If there is one thing that the Covid-19 virus has inspired in the entire human race, it is the need, now more than ever before, to prepare for an uncertain future especially in terms of instituting structures for preserving business achievements, and sustainably accumulating wealth. Typically, depending on his risk appetite, the average investor should have a range of diverse assets in his portfolio and be constantly concerned with the bottom line. Visual art (art), provides a safe and relatively secure option for those looking for safety, convenience, and building reasonable capital appreciation over time. This has been the case since some form of art collection existed in the earliest civilizations with arrays of precious objects and artworks stored in temples, tombs, and sanctuaries. In like manner, palaces and treasury houses of kings and traditional rulers from early time, were filled with art collections, in ways which typified the extent of their prowess, dominion and affluence.
Notwithstanding the widely available variety of asset mix and risk appetites, the bottom-line remains the main aspiration of every potential investor or lover of artworks. In this article, we have analyzed the role of visual art in advancing the objectives of wealth creation, preservation and sustenance, in conjunction with other conventional wealth creation and preservation tools.
The Role of Art in Wealth Creation and Preservation
According to Warren Buffet, in one of his most revered investment warnings ever; "never lose money!" Wealth creation and preservation refers to the series of processes and mechanisms instituted by investors to build and sustain the value of their assets. It ensures that even if investors do not accumulate any new assets, they would not become worse off due to the volatility of the financial markets and economy in general for future generations. While traditional investment methods only cater for the bottom-line; being profitability, wealth preservation takes a more holistic and family-oriented approach, in catering for profitability, personal ideals, family values and legacy building for some generations, or hundreds of years. Generally, wealth preservation often appears to be an unwritten goal of investment with its own set of tools and conscious planning. However, over the years, the visual art market has, through unconventional means, maintained observable stability across all periods, notwithstanding harsh and unfavorable economic climates. Informed investors are mostly aware that turbulent economies do not generally harm the visual art market. In other words, investors balance their portfolios with assets that hedge against inflation with investment in art, stocks and bonds. As artwork is increasingly being purchased for building up wealth and as a reliable investment vehicle, investors are now less viewing artworks as only decorative objects, but more as tangible assets to accumulate, hold and to accrue substantial value over time. In the event of downward pressure on asset prices in the economy, these tangible assets are further viewed as stores of wealth useful for riding out economic turbulence. It therefore follows that the diversification of portfolios with visual art inclusion is an efficient way to build investment portfolio and mitigate risks, while ensuring the continued investment in an industry that has creditably performed historically across different global geographies.
Investors who appreciate the financial qualities in visual art but do not have the expertise to invest must be aware that art funds allow investors to reap the benefits of art as an alternative investment asset within their portfolio. Meanwhile, access to art and finance professionals who strategically invest in works that reflect positive trends in the market are now becoming commonplace within the art industry. When the economy slows down or declines, it is a relief to know that art experts are investing and managing your art investments as stores of wealth while allowing investors to yield returns on a booming asset class. The fertile nature of the art market has made the new generation of High-Net-Worth Individuals (HNWIs) to choose art, as an alternative asset class for the purpose of wealth creation and preservation.
Art as a New Asset Class
While there is no one-size-fits-all formula for the right investment mix that will preserve value across generations, there is certainly a right investment mix per person and per season. Ultimately, a successful wealth preservation mechanism should be such which maximizes net expected returns regardless of the economic situations.
According to an online magazine, Zuu, when some Asian experts (comprising of CFOs of some of the biggest corporations), were asked 'If you had $250,000, what should you do with it?' 90% of them advocated for investment in stocks and bonds which is very much in line with the conventional investment culture of people across the world. While stocks offer an easily accessible (but usually volatile), highly regulated and market driven liquid asset, bonds offer a lower-risk (sometimes risk-free) alternative to the volatile nature of stocks while, at the same time, preserving its other characteristics. Consequently, when strategically done, they are a must-have in every portfolio aiming for long-term growth.
