MARKET ANALYSIS

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art marKet UPDatecoNtemPorarY coLLectors UNswaYeD BY marKetING HYPe

hen US financial markets first tumbled in May and June under renewed economic uncertainty and anemic growth in the US and UK, various sectors of the art market performed as if immune to the laws of gravity. But looking beneath the surface of reported results reveals a more complicated landscape. Compare, for example, three recent Christies sales. In New York, the auction house realized its second highest Post-War & Contemporary evening auction total in its history at US $301.7 million. Its London Impressionist & Modern Art evening auction, which included the property of the Ernst Beyeler Foundation, fared equally well. At US $227.0 million, it was the second highest result ever in that category for Christies London. Contrast these impressive results with the same companys American Paintings auction in May, for which the total hammer came in at a mere 62% of its low estimate. How can this discrepancy be explained when over the last thirty years the American Art sector has been both the first into and out of art market down cycles? Are there new factors at play? (see article on page 6) Impressionist & Modern Art evening sales in New York achieved less than their low estimates at both Sothebys and Christies. The success of the comparable Christies London sale just a month later (noted above) suggests that a lack of quality supply, rather than insufficient demand, was the problem with the sales in New York. Senior auc-

tion house specialists complained that clients were refusing to sell at auction, despite high estimates, given the lack of better performing assets in which to invest proceeds. Many potential sellers were reasonably comfortable leaving their money invested in art, which is an important signal of long-term confidence in the market. Another sign of market strength is increased activity in the art fund space. Both new endeavors and first generation fund companies issuing second and third cycle funds are indicative of the evolution of this nascent industry. Yet investors need to approach start-up fund companies with a significant degree of caution, as their failure rate tends to be high. Most importantly, investors should keep in mind that the mention of a new art fund in the press does not an art fund make (see article on page 4). As in 2010, buyers remained unmoved when auction houses pushed estimates to win consignments during the spring season. This continues to be an art economy in which elaborate marketing programs cannot substantively increase the value of a work that does not merit it. Take, for example, the 1986 red Warhol self-portrait in Christies Post-War & Contemporary evening sale on May 11th. The lot was highly promoted before the sale with a lavish separate catalogue and a since-discredited claim that it was the last of the series in private hands. This work, estimated at US $30 to 40 million, only reached a (continued on page 5)

Andy Warhol, Self-Portrait, 19631964. Est. US $2030 million, Sold for US $38,442,500 with premium. Christies New York, 11 May 2011. World auction record for any portrait by the artist. Image courtesy of Christies

ARTVEST BLOG For up to the moment commentary on the latest art news and analysis of trends in the market, read the Artvest blog, ArtSpeak. Please visit Artvests new website at www.artvest.com.

chart I: 10-Year average Price movement by sector

taBLe of coNteNts art market Update ........................... p. 1

June 1, 2001 = 1,000

Investing in contemporary art what You Need to Know ............ pp. 2-3 the truth about art funds ......... pp. 4-5 american art the malaise continues ..................... p. 6 astonishing results in china ....... pp. 6-7 art and fiduciary responsibility ........ p. 7 art fairsHong Kong and Basel ...... p. 7 Looking ahead ................................. p. 8

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POST WAR & CONTEMPORARY MARKET REVIEW chInESE MarkEt rEVIEw

INvestING IN coNtemPorarY art wHat YoU NeeD to KNow

about how to label the category. Unlike art historical scholarship, financial analysis of each category or school requires a sufficient critical mass of auction trading to be treated as a trackable sub-sector. Some categorizations are obvious: Post-War (Pollock), Pop (Warhol), Minimalism (Judd), Established Contemporary (Koons, Hirst, Murakami). Defining which art and artists are Emerging is arguably the most contentious while it is easy to define a young artist at the beginning of his career as emerging, it is much more difficult to determine when he no longer is. This time is not different. The art market is cyclical, and the Contemporary sector is the most volatile. In the 2008 market crash, the prices for Contemporary Art tumbled by as much as 50%, while art in many other sectors saw price declines of 35% or less. There will be future corrections, and Contemporary Art is likely to continue to suffer them more severely.
Yayoi Kusama, Red-Nets No. 2.A.3, 1960. est. Us $300 400,000, sold for Us $662,500 with premium. sothebys New York, 10 may 2011. Image courtesy of Sothebys

