Themes: Bitish Rail Pension Fund, Investing in Art
A banking crisis, declining economic output, and the IMF possibly readying itself to bail-out UK government finances: in economic terms, the UK is back to the dark days of the 1970s.
So what did smart investors do with their cash in the mid-1970s? Well one of the biggest investors of the day – the British Rail pension fund – reduced its exposure to gilts and the stock market. In 1974, it did what no big pension fund had done before. It bought fine art.
And by the time the financial storms of the 1970s and early 80s had passed, that art had earned British Rail pensioners an 11.3% average annual compound return. That is higher than typical very long-term returns on equities of around 8%.
But – and this is crucial – the art also introduced an element of diversification into British Rail’s pension portfolio and thereby reduced the overall riskiness of its investment returns. That was a savvy thing to have done when, just as today, the financial system was facing exceptional stresses.
An outstanding opportunity to pick up great art on the cheap
Well, that same great investment opportunity could be opening up for you right now. The credit crunch has caused fine art prices to fall by as much as 40% from recent peaks. Transaction volumes at auction have dropped back significantly. But this time round, you don’t need to be a big City institution to grab your share. By investing via a unique fund, you could soon have your very own stake in a Picasso.
And that could prove a very shrewd move, protecting your wealth from the inflationary impact of our government’s reckless borrowing binge. If our experience of the inflationary 1970s and 1980s is to be repeated, then you must make sure you own some assets that are real rather than financial. And the better quality and more scarce they are, the better.
Fine art could fit the bill perfectly. How much you should allocate to fine art will depend on your own circumstances and investment objectives. But it might be helpful to know that the British Rail pension fund invested 2.5% of its assets in art.
There are many factors at play which support the case for investing in art right now. Urbanization and population growth are driving a boom in art museum construction as a catalyst for urban renewal. It’s known as the “Bilbao Effect” when a successful museum helps to regenerate a whole city or district and attract international visitors. Examples of this include the Tate Liverpool and the Lowry Salford in the UK. The authorities in the United Arab Emirates recognised this when they decided to construct a new Louvre museum in Abu Dhabi, due for completion in 2012.
Finite supply and growing demand point to higher prices ahead
There is a shrinking supply of major works worldwide, with museums tending to hold forever once an item has passed out of private hands. This bodes well for future prices being higher than they are today. Research has established that art gave investors an average annual return of 7.7% between 1875 and 2000. That compares to a return of just 6.6% from equities over the same period, although the comparison ignores the significant additional return from dividends, which art, of course, does not provide.
Art’s investment performance has been strongest during periods of currency devaluation or price inflation – which the UK looks to be heading into right now. The UK-based manager of one art fund summarises the benefit of art as providing an “irreplaceable, unleveraged real asset.” It all stacks up to art becoming an increasingly mainstream investment option in the years ahead.
Just like gold, art pays no dividend and has to be stored safely. If the lack of any dividend puts you off, then you might be interested to know this: some art funds may allow their investors to enjoy the art by viewing it at their offices. And, if the pieces are lent out to museums, you can see them there and perhaps feel a sense of pride in owning something of such quality and lasting value. Lending art to museums also helps to raise the work’s profile, quite possibly boosting its future valuation – and your eventual profit.
This situation presents you with perhaps a once-in-a-lifetime opportunity to acquire top museum quality works of art. However, it is a long-term and illiquid investment that requires very specialist knowledge and experience.
If you are sufficiently wealthy and knowledgeable about art, then you may be in a position to purchase artworks directly yourself. But if you are of more modest means or prefer to leave the task to an expert, you could invest via a fund. Investing via a fund spreads your money over several works, and helps you achieve that all-important diversification.
Good investing,
Andrew Vaughan
The Right Side
Editor’s note: Andrew Vaughan is Investment Director of The Zurich Club, an exclusive network of successful private investors. He recently identified a newly launched art fund structured specifically for UK-based small private investors. It has avoided the market peak and is poised now to snap up bargains that are finding their way onto the market from distressed sellers. To find out more about this and other investment ideas from The Zurich Club, click here.
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