Art Fund Tracker

Transcription

Art Fund Tracker

Issue 11, Spring 2012
www.fineartwealthmgt.com
Art Fund Tracker
SPECIAL REPORT - Art Funds and the Family Office Investment Platform
In this issue
Editor’s Letter
1
Art Funds and the Family Office Investment
Platform
Special Report on Art Funds and their Role in a
Family Office
3 The Aesthetic, Financial and Cultural Value of
an Art Fund to Collecting Families
Alexander “Sandy” Kemper, Chairman and Founder of
the Collectors Fund discusses how the endeavour of a
few Midwestern families to acquire and enjoy art in a
more satisfying and economically rewarding way has
effectively become a private museum whose members
and collecting families own and display the art in their
private homes.
4 Family Offices and the Emergence of Managed
Art Accounts
Phillip Hoffman, Founder and CEO of the Art Fund
Group explains how a staggering 40% of the Fund’s
business today centres on family office investors with a
growing number of ultra-high net worth individuals
seeking to establish their own bespoke managed art
accounts.
6 The Operational Challenges of Investing in Art
for a Family Office
Gil Brandes, Founder and Managing Partner with Art
Partners considers the challenges still ahead for family
offices to fully embrace art investment funds and the
operational complexity involved to provide the
transparency and control required by sophisticated
investors.
© 2012 Fine Art Wealth Management | [email protected]
EDITOR’S LETTER
Art Funds and the Family Office
Investment Platform
It may not be usual to associate fine art and a family office
at first glance. There is, however, a long history in the
collection of beautiful objects by wealthy families and the
discreet management of their various financial planning
and lifestyle needs by professional advisors. Art patronage
has historically played an important part throughout
history in the wealth of ultra-high net worth families.
Although the Renaissance is regarded as the golden age of
patronage, we are seeing the rise of art as an alternative
investment in the modern day portfolios and in the private
estates of family offices.
At a time when the financial markets are fluctuating
dramatically, investment in high quality works of art with
strong provenance is becoming a part of the long-term
alternative investment strategy for a growing number of
family offices. Equally important, the rise of art collecting
by wealthy families is creating a more complex set of
financial and non- financial needs which go beyond the
traditional range of services family offices offer, and indeed
are ill-equipped to provide through their existing business
models.
The interests of financial families with exceptional art
wealth is becoming more diversified necessitating the
integration of art and finance to structure solutions for art
succession planning, art financing, art philanthropy and
increasingly art investment.
A powerful investment platform has a central role within a
family office for families of substantial wealth. Many of the
gains realized by family offices in recent years have been a
result of strategic diversification of their holdings by
moving into a broad range of asset classes. The way
investment management is handled however, can vary
from office to office, as can the individual products they
choose to use as part of their investment strategies.
2 | ART FUND TRACKER | SPRING ISSUE 2012
Broadly speaking, about 40% of family offices have an inhouse proprietary asset management capability, and 96%
select and monitor third party managers on behalf of the
families. About two-thirds of family offices use alternative
investments in their portfolios – namely hedge funds,
private equity and funds of funds.
Most recently, this trend has extended to investing in art,
as family offices shift their concern from weathering the
financial crisis to anticipating the inflationary effects of
rising government spending and debt. Additionally, we
are seeing the emergence of art funds and single owner
managed art accounts for ultra-high net worth families
looking to put a portion of their wealth into selected
sectors of the art market.
Historically family offices were the domain of the superrich – low profile entities established by and for the ultrawealthy to coordinate their financial and sometimes
personal affairs. Today, the collective assets of a typical
family with its own office can rival those of institutions and
by joining forces an extended family unit can achieve true
independence and privacy while creating negotiating
leverage and a shared culture for its individual family
members.
By their very nature, family offices are customised vehicles
that are built around the explicit needs of a family and all
its members. That said, there is some consistency across
the platforms of products and services within most single
and multi-family offices. Nearly all family offices are
organised around the investment function.
Recently we have seen the emergence of managed accounts
from select art fund managers seeking to provide family
offices with higher levels of transparency and control,
greater liquidity, and more flexible fee schedules. As art
fund managers wrestle with ways to attract new capital
infusion, one increasingly popular solution is to offer
private single owner accounts particularly for family offices
with larger pools of capital and a long term investment
horizon. Successful art fund managers are seeing a marked
increase in activity from family offices in some cases
representing as much as 40% of their activity. The
minimum investment for a managed art account ranges
between $2 and $3 million with a 3 to 5 year investment
horizon.
Most managed art accounts aim to emulate the world’s top
collectors who tend to focus on specific sectors of the
broader art market. Family offices pursuing a sector
allocation strategy seek to obtain their investment
objective of medium to long term capital appreciation
through the active management of a broadly diversified
portfolio of art across the most established sectors such as
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Old Masters, Impressionist, Modern and Contemporary.
These sectors are identified for having significant size and
maturity of collector base; independent market behaviour
(including price performance and volatility); and a long
transaction history allowing greater predictability.