Buying Emerging Contemporary is akin to venture capital investing. A common rule-of-thumb practiced by experienced Emerging Contemporary collectors is similar to that practiced by venture capitalists one in ten. Of every ten works of art purchased, one is likely to increase exponentially in value, while the others are likely to become worthless. The one gain should more than offset the losses on the other nine. Thus it is not uncommon for an avid and successful collector to be left with numerous, if not hundreds, of effectively valueless works of art by the end of his collecting career. Auction records can be misleading. For works by artists just beginning to trade at auction and who are setting outsized records, it is important to be circumspect. For instance, if a dealer buying a work at auction also handles the artist through his gallery, proceed with caution before using that auction price as a relevant benchmark. Be skeptical of galleries promoting their artists as good investments. No one has a crystal ball, and it is rare that anyone with a stake in an artist will give objective investment advice. On the other hand, do take notice of a gallerist who is passionate and deeply knowledgeable about a particular artists corpus of work because that may be one sign that he is an artist worth following. Even works by well-known artists may decrease in value. A May 30th article in the New York Times by Robin Pogrebin and Kevin Flynn thoroughly explores this risk, explaining how hot artists from the 1990s (Larry Rivers,

ith reports of robust sales from Art Basel in June and the notable success of Christies Post-War & Contemporary auctions in May, Contemporary Art has regained its luster as the darling of buyers who have their eyes on art as an investment. With that in mind, it is important to discuss a number of the complexities of investing in this sector. What Is Contemporary Art? There is no uniformity in defining the Contemporary sector. Even Christies and Sothebys are in disagreement

The more recent the work, the more volatile the price. Prices for Old Masters are less volatile than those for Modern Art, and Abstract Expressionist works are less volatile than Pop works. Works created after 2000 are higher risk and most volatile of all in terms of investment. New art is the most illiquid. Until an artist is firmly established in the secondary market (i.e. public auction sales), he is not considered tradable for the purposes of art collateral. There are some notable exceptions, but once an artist is selling well at auction, he is then perceived to have reached a new level of market staying power.

Chart II: May & June Contemporary Art Auction Results1

Chart III: Contemporary Art Results vs. Estimates1

London and New York Evening and Day Sales at Christies, Sothebys & Phillips de Pury, 2011.

London and New York Evening and Day Sales at Christies, Sothebys & Phillips de Pury, 2011.

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Chart IV: May & June Auction Results by Sub-Sector I1

the following issues pertain to investing in all sectors, not just contemporary:
Skills mastered in another industry may not translate well into building an art collection. Slight differences in condition, size, color, visual impact, period, medium and quality often only detectable by an informed art professional can significantly alter value. What you may perceive to be a bargain may actually be overpriced to a trained eye. Also, the best galleries and dealers are long-term relationship players. Making a price negotiation over a work of art a zero-sum game could cause you to lose access to future buying opportunities. All decorators are not created equal. If your decorator is also selling you art, be certain that he has the qualifications to do so. Ensure the compensation structure is transparent. A ten percent mark-up is standard, while an undisclosed back-end payment is not. Success has unintended consequences. Unlike financial assets and real estate, art is subject to a federal capital gains tax rate of 28% plus applicable state and local rates in the US. If a collector buys a work at a very low price that increases exponentially (a problem many of the original Pop collectors are contending with now), that collector is often surprised to learn that a third or more of the proceeds are due to the government. Do your homework. Find a good advisor and listen to him. Research comparable prices but know when to ignore them. And the old adage is still a critical one (continued on page 5)

London and New York Evening and Day Sales at Christies, Sothebys & Phillips de Pury, 2011.

Eric Fischl and Fancesco Clemente) have seen their prices at auction remain flat or decrease in value over time (find a link to this article on Artvests blog, ArtSpeak). Different genres of an artists body of work perform differently. All artists, even the Masters, have wide price variations for different periods, depending upon whether a work is part of a seminal time or from a less inspired one. For Picasso, paintings from his MarieThrse years are valued more highly than those from the 1950s and later. For Warhol, work from his disaster series in the 1960s is valued much more highly than his camouflage pictures from the 1980s.