Historically, the international visual art markets have continuously evolved and expanded to new countries and new customers around the world. Today, they have reached a truly global dimension in the sense that nearly everywhere on earth, people are buying and selling artworks every day and are moving around the world to find the desired items. Art markets are now global, intertwined, very large, and growing. As at 2009, it was estimated that the value of the global stock of artworks is over US$3 trillion with annual sales of art and antiquities at US$50 billion. Real estate, as an interesting and complementary favourite of investors, also provides a favoured alternative to stocks and bonds. It is typically capital intensive but offers tremendous benefits in the form of steady rental incomes, collateral for financing purposes, capital appreciation which goes to hedge the impact of inflation, an avenue for reduced taxes (in the form of capital allowances and deductible expenses), and ultimately, serves as a cushion for the fluctuations in stock and bond performances, when added to investors' portfolio of assets. An added perk (owing to its tangible form) is the potential of investments in real estate, for creating long lasting legacies in the form of an heirloom that can be passed on to future generations; hence, suitable for wealth preservation.
Meanwhile, a third less discussed but emerging investment vehicle are collectibles such as gold, vinyl records, rare antiques, artworks etc. They provide a noteworthy balance to an investor's portfolio because of their distinctly indirect correlation with the financial market. Given that they are esoteric, rare, and sometimes old-fashioned, they can be worth so much in the right market, even far more than their original purchase or acquisition value. This is because their ultimate value is largely ascribed by the highest bidder at the point of sale. Also, like real estate properties, they are capital intensive to acquire and illiquid to dispose of in a whim but they typically appreciate over time which makes them a good avenue for wealth preservation.
Benefits and Demerits of Art as a Wealth Preservation Tool
Interestingly, artworks are typically revered in the Nigerian and African culture. The advent of social media, which provides easier access to established and new artists, has further served as catalyst in expanding the scope and increasing the appreciation of art market. We may go to museums, exhibitions, and galleries to appreciate these beauties and sometimes buy them to adorn our office walls and living areas but may still not fully recognize that their financial worth transcends their physical allure and the emotional attachment they oftentimes evoke. Most notably, a shift in perspective from acquiring art for its beauty to acquiring it for its capacity to store value without dwindling over a long period, can have tremendous effects on our financial outlook as individuals and as a country.
Compared to other collectibles, artworks are more sophisticated and may require more depth in knowledge and other resources, which somewhat add to its appeal. Artworks are full of new meanings that evoke different moral and emotional connections in people of varied walks of life and their intrinsic value are hardly transferable from one owner to the other. For example, a blank canvas to one buyer could evoke thoughts of the beginning of life where there was nothing, while it may evoke the idea of boundless possibilities to another buyer. Further, beyond the opportunity to invest in items that project values about life and culture in a tangible form, artworks also provide means of memorializing momentous occasions for future generations. They are sources of pleasure and passion which can be enjoyed with little or no fear of depreciation in monetary value before being passed along to the next generation or acquirer.
The above notwithstanding, proper functioning of the visual art market is complex. There are other key concerns associated with artworks. They include:
- their long-term nature that tends to render them less liquid;
- the unregulated market which allows only few people to control the market;
- the heterogeneity of artworks as transferable products;
- valuation of artworks;
- high risks of fraud or forgery within the art market; and
- high transaction costs of players within the art market.
Nevertheless, there are other inherent financial benefits of visual art and some of them, are summarized as follows:
- art provides a hedge against inflation and currency devaluation thereby making it an ideal investment for the HNWIs focused on wealth preservation;
- art is characterized by little or no risk of losing the initial investment;
- no minimum investment is required for art;
- art investments enjoy favorable tax treatment; and
- the art market does not have geographical risk and enjoys easy mobility.
Wealth accumulation and preservation is an art and not a science. It must be tailored to fit each investor. Ultimately, it goes beyond addressing questions around 'where will my finances be in ten (10) or twenty (20) years from now?', to longer-term questions about 'what will my assets be worth in the next number of generations from mine?'; and the storage and management costs to be incurred at each relevant stage.
There is a growing recognition of visual art as a rational alternative for building investment portfolios by investors. Investment in visual art is characterized by low risks of inflation and is an effective hedge against fall in the value of currencies, thereby making it a suitable mechanism for storing wealth.
In the light of the above, it is also pertinent to ensure investors constantly review their investment mix to monitor continued investments efficiency. It is best practice and our recommendation that investors engage competent advisors to ascertain their investment choices and curate a tax efficient investment mix tailored to their specific wealth profile. Andersen in Nigeria, in partnership with its collaborating partners, is well suited to provide further advice and information in this vital investment area.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.