The Fine Art of Financing: Measuring Art Investing Risk and Return with a Repeat Sales Index

Published on May 3, 2016
One investment which has attracted investor interest recently is fine art. As with any investment, potential art investors must consider both the return and the risk associated with the asset, which an art index could help them assess. One way to construct an index for art or other illiquid asset classes is the ‘repeat-sales’ methodology. This video explores art risk and return and the construction of a repeat-sales index.


0:03one investment which has attracted investor interest recently is fine art
0:08well paintings sculptures photographs and other media are not typical
0:12investments the recent sale of a Picasso painting for a hundred and seventy nine
0:17million and a Modigliani painting for a hundred and seventy million might have
0:21potential investors seeing dollar signs
0:24as with any investment potential art investors must consider both the return
0:28and the risk associated with the asset which in our index could help them
0:33everyday financial news reports measure the status of stock markets around the
0:38globe using market indices
0:40the level in change of the Dow Jones Industrial Average Nikkei Shanghai
0:44Composite and others
0:45conveyed to investors in a simple way that day today ups and downs of markets
0:50however one difficulty in constructing an art index is the frequency in which
0:55different pieces of our trade
0:57a property we refer to as liquidity
1:01when constructing the returns for highly liquid securities such as stocks we
1:05simply measure the change in the value of the basket of stocks at fixed points
1:09in time
1:11because stocks trade multiple times each day generating a new price for the stock
1:15with each trade it is easy to calculate returns over yearly monthly or even
1:20daily frequencies
1:22what about art
1:24a given piece of art may not trade for years decades or centuries
1:29for example the Picasso painting that sold four hundred and seventy nine
1:33million in 2015 was purchased in 1997 for 31.9 million
1:39the percentage change in the price or return on that are purchased was just
1:44over four hundred and sixty percent over those 18 years or roughly 10% per year
1:50but if the owner was wondering what the return on investing in that piece of art
1:53was in 1998 what price would you use
1:57one approach would be to average the prices of all pieces of art sold in a
2:01given year to measure the average price of art from here here
2:05with stocks we can use the price of any share of a company sold because they are
2:11with art it is more complicated
2:14for one thing the medium of each piece of art paintings sculpture or photograph
2:19is different
2:20at different points in time different media may be more or less in favour
2:24affecting the price
2:27as a result we wouldn’t want to use the price of a painting purchased in one
2:31year and the price of a sculpture sold in another to measure the return
2:35in addition to the medium the artist is unique as well
2:39if demand for pieces of picasso is greater than pieces by Vincent van Gogh
2:43it will affect the price and as a result we wouldn’t want to use the purchase
2:48price of a picasso and one year and the sale price of a van gogh in another year
2:51to calculate the return
2:53one alternative way to construct an index for the liquid asset class is the
2:58repeat sales methodology
3:00to construct a repeat sales index we first identify the purchase and sale of
3:05the same asset over time
3:07if for example we see the same picasso purchased and sold over time we can
3:11correctly infer the total return earned by the owner of that painting
3:16even if there is a long time period between the purchase and sale we can
3:20infer the annual return earned for that painting over that time period
3:24then if we identify many of these repeat sale pairs overtime for any given year
3:29we can average the returns across the different pairs to calculate the average
3:33return for art for that year
3:36create such an index we would first find the prices for the repeat pairs using an
3:41auction date a website such as the blowout parts sales index site
3:45let’s search for one artist for example Pablo Picasso
3:50Picasso’s painting titled from osha PO sold at Christie’s in London on February
3:554th 2014 for over 2.5 million British pounds or about 4.1 million dollars
4:03the provenance information shows the previous owner had acquired it at
4:07another auction at Christie’s in New York on May 9th 2007 for 2.4 fifteen
4:11million dollars
4:13computing the return the painting almost doubled in value over the almost seven
4:17years it was held by the investor corresponding to an annual rate of
4:21return of 10.3%
4:24we then repeat the process for additional Picasso paintings purchased
4:28and sold at auction over the last few years
4:31first let’s play up the return for the 2009 to 2014 repeat sale pair from ocean
4:37up opening
4:39then let’s add a second Picasso painting that was purchased in 2014 and actually
4:44sold at a loss in 2015 and the third Picasso painting that was held for over
4:4950 years and appreciated substantially over that time you get the idea
4:55flooding twenty of these repeated sales pairs looks like this
5:00by aggregating information over many of these repeat sale pairs we can estimate
5:04the average return on the market as a whole and each year and we have the
5:09repeat sales our index
5:12using annual resales of almost 33,000 unique paintings from 1962 2013 and
5:19academic study by court to leg trouser and veterinarian created a repeat sales
5:23index of art they also account for the fact that in bed markets owners of art
5:28are less likely to sell at auction this KK UV index as it is called shows that
5:33the average return on art is 5.7 percent over that time period
5:38while this rate of return is higher than inflation it is lower than the average
5:42return on both stocks and bonds
5:45they also show that when you calculate indexes separately for different types
5:49of art such as old masters and post war and contemporary art the return and
5:54volatility characteristics for different types of art can be quite different
5:59few art collectors have a portfolio that is diversified across dials the reality
6:04of the risk and return they will experience do their investments might
6:08differ from the general our index substantially