The power of many is greater than the power of one. Artists who are part of schools or peer groups are more likely to increase in value. A group of artists like the YBAs (Young British Artists) inspire, promote and even collect each others work. They are also likely to be represented by a larger network of dealers and reach a broader range of collectors and museum curators. Buy with your eyes, not your ears. Works of art are not fungible commodities. Connoisseurship counts: condition, quality, message, visual impact, physical viability (stability of media) and how the work contributes to the narrative of art history all matter in sustaining value over time, even if the artist is the hottest buy of the moment.

Chart V: May & June Auction Results by Sub-Sector II1

Chart VI: Forecasted Estimate Changes Based on Spring Sale Results1,2

five artists whose auction estimates are Likely to Increase in the short-term artist Lucian Freud Yayoi Kusama Sigmar Polke Vik Muniz Glenn Ligon Lots offered 11 12 14 16 9 Lots sold. above High est 8 10 10 9 5 total Hammer / Low est. of sold Lots 143% 178% 194% 162% 166%

five artists whose auction estimates are Likely to Decrease in the short-term artist Sol LeWitt John Baldessari Sir Anthony Caro Andres Serrano Wangechi Mutu
1

Lots offered 10 12 4 9 7

Lots Unsold 6 6 4 2 4

total Hammer / Low est. of sold Lots 65% 108% n/a 87% 104%

London and New York evening and Day sales at christies, sothebys & Phillips de Pury, 2011.

2
1

London and New York Evening and Day Sales at Christies, Sothebys & Phillips de Pury, 2011.

these lists are indicative, not exhaustive. Note: For a more detailed explanation of the logic behind this chart, please visit Artvests blog, ArtSpeak, at www.artvest.com.

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ART FUND MARKET REVIEW

tHe trUtH aBoUt art fUNDs

he outstanding performance of the art market over the past ten years, coupled with the trepidation many have about financial markets post-2008, has led to growing interest in art as an investment and increased dialogue about art fund vehicles.

Defining an art fund

The sheer mention of the term art fund often stirs controversy. A contributing factor to the lack of understanding and agreement is that the term is broadly, and sometimes inappropriately, applied. Artvest defines an art fund as a structured investment vehicle with Offering Documents that is open to third-party investors for the purpose of financial gain. Everything from valuation methodology, to inherent conflicts of interest, to risk control and diversification must be sound, wellconsidered and documented. Properly created, an art fund will share similarities in structure to financial asset funds yet take into account the crucial difference that art is the underlying asset. Specialized expertise is essential to successfully manage such an entity. Private Investment Partnerships (PIPs) are often conflated with art funds, creating additional misunderstanding. Unlike art funds, PIPs are not made available to outside investors and are simply groups of individuals who have pooled resources to invest in art or other assets.

controls; how often is the fund valued and what is the methodology; what is the liquidation strategy; and most importantly, who are the principals and advisors, how are they compensated and what are their potential conflicts of interest? This is not by any means a comprehensive list, the questions are many and engaging a true expert before committing capital to any art fund is crucial. The art fund industry is still in its infancy, so experts with authentic experience are few and far between. Lack of regulation has allowed for the unfortunate rise of self-appointed experts which has made it more difficult for potential fund investors to separate fact from fiction. One ill-informed art fund expert went so far as to make the erroneous claim in an interview this past spring on the Financial Times website that art funds put a floor in the art market during the correction in the last half of 2008. This is a patently false claim given that the buying power of art funds was less than 0.25% of the US $59.5 billion market turnover that year.

opposing sides in the art fund Debate

A primary disagreement in the art fund debate centers on investment versus connoisseurship. As the tradable art market has increased dramatically, both in terms of overall transactions and values of individual works of art, interest has expanded considerably. Many new entrants see the market as another opportunity for financial gain while more traditional collectors adhere to the notion that art is simply to be lived with and enjoyed.

