Why you shouldn’t shred your Banksy and other tales from the art market

About the event

Ruth Knowles from the Fine Art Group provided a different view of art - as an alternative asset class.

Art has been made and enjoyed since the dawn of time, but it is only really since the Robert Scull sale in 1973 (when the collector of abstract expressionist and pop art sold 50 paintings for the then unheard-of price of US$2.2 million) that it has been thought of additionally as a money-making tool. Since then, with another important landmark in 1987 when Van Gogh’s sunflowers made US$40million at auction, the art market has expanded to around US$45 billion in 2016 – and probably closer to US$65 billion in 2017.

Ruth Knowles, Senior Director, Investor Relations and Marketing at the Fine Art Group, which advises investors in art and manages its own art funds, told the Oxford Saïd audience that wealth is one of the biggest drivers of the market. More interestingly, she said, most of that wealth is coming from Asia, the Middle East, and Russia. ‘You see that with the museums that are being built in Qatar and UAE. There is the Louvre, the Guggenheim museum … really recognisable western names are going to these different areas and they are creating massive collections … Over the last five to eight years some of the biggest acquisitions at auction have been underpinned by bidders from those regions.’

Although London and New York are still hugely important centres for buying art, the expansion in the number of art fairs means that ‘there is basically an art fair somewhere in the world every week of the year … when you think of the volumes of transactions at those kind of events you get an idea of just how big this market is and just how powerful it is as well,’ said Knowles.

So why do people invest in art? Firstly, Knowles pointed out, it is a tangible asset: ‘You can put it on your wall; you can tuck it away – you have something there for the future’. It is quite a good hedge against inflation. It is very portable -- you can buy it in London and you can ship it to New York and you can move it in different currencies. And, certainly at the top end of the market, it seems not to be hugely affected by what is happening in the financial markets. Knowles pointed out that the day on which Lehman Brothers collapsed was also the day of a Damien Hirst sale at Sotheby’s. ‘There were a lot of reasons behind what happened, but the fact was that the financial world was in absolute turmoil, one of the oldest investment banks had suddenly -- seemingly without warning -- gone under, yet people turned up and were spending two hundred million pounds buying Damien Hirst art works.’

Having said that, the art market is also highly inefficient, and there are a lot of additional costs associated with owning art. Once you have bought a work of art, you have to ship it and store it; you have to insure it; and you might need to restore it. You have to think about where you can hang it so that it is not affected by sunlight or in danger of water damage or heat damage. It’s not a simple asset to own.

Just because one Picasso makes $100 million it doesn’t suddenly mean that every other Picasso in the world is worth $100 million

In addition, the market is not regulated, ‘so just because one Picasso makes $100 million it doesn’t suddenly mean that every other Picasso in the world is worth $100 million.’ In fact, Knowles told the story of how Banksy’s remote shredding of his own work Girl with Balloon, minutes after it had sold at auction, had apparently inspired the owner of another Banksy work to shred it, imagining that it would increase its value. As a result, there were numerous press articles headlined ‘Please don’t shred your Banksy’, as authenticators pointed out that for most works the shredding would destroy all value. ‘If you have a bar of gold and you can price it, then you know that the next bar of gold at the same weight is going to be the same price. But art doesn’t work like that.’

There is also the problem that between 50 and 60 per cent of all transactions that take place in the art world every year are private. ‘So they are not registered anywhere and you can’t track them,’ said Knowles. ‘You can use your best guesses and your estimations but there is no record of what is happening in those sales and that is a very powerful part of the market. It is also one of the key reasons why, if you are going to consider art as an asset, you really need to be in that market day in and day out.’

It is also worth understanding how much apparent ‘value’ can be affected by the most irrational factors, from a fear of clowns to a passionate dislike of a competing bidder at auction. The latter, according to Knowles, once inflated the price on one artwork from a realistic $2 million estimate to £10 million.

This is why the Fine Art Group itself, and other organisations, started offering advice and creating more structured art funds, as well as art financing and providing loans against art works. Due diligence is also extremely important: Knowles said that ‘the number one reason why people fall down on actually trying to use art as asset is that they don’t do their due diligence properly’. This is about checking whether a work of art is listed as lost or stolen, what condition it is in, and whether the artist is dead or alive.

Ruth Knowles

So art should be, and indeed is, considered a valued asset class, Knowles concluded. ‘But it always comes with a big caveat. Make sure that you work with the experts and appreciate that the different sectors of the market behave differently. Don’t assume that you are doing the right thing just because you are going to Christies, or you are going to Sotheby’s. That might not be right for each individual work of art. … But as long as you are very, very careful and are working with the people who can [understand the market], then you should be making money out of investing in art. It is a good solid diversifying asset to hold in your portfolios.’