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

EaselRecent 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.

Arun Jethmalani

Arun is one of the founders of ValueNotes. Apart from trying to build a high-quality research business, he has spent the last 27 years researching, analyzing, and dissecting companies and industries. He has worked with clients of all shapes and sizes, from all parts of the world – in providing them insights that make a difference to their business.
Prior to ValueNotes, he was an equity analyst/advisor, and wrote extensively on investing – including a column titled “Value for Money” which ran for 10 years in the Sunday edition of the Economic Times. To this day, he remains an avid “value” investor.
He has also been published in several other publications, and is a regular speaker at events related to technology, investing, competitive intelligence, business process management, Internet, etc. See: Valuenotes Events
He has been instrumental in developing a community of research and intelligence professionals in India, and is the founder and current chairman of the SCIP (India) Chapter. Arun holds a B Tech from IIT, Bombay and an MS from Duke University, NC, USA. LinkedIn Profile

  • Arun Jethmalani
    Posted at 22:17h, 25 January Reply

    Hi Kinshuk
    Thanks for the input. Yes, everything is cyclical and subject to excessive speculation, but the value of art is (arguably)much more difficult to decipher for most of us ordinary folk. Secondly, in equity, one can exit at any time regardless of the price, while in relatively illiquid investments like art, even if you want to sell, it may not be possible to find a ready buyer (again, regardless of price).


  • Kinshuk Chandra
    Posted at 22:15h, 23 January Reply

    Looks like you know all the obvious reason why art funds crashed in India.But let me tell you, once something bad happens, predictors like you are already ready to say why it failed or why it succeeded? As equities crashed, so does the art market, as there was lack of liquidity and pressure from clients to redeem their money, these funds crashed. So please predict future, and focus on future rather than focussing on past, apart from learning from it 🙂 No grudges, articles 1.5/5 star

  • Will
    Posted at 21:29h, 03 March Reply

    The collapse in art funds is not a phenonmenon distinct to India – it’s happened in the U.S. and Europe as well over the last 18 months.

  • Rathin
    Posted at 13:06h, 24 December Reply

    happens all over again…

    only 4 words which are repeated…

    “This time its different”…
    …so u end up losing your moolah in different way…:)

  • bhupesh gupta
    Posted at 10:52h, 20 December Reply

    i’m tempted to rate this article 2/5 for it’s understanding of matters of art !
    though it’s lacking in overall assessment of art as a mere fad it does score in honesty and touches a chord when it comes to greed alas the final notes are jarring to say the least!

    it’s entirely true that popularity (only in the case of time tested artists with a proven record over a period of time) drives the values it can’t be a fad probably you can add other artists which were nowhere near these parameters and their prices were hugely manipulated thanks mainly to herd mentality of cocktail circuit which failed the acid test to leave so many pockets with a burning hole!

    Ultimately, nobody out there can protect you if you’re careless with your own money!

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