the current art fund Landscape

The scale of the art fund industry is commonly believed to be significantly larger than it is. New fund announcements usually garner extensive attention from the press yet few actually raise capital, and those that do are typically a fraction of their intended size. It is not uncommon for funds that had stated goals of US $100 million+ when announced, to have total assets under management of US $1015 million when they close on funding and begin art buying. There are less than a handful of operational art funds investing meaningful capital greater than US $50 million. Artvest estimates the global art fund industry to be between US $700 and 750 million, with Asian funds accounting for approximately one third of that total. Traction has been slow for a number of reasons, most importantly apprehension about investing in a little-understood market. Another concern is the impact that unpredictable trends in fashion and taste can have on the art market over time. A scarcity of art fund structuring expertise has also been a detriment. These factors, along with the absence of established long-term track records, has made the possibility of meaningful institutional investment in art funds a challenge thus far. Further exacerbating the broader acceptance of art funds are a few notable instances of fraud and/or incompetence in the last five years the result of unscrupulous practices by a handful of individuals that led to the loss of investor capital, numerous lawsuits and a considerable hit to the industry. More confusion comes from individuals successful in financial products venturing into the art fund space, believing that their experience is portable. The art market is remarkably different from all other asset classes it is opaque, illiquid, unregulated, non-commoditized and emotional. A deep understanding of the players, artists, sectors and intricacies is essential. Getting involved without this knowledge is akin to letting a child drive the family car.

art funds in asia

China and India have seen the quickest adoption of art funds. During the past five years, the number of Asian-based art investment funds has experienced unprecedented growth. Art funds first gained traction in India, but since the financial crisis, China has become the more important player. Artvest has also identified a number of active PIPs in Asia. Though there is little information available because they are not open to outside investors, PIPs are an increasingly influential force in the market. Primarily, Asian art funds are focused on acquiring works by native artists and are typically able to raise capital more quickly than Western art funds given the regions predisposition for tangible assets. In addition, the willingness of Asian banks, including ICICI, Kotak Mahindra and Minsheng, to actively participate in the art fund industry has further legitimized interest. chart vII: funds announced vs. funds active1

considerable Due Diligence is Imperative

When considering an art fund investment, many critical questions must be answered such as: how is the fund structured; are there adequate risk

1 2

All funds between 20032011. Multiple funds run by the same manager are counted as a single fund.

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Chart VIII: Art Fund Entities by Location by Year1

This time is not different. The art market is cyclical, and the Contemporary sector is the most volatile.
(see article on page 2)

Recently Indian-based art funds have encountered several critical setbacks. Many of Indias art funds have struggled with eroding valuations, negative press coverage and rumors of difficulty honoring fund redemptions. It has been reported that the Securities and Exchange Board of India may soon institute stringent rules and regulations for local art funds, which will have a consequential impact on the future of Indias art fund industry. In China, however, the soaring art market has led to an increasing number of art investment funds currently raising capital or acquiring art. While inefficiencies in the art market in China present potentially lucrative opportunities for art funds, there are numerous obstacles that may hinder the industrys future. For example, as the value of Chinese art continues to rise, Chinese art funds will face the challenge of raising increasingly large amounts of capital in order to remain relevant and competitive.

the future
1

Art exchanges art not included.

Despite these issues, interest in art funds continues to grow and the future is certain to see more legitimate vehicles coming to the market. Several funds in the US and the UK are in the process of raising capital for their second or third generation funds and finding it much easier to do so, now that they have established track records. Continued global economic uncertainty combined with low interest rates has led many to seek investments outside of traditional financial vehicles. As new art funds proliferate and investors commit more capital, due diligence will become more imperative and a full understanding of such issues as tax consequences, legal implications, risk management, market access and collecting trends will be all the more critical. When Artvest advises clients on art fund investments, we stress the importance of dealing with professionals who have substantial experience with both financial and art assets and who adhere to strict risk controls, calculated portfolio diversification, active management, open architecture and strict governance guidelines. Above all, Artvest helps its clients avoid funds with conflicts of interest that are neither disclosed nor apparent.