While managed accounts are introducing new support
challenges for art fund managers, they do represent an
interesting opportunity for family offices providing greater
transparency and control. All art assets within the
managed account are held in the name of the account
holder and are segregated. The trading strategy generally
mirrors an art fund manager's reference fund, but the
investment mandates can be bespoke and tailored to meet
the investor’s individual requirements. Alternatively, a
family office may choose to establish its own bespoke art
investment vehicle and engage an independent art
investment manager.
Today’s global art investment community has evolved into
a complex and intricate web of collecting families, law
firms, trust and estate practitioners and art market
experts. Successfully managing the interests of ultra-highnet-worth families with exceptional art wealth requires a
consistent and dedicated approach. At the same time, a
complete and well-developed alternative investment
platform at a family office is a competitive advantage, and
as competition increases among family offices these
platforms will be more global, transparent and diverse in
their offerings. Knowing these trends and changing your
office to accommodate them can set a family office on solid
ground with often demanding and rewarding families.
According to most experts, more family offices are turning
to specialist asset managers to fill specific investment
mandates than ever before. This frees them up to focus on
macro concerns like asset allocation, along with the other
day to day responsibilities of managing a multifaceted
operation. On a related note, there is a bifurcation among
today’s family offices when it comes to investment strategy.
The average age and net worth of families are decreasing.
There has been a commensurate increase in the number of
families focused intently on generating additional wealth
with the assistance of their family office. In contrast, there
is also a distinct group of families that has transitioned
from the wealth creation to the wealth preservation stage.
In this special report of the Art Fund Tracker we hear from
three separate art investment fund managers that have
established track records of performance over the last
several years and how they view their role in the context of
a family office investment platform.
Randall Willette – Founder & Managing Director
Fine Art Wealth Management Ltd.
ART FUNDS AND THE FAMILY OFFICE
Financial, Aesthetic and
Cultural Value for a Family
Office
Alexander “Sandy” Kemper, Chairman and Founder of
the Collectors Fund discusses how the endeavour of a few
Midwestern families to acquire and enjoy art in a more
satisfying and economically rewarding way has
effectively become a private museum whose members
own and display the art in their private homes.
I’ve been fortunate to have spent my life surrounded by
outstanding art at home, due to my family’s life-long
commitment to collecting and further, through its
founding and support of our local contemporary art
museum. In addition, during my time as a banker, it was a
pleasure to be surrounded by a noteworthy corporate art
collection also developed by my family. Although my wife,
Christine, and I are steady collectors, acquisition of truly
remarkable works by our generation was typically out of
our reach during our first decade or so of marriage, as we
were focused on building businesses and raising a family.
Serendipitously, during a trip to visit New York galleries
with our good friends (who later became founding
members of our first art fund), we were both enamoured of
a rather expensive piece and we joked that neither of our
wives would let us buy it alone. So one of us said, “Why
don’t we split it?” We didn’t actually do it then, but the
seeds for The Collectors Fund had been sown.
It is telling that the origin of the fund was as much about
our shared passion for art as it was about the inherent
investment potential of acquiring extraordinary works.
The blend of both objectives has been a trademark of The
Collectors Fund and our two art funds – American Masters
Collection I (closed to new investment) and Twentieth
Century Masters Collection (opened first quarter of this
year). Our broader goals are centered on solid investment
returns, of course, with the unique value-added feature of
enabling our members to be surrounded by exceptional art
through a program that rotates the art through our
members’ homes three times a year.
Because of this rotation program, our members will, over
the course of the fund, receive into their homes or offices
art valued at more than 10 times their initial investment.
In addition, the chance to interact with like-minded
members has been seen as a great benefit of investment for
our members.
For example, we engage our members with a variety of
educational opportunities that serve to help them become
more confident and comfortable as art collectors and
patrons on their own. We share our curatorial services and
advice as they build their private collections. We also
organize annual trips to major events such as Art Basel
Miami Beach; arrange exclusive “backstage” tours of places
such as Sotheby’s, the Getty Museum, and major private
collections; and connect our members with artists through
studio visits and artist receptions.
In considering structures for this concept, the private
equity model made the most sense because it provided a
means to achieve sufficient economies of scale with
professional management. Ours was by no means the first
art investment vehicle to take that route, but many of those
early efforts either never got off the ground or failed under
the weight of excessive management spending. We’re
based in Kansas City with modest overhead, so we can
operate effectively and efficiently on behalf of our
investors. All installation, de-installation, transportation,
insurance, collection management and curatorial services
are handled by The Collectors Fund’s professional staff.
Unlike some other funds, our 2% annual fee is charged
against member capital, rather than against appreciated
value of the art –which is an inherent conflict in my
opinion. Our staff curatorial expenses are paid for by the
management company, not the art fund. And all
management fees paid by a member must be repaid to the
member pro-rata before the management company may
take its share of profit from the sale of any work.
