19 Dec 09 Investing in Art Funds – how Greed makes us foolish

Recent outrage on the raw deal investors have got with Osian’s art fund would be funny, if only many “innocents” hadn’t got burnt. Talking about manias, this was surely one – or at least a micro-mania! The fund raised over Rs 1 billion, and several others (Edelweiss Capital Yatra Art Fund. Religare Arts Initiative, Copal Art fund, Crayon Capital Art Fund, Kotak India Art Fund and Indian Fine Art Fund) got into the act (circa 2006-2008). Since art funds are not regulated, nobody knows exactly how much money was raised. However, newspaper reports suggest a sum in excess of Rs 3 billion.

Investing history is littered with stories of illogical behavior by greedy human herds, and this is no different. Firstly, art is highly illiquid (and that’s an understatement!). There is no established market, nor any regulation, nor transparent price discovery. Huge commissions to auction houses or brokers mean enormous transaction costs. Finally, valuation of art, is itself an art!

There is no apparent method, except for having “an eye” for art. There are “art experts”, but there is little evidence of correlation between critical acclaim and market price. In fact, many highly touted artists of the 18th and 19th century are in oblivion today.

In other words, value depends on popularity – which I could define as a fad. Some fads, like Rembrandt or Picasso may endure for decades (or longer), but these are very (very) few. The vast majority remain unknown. And since there is also no scientific tracking of prices of all artists, the few blue-chips create new benchmarks and generate hype. But what is the percentage of blue-chip artists to the entire artist universe?

Supply is highly elastic and dwarfs demand, so majority of art does not sell at all or if it does, is unlikely to appreciate very much.

Despite all the obvious negatives, investors bought art funds, that too funds with very short horizons. And now, we are all blaming the fund promoters and distributors for making unrealistic promises. This might help vent our frustration, but why did we believe them?

I agree that lack of regulation has worsened matters, but no amount of regulation can prevent crackpot schemes build around popular fads. Ultimately, nobody out there can protect you if you’re careless with your own money!

Would welcome your views on investing in art, especially if you disagree with me.