent of their assets, exclusive of real estate, "hard." Gold, silver, diamonds, stamps, art and miscellany classed under the rubric "collectibles" -- in fact anything that can appreciate in value fast enough to outpace inflation -- are considered legitimate investments nowadays.
Salomon Brothers, a leading Wall Street investment banking house, recently issued an index showing the compounded annual rates of return on tangibles during the past year and decade. Silver headed the list with a 62.5 percent appreciation between 1978-79, but investment-grade stamps were close behind at 61 percent. Next came Chinese ceramics, with 31 percent growth, followed by Old Master paintings at 22 percent. Real estate was up 14 percent. By contrast, common stocks increased 5.3 percent in a year during which consumer prices rose at an annual rate of 10.5 percent. For the decade ending June 1, 1979, the winner was Chinese ceramics at 18 percent, followed by rare books (16.5 percent), gold (16.3 percent) and so on, down to common stocks, which gained a paltry 2.9 percent.
This month, Business Week boldly announced the "death of equities" due to inflation and the rise of alternative investments. Merrill Lynch, which has long proclaimed itself "bullish on America," answered the magazine in a word: "Bull!" It belittled collectibles as 'too risky, too small a market, not liquid enough, not a realistic alternative to the stock market." What the country's largest brokerage house, now heavily diversified into insurance, real estate, etcetera. failed to add, however, is that it now is studying the feasibility of making a market in collectibles.
One expert who Merrill Lynch has consulted is Robert D. Schonfeld of Sotheby Parke Bernet, who holds an MBA from New York University and who formerly worked for Shearson Hayden Stone. He joined the auction house a year ago to develop its investment services. In a recent interview, he discussed art as an investment and the SPB Art Report.
The report will include quarterly updates on the prices of 40 ot 50 categories of art sold at auction in New York and, eventually, worldwide. The main body of each issue will be devoted to an analysis of one of those categories by PSB's expert in charge of that department. A draft article covering the market for Chinese art pronounced it stable at the moment and suggested that, although prices for ceramics might not continue to grow so rapidly, prices for other forms of Chinese art would soar.
Schonfeld speaks in terms of establishing key indicators for the art market, an index of changes in value. Categories to watch include Old Master paintings and jewelry (considered extremely conservative investments), late 18th Century and early 19th Century American paintings and furniture (growth areas), and 19th Century European and contemporary paintings (very speculative). For example, in the same six-year period in which Art Deco jewelry doubled in value, Andy Warhol's famous painting of a Campbell soup can dropped by about 50 percent. Impressionist paintings may be speculative because they have been bid up so high that price levels cannot be maintained in the long term, according to the auction house.
Ever mindful of the Securities and Exchange Commission, Schonfeld stressed that the PSB report offers neither forecasts nor investment advice.However, he conceded that an investment adviser relying on the report could make generalizations as to the yield of various types of art. It should be noted this information applies only to investment-grade objects -- usually those that sell for $50,000 and up at auction -- and not to "collectibles" such as so-called limited-edition medallions and facsimile furniture. (Though Schonfeld makes a careful distinction, others don't. "Collectibles" increasingly is being used for all tangible objects set aside for investment purposes.)
When word of Merrill Lynch's feasibility study leaked out, the firm was deluged with calls, an official said. Similarly, Schonfeld reported receiving 25 phone calls in a fortnight, including one from the president of a reagional stock exchange who suggested SPB trade on his exchange. Most were from persons seeking information about art syndicates. Diamond, Oriental rug and Old Master syndicates are reported to be springing up in this country. For investors interested in art, limited partnerships, rather than publicly traded mutual funds like those in operation in London and Paris, are the vehicle of the future, in Schonfeld's opinion. SPB foresees a dual role for itself as consultant and auctioneer.
One of the frequent criticisms of art as an investment is its lack of liquidity, a seller may not be able to find a buyer at the right time and the right price. Though the many auction houses in this country help to increase art's liquidity by providing markets, experts stress the necessity of planning to hold art for the long term, ranging from 3 to 5 years for investment-grade diamonds to 15 to 20 years for Old Masters. Schonfeld explained that churning Rembrandts is frowned upon in the art world because it tends to make experts suspect something is wrong with the scholarship, i.e., that the painting may be a fake.
Of course art doesn't produce income until it is sold, another drawback for investors. Yet long ownership may have some advantages such as the ability to ride out downturns in the economy as well as the ability to find a buyer. Museum directors who have had a masterpiece on loan for many years often wish to acquire it permanently.
The long-term nature of art for investment's sake suggests it is most suited to trusts and pension funds. This unorthodox type of investment thus far has attracted little institutional interest in this country, but proponents are guardedly optimistic following a recent change in the Labor Department's prudence standards for pension fund trustees, the growing acceptance of gold and other tangibles in this country, and increasing knowledge of European experiments.
The British Rail Pension Fund paved the way -- albeit very secretly -- in 1974 when it began to make massive purchases of works of art. Its primary consultant is Sotheby's. Today its collection contains more than 1,600 items, ranging from Renoir's Portrait of Cezanne to a pair of 11th Century B.C. Chinese sacrificial food vessels, from Houdon's bust of Benjamin Franklin (1779) to a Nort American Indian carved wooden rattle. A number of its most prized masterpieces, amounting to 40 percent of the value of the collection, are on loan to the Victoria and Albert, the British and other museums. Moreover, had not BR bought them, it is likely many of these precious items would have been bought by foreigners.
This has assuaged some of BR's critics who, when the existence of the collection was made public last year, charged the fund with endangering pensioners' benefits by squandering money on art rather than investing it in something socially useful like housing. As an example, BR reportedly offered $1.5 million for a Louis XV corner cabinet last June, only to be outbid by an agent for the Getty Museum, who paid $1.7 million.
The fund thus far has spent $73.5 million, or about 3 percent of its total assets, on art, and plans to invest another $16 million to round out its collection, said general manager John Morgan in a transatlantic interview. As for the fund's investment strategy, he would say only that purchases were made over a fairly wide field, up to early 20th Century art, and that "quirks in the market are to be avoided." However, he declined to state the current value of the collection or the yield for various categories.
According to British sources, the fund was spending 4 percent or 5 percent of its new money annually on the art market when Morgan, an exbanker, was appointed 18 months ago. Reportedly daunted by the massive proportions the collection would have achieved, he decided to halt the practice. Although the fund already has received lucrative offers for some items, Morgan said he expected the collection to remain pretty much intact for about 20 years.
Should enough U.S. pension funds elect to invest in art, experts agree that their massive funds, now totalling more than half a trillion dollars, could have a significant effect on the price of art works.