Portfolio diversification is a key reason why the art
investment asset class has recently gained significant
attention among HNW families and individuals. A recent
survey of bankers and investment managers conducted by
a wealth management forum (as reported in Wealth
Manager, Feb 12, 2012) “showed investors were looking for
lower volatility through wider asset diversification,” a view
supported by extensive research that art as a component of
an investment portfolio can decrease risk at a given level of
return. “The high level of uncertainty created by the
Eurozone crisis … means that assets with intrinsic value
are in increasing demand,” according to the survey
conclusions. “People will always value beautiful works of
art, and see them as something they want to own as well as
safe investments.”
However, the private equity art fund structure also adds a
higher level of diversification than is generally available to
the individual collector because it adds diversification
within the asset class, as well – investing in several
artworks of various artists, time periods, genres and
media. Our first fund, American Masters Collection I,
consists of approximately 140 works by more than 75
artists spanning the 20th century and present, all acquired
with professional curatorial expertise and discipline.
Moreover, unlike individual collectors, we take care of all
storage, insurance, and maintenance issues.
In that same survey of bankers and investment managers
(as reported in Financial Times Feb 16, 2012), art was
identified as “the asset class with the best chance of
positive returns this year, ahead of alternative investment
funds, soft commodities and property.” The article also
called attention to the growing role of art investment funds
as a strategy for collectors. “But rather than build up
private collections,” it said, “more investors are opting to
buy into collective investment funds that provide returns
by selling off individual pieces of art over a number of
years.”
As art funds have gained attention in the financial press in
the last few years, we’ve seen growth in interest from HNW
families and family offices. Several of the investors in our
first fund are family trusts sharing the investment– and joy
-- of art ownership across generations. Our members often
engage their children in choosing artworks that will rotate
into their homes. Anecdotally, we have enjoyed stories
such as when a member’s child had studied and tried to
emulate a particular artist in class; then later one of that
artist’s works from our collection was hung in the family’s
home. “It’s been really nice for us as a family,” the
member said. “Where you’re going to a museum, you
might spend an hour or two there.” With The Collectors
Fund program, he said, “you’re actually living with this
world-class art in your home.”
Our second fund, Twentieth Century Masters Collection,
which just opened in February, has been attracting interest
from family offices across the country. While these
investor groups certainly have the resources to make
significant art acquisitions on their own, many don’t have
the expertise themselves or are reluctant to rely on a single
outside art advisor. An experienced art fund manager,
such as The Collectors Fund, has the advisory
infrastructure and operational mechanisms in place to
make the addition of art to an investment portfolio
straightforward and cost-effective, without a significant
investment of time and management on the part of the
family office advisor or its family members.
Family Offices and the
Emergence of Managed Art
Accounts
Phillip Hoffman, Founder and CEO of the Art Fund
Group explains how a staggering 40% of the Fund’s
business today centres on family office investors with a
marked increase in the number of managed art accounts
now requested by ultra-high net worth individuals.
At what point throughout the history of art have the words
art and family not been linked? We know that for Van
Gogh, whose brother Theodore provided much needed
familial (and income!) support, ‘family’ would have had
many resonances. When Valezquez painted his triumph,
Las Menias at the behest of the Spanish royal family, it was
to eternalise the group and register the family’s position in
history. The historical examples are numerous, yet more
recently we might view the art-family relationship from an
alternative angle: How are today’s family offices investing
in art?
Over the past decade, art funds and financial vehicles have
arisen to provide investors an alternative means of
generating wealth. A rapidly growing global industry, the
art market is today estimated to be worth an impressive
$50bn. One such art investment house is London’s The
Fine Art Fund, whose assets of approximately $120m
under management and track record IRR of 24.51% per
annum on sold assets make it foremost in this field. Here,
the changes in art investment practices are abundantly
clear. Ten or so years ago, private and institutional
investors were cautious about viewing art as an investable
asset. Having proved itself as an excellent hedge against
inflation and superb means of diversifying financial
portfolios, perceptions of art’s investment potential have
firmly changed.
At The Fine Art Fund, the past decade has seen what was
originally mostly private investors being joined by
institutional counterparts. Alongside this, family offices
have begun to really utilise the market as a means of
diversification or to promote a passion for the arts. Most
recent changes have shown that more and more family
offices and private individuals with considerable family
wealth are signing up to art investment products like
privately managed art accounts. But why are they doing
this? At The Fine Art Fund, our private accounts allow
clients total flexibility over their investments. From how
much capital to spend, what genre or artwork to buy, to
where the pieces are eventually displayed, clients are able
to work alongside an expert art manager to create a
portfolio that is bespoke to their needs and tastes; they can
be as involved as they wish. As investors acknowledge the
benefits of buying museum-quality artworks which often
provide bulky returns, The Fine Art Fund’s privately
managed accounts have seen an outright increase in
demand.
One reason family offices are turning to art as an
alternative to trading on the stock exchanges are possibly
the parallels between the two and their global business
structures. Created in 2000, the Mei Moses All Art Index
tracks the prices on all art objects that are repeatedly on
sale. With a similarly formalised trading system to
highlight art investors’ financial gains, it is no wonder that
managers are turning to this passion asset to generate
income. Returning 16.6% on an annual basis in