art marKet UPDate

(continued from page 1)

hammer price of US $24.5 million. The estimate defied credulity from the start and was treated accordingly by the marketplace. Contrast that with another lot from the same auction, the blue four-image self-portrait of Warhol from 19631964, a considerably more important work estimated at a lower and more sensible level of US $20 to 30 million. This painting sold for a hammer price of US $34.3 million, well above its high estimate (see cover image). Sothebys had a value-hype of its own in its May 10th sale with Jeff Koons 1988 Pink Panther, estimated at US $20 to 30 million but only achieving a hammer price of US $15 million. Take note: in this post-crash era, these ambitious pricing exercises rarely work, and it is a sign of a healthy marketplace that they do not. As the auction houses put their fall sales together after the results of Art Basel (see article on page 7) and the spring Contemporary auctions, there will be even more pressure than last season to raise estimates to unrealistic levels. For the sake of the market, let us hope that in these fragile economic times it is not more than the market can bear.

Artvest maintains that if a collector has an art collection valued at 20% or more of her net worth, the wealth advisor is not fully doing his job if he ignores its part in the portfolio.
(see article on page 7)

coNtemPorarY art

(continued from page 3)

like (and understand) what you buy. The best collections and the most successful investments are those that have been formed with a strong visual sensibility and focus. Ultimately, for the whole collection to be greater than the sum of its parts, there needs to be visual, period or thematic unity. An experienced advisor should be able to understand your taste, appreciate your buying and investing goals and work with you to bring coherence to your collection.
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REGIONAL MARKETS

amerIcaN arttHe maLaIse coNtINUes

are new factors at play?
merican Paintings have traditionally led the art market out of downturns, but not this time. Since the pullback in late 2008, the American market has yet to see any sign of recovery (see Chart I). Why? What is different now? There are essentially two schools of thought as to why the American market has lagged almost all other sectors so dramatically. One side notes the lack of demographic diversity in the collector base (90% or more of which are Americans over the age of 40). This uniformity coupled with a dearth of interest amongst global players is not an issue in other sectors such as Contemporary, where the following of artists such as Bacon, Murakami and Ruscha is quite heterogeneous. The other side feels that the resident economic and political uncertainty in the US has led American collectors to put the brakes on buying. Many are already broadly exposed to the US market and need to maintain as much liquidity as possible until greater stability and political clarity emerge. Artvest believes that these two schools of thought are not mutually exclusive, and we are not surprised that a recovery has yet to come. This malaise continued to be evident in the spring season sales at both Christies and Sothebys (see Chart IX). Eric P. Widing, Department Head of American Art at Christies, acknowledges that the market is slower to recover this time around. There are concerns. One is the current sell-through rates which are low and that is troubling. We want to get back to the historical range of 80 85%...There seems to be a crisis of confidence among American buyers and specifically at present there seems to be tremendous concern based on political risk. He went on to discuss the opportunities that are available at the high-end of the American market, pointing out that Collectors can purchase iconic American Art in the US $1 5 million range while those types of opportunities are rare in the Impressionist & Modern or Post-War & Contemporary categories. We look like a bargain. chart IX: american art Pre-1950 results vs. estimates

astoNIsHING resULts coNtINUe IN cHINa

Qi Baishi, Eagle Standing on Pine Tree, 1946. sold for rmB 425.5 million with premium (Us $65.0 million). china Guardian, 22 may 2011. Image courtesy of China Guardian

rtvests Winter-Spring 2011 Market Analysis discussed the growing phenomenon of the Chinese art market. Results from the spring sales in New York, Hong Kong and Beijing demonstrate that the Chinese auction market continues to gain momentum at a dizzying rate. Sky-high sales results and shattered records were abundant across categories from Ceramics to Paintings to Wine to Jewelry. There has yet to be a sign that growth is slowing. March 22 New York: In Sothebys J.T. Tai sale, a gilt and embellished Famille-Rose porcelain vase estimated for as little as $800 sold for over US $18 million, stunningly exceeding expectations and accounting for nearly half of the entire sale total. The estimate was not a mistake, but rather a decision by the auction house and the estates advisors to let the market decide the price for a work for which there were some complications in attribution. On account of purposefully low estimates, 78% of the lots sold above their high estimates, yielding a total hammer price 7.5 times the sales high estimate. April 3 Hong Kong: In the Ullens Collection sale at Sothebys, Zhang Xiaogangs painting Forever Lasting Love set the new world record for Contemporary Chinese Art as well as the world record for the artist at auction at US $10.1 million. May 22 Beijing: At China Guardian, Eagle Standing on Pine Tree by Qi Baishi sold for US $65.0 million, becoming the record-holder for the most valuable Modern Chinese Painting (see image above). May 30 Hong Kong: At Ravenels spring sale, Sanyus Five Nudes, which last sold in 1993 at Sothebys Taipei for just 119,268 with premium, shot up over its opening bid of US $10 million, ultimately selling for $16.5 million, accounting for over half the sale total. June 1 Hong Kong: Christies Inspired Connoisseurship auction, which included 30 lots, was 100% sold by lot (known as a white glove sale), and at the Imperial Sale an extremely rare Falangcai kui dragons bowl sold for a hammer price of US $6.8 million, five times its low estimate. The overwhelming success of the Chinese Paintings and Ceramics sales confirms Chinese collectors unbridled enthusiasm for traditional Chinese arts, as well as for more modern and contemporary work. There were also a few notable failures this season that cannot be ignored, but these examples deserve careful consideration, as there were unique reasons for each.

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investors should keep in mind that the mention of a new art fund in the press does not an art fund make (see article on page 4)
April 7 Hong Kong: The first part of Sothebys greatly anticipated Meiyintang sale produced highly disappointing results with 30% of the porcelain going unsold. Despite exceptional provenance, the unexpectedly stringent credit restrictions and extremely high reserves secured by an ultimately ambivalent seller prevented the sale from living up to expectations. Artvest hopes that the seller and his advisors adjust their approach for the upcoming sale of additional Meiyintang property, as salesroom prices for a collection of this quality should serve as a more accurate bellwether of current market interest. June 1 Hong Kong: Following the spectacularly successful Imperial Sale at Christies Hong Kong, the magnificent Famille-Rose Qianlong Revolving Vase, highlighted with its own catalogue, failed to find a buyer during the auction. Deemed similar in style to the Qianlong vase sold at Bainbridges in November 2010 for a surprising 53.1 million with premium (against an estimate of only 800,000 to 1.2 million), Christies set an aggressive estimate of HK $200 million (US $25.7 million), which the market proved unwilling to accept. Reflecting on what went wrong in an article on Artinfo.com, Pola Antebi, Head of Chinese Ceramics at Christies Hong Kong, conjectured, After seeing a number of lots sold in the tens of millions of dollars for the first time [in the fall and also in New York], the expectations for these very rare and very important pieces that we did offer were the same and maybe in hindsight that wasnt the best place to start...There was interestbut the estimates the starting points were a little too high, and that put people off, (find a link to this article on Artvests blog, ArtSpeak). As a point of auction room psychology, it is interesting to compare the outcome of the J. T. Tai Famille-Rose vase that reached US $18 million off a US $800 estimate with this example. The auction houses frequent assertion that low estimates sell works and high ones do not, seems to be just as true with Asian collectors as with those in the West.

art faIrsHoNG KoNG aND BaseL

his years 4th edition of the Hong Kong International Art Fair (ART HK) has solidified its position as the most important annual Asian art fair. Leading galleries from all over the world exhibited, primarily those specializing in Contemporary Art (Gagosian, White Cube, James Cohan, Pearl Lam Galleries) but also some known for Modern Art (Acquavella), suggesting the belief in an increasingly diversified interest amongst potential buyers. As this venue is now considered the place to be in Asia for exhibitors, only half of the 500 galleries which applied to exhibit were selected to participate. The fair and an entire week of art events (including Christies 13 sales and various gallery openings) were attended mostly by mainland Chinese but also by a number of collectors from Europe and the US. When it comes to actual sales of Western art to Hong Kong and mainland residents, however, ART HK is arguably more about the promise than the reality. Fundamental language and cultural barriers inhibit a majority of the Chinese wealthy when considering the purchase of Picassos and Warhols. This evolution, while in progress, is not happening overnight and will require the patience of Western galleries and an investment in Chinese-speaking staff. Christies spring auctions were held in the Hong Kong Convention Center concurrent with the fair, which had the potential to either benefit or detract from Christies sale results. Despite overall success at Sothebys Hong Kong sales two months earlier in the categories of Fine Chinese Painting, Ceramics, Contemporary Chinese Art and Wine, many were convinced that the disappointing Meiyintang auction results on April 7 were an indication that the astonishing mainland Chinese demand for art did in fact have its limits (see article on page 6). This sentiment left many anticipating that the two convergent events would offer too much property for the market to absorb at one time. Others argued that the sheer size of the Sothebys sale (nearly double that of the previous October sale) had caught the Chinese collectors by surprise, as they had been unprepared to spend so much in April, but that going forward expectations would be adjusted. In their execution, each of the events proved successful. Christies may have even fulfilled the Chinese collectors incredible appetite for traditional art such as Ceramics and Paintings, which were entirely absent from ART HK, which featured almost exclusively Modern and Contemporary Western Art. This was an exceptionally strong year at the 42nd Edition of Art Basel. Widely considered the best Modern and Contemporary art fair in the world, most major global galleries exhibited (Pace, Marian Goodman, Sperone Westwater, Hauser & Wirth). Attendance was estimated at over 65,000, a new record, and the value of art on offer was nearly US $2 billion. Many artists and a few notable celebrities were seen walking the fair, and sales were brisk from the start, with countless galleries reporting that the mood of collectors was upbeat and their buying energetic. One noticeable difference from the height of the market in 2007, and positive from the perspective of market stability, was that buyers were alert to realistic pricing and works with unreasonable mark-ups often failed to attract serious interest.

art aND fIDUcIarY resPoNsIBILItY

f a client of a wealth advisor has a substantial percentage of her net worth in an art collection, is the advisor neglecting his fiduciary responsibility when ignoring the clients art assets? It is standard financial industry practice to classify art as a hobby asset and place it in the same category as yachts, luxury automobiles and collectibles. This is policy for a majority of firms and uncontested by many advisors who, in general, lack expertise and familiarity with art. Unlike most other hobby pursuits, art is often a sizeable and growing part of a clients overall wealth and, in the case of many passionate collectors, over time it becomes a meaningful portion of the clients assets. In many instances, art has outperformed collectors financial assets, particularly over the last ten years. For these reasons, Artvest maintains that if a collector has an art collection valued at 20% or more of her net worth, the wealth advisor is not fully doing his job if he ignores the role of art in the portfolio, especially given its unique liquidity, selling, tax and estate planning issues. For example, heading into the last market downturn, if a client had an extensive collection of Contemporary Art and a material exposure to real estate commercial or residential she was likely hit with a significant liquidity squeeze which could have resulted in either distressed selling or a nearly usurious loan. Unfortunately, this was not an uncommon scenario in 2009 and the first half of 2010. An astute wealth advisor working with a qualified art investment professional could have saved his client from this scenario or future ones.

Kendell Geers, Hanging Piece, 1993. art Unlimited, art Basel 42. Image courtesy of Artvest

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MARKET ANALYSIS chInESE MarkEt rEVIEw

VOLUME 2 | ISSUE 2 | FALL 2011

LooKING aHeaD
will the art economy continue to Be Immune?
ypically, writing our forecast is a routine endeavor, as we consider the previous seasons results as well as key factors that are likely to influence the market going forward. This time proved to be a less straightforward undertaking. The events of the summer made such projections unusually difficult, as all markets were increasingly volatile and uncertain, and are expected to remain so for some period to come. What has worked in the art economys favor to date, both in terms of the rebound out of the 2008 downturn and the many record results in 2010 and 2011, has been the belief amongst the wealthy that art, and other tangible assets, are a reliable store of value when faith in global financial markets is fragile. Additionally, to the extent that the US and European economies can be said to have recovered since the last downturn, it is predominately only the wealthy who have experienced it. The middle class, the core driver of the US economy, is still mired in what is effectively, though not technically, an ongoing recession. Add in the political and economic uncertainty in the EU, and the economic outlook for the second half of 2011 and early 2012 is not a promising one. That being said, except in times of market dislocation such as the fall of 2008, the art economy is a lagging indicator into downturns by approximately six to nine months. Furthermore, a notable single-owner collection that presents a oncein-a-lifetime buying opportunity for passionate collectors can temporarily buck the trend, as seen in the Yves St. Laurent sale in February 2009. So, even if financial market turmoil continues this fall, sale results could still be strong if the auction houses have good and suitably-priced property. The upcoming auction of Elizabeth Taylors important jewelry, paintings and memorabilia at Christies is likely to create a well-publicized feeding frenzy which could go a long way in boosting the appearance of a robust and still-healthy art market in the latter half of 2011.
Disclaimer: This Market Analysis is provided for informational purposes only and does not constitute legal, tax or investment advice. This Market Analysis does not constitute any form of recommendation or endorsement by Artvest Partners LLC and is not to be relied upon by readers in making (or refraining from making) any specific investment or other decisions. Any agreements, transactions or other arrangements made between you and Artvest Partners LLC, or you and any third party, on account of this Market Analysis are at your sole risk and responsibility. Artvest Partners LLC does not guarantee the accuracy of the data provided in this document, as it relies on third party data providers not under its direct control. This document is for the exclusive use of the person to whom it was sent, and the information contained herein cannot be distributed, published, disclosed, reproduced or reused without the express written consent of Artvest Partners LLC. Any information contained in this document may have ceased to be current by the time it reaches you. Artvest Partners LLC is not responsible for any use of content by you outside the scope stated in these terms and conditions.

Nonetheless, we are left with a nagging concern, especially when we look back to the summer of 2007 when the debt markets seized up nearly overnight, signaling the beginning of the yearlong collapse that brought about the full crisis later in 2008. During that period, the art market seemed entirely unaffected and naysayers who warned of impending problems were shunted to the sidelines. Christies and Sothebys continued to take enormous risks on auction guarantees, ending disastrously in the fall of 2008. Since that time, both houses have adopted a welcome prudence and sobriety when it comes to risk, specifically auction guarantees, and we would expect, in times like these, they will continue to stick to it. Now is an important time for all collectors and art businesses to keep a close eye on both their liquidity and exposure to value risk, and for auction houses to keep estimates low. To conclude that the art market is immune to broader economic uncertainty, based on the strong results of the first half of 2011, might be a repeat of a past mistake.

With three decades of experience in art and finance, Artvest offers investment advice and custom strategies for acquiring and selling, protecting art wealth and passing it on to future generations. Artvest fills a need in the market by introducing a financial focus for collectors at all stages. Entirely independent, the firm has the flexibility to promote the clients best interests and offers impartial guidance through the complex, opaque and unregulated art market. Collection Building & Investment Strategies Art Investment Structures & Art Fund Due Diligence Global Sourcing, Selling & Auction Advocacy Market Research, Enhanced Appraisals & Liquidity Assessments Art Wealth Transfer & Estate Planning Advisor Assistance for Life Events Art Financing

Michael Plummer, Principal mplummer@artvest.com | 212.763.8653 Jeff Rabin, Principal jrabin@artvest.com | 212.763.8654 Erica Waldbaum, Associate ewaldbaum@artvest.com | 212.763.8657 Jeremy Rhodes, Business Analyst jrhodes@artvest.com | 212.763.8655 General Inquiries info@artvest.com

Michael Plummer, Jeff Rabin New York, September 2011 Editors Note: At the time of publishing, global markets were in turmoil. As volatility is likely to continue well into the fall season, we will post updates to our market outlook on the Artvest blog, ArtSpeak, at www.artvest.com.
Data provided by Art Market Monitor, Art Market Research, Art Price, Bloomberg, China Guardian, Christies, Financial Times, Art HK, New York Times, Phillips de Pury & Co, Sothebys, and US Department of Commerce. Reported auction prices include buyers premium, unless otherwise noted. However, since estimates do not account for premiums, in analysis of prices in relation to estimates, hammer prices are used. Indexes have not been adjusted for inflation.
Peter Doig, Red Boat (Imaginary Boys), 20032004. Est. 1.41.8 million, Sold for 6,201,250 with premium. Christies London, 28 June 2001. Image courtesy of Christies

Artvest Partners LLC 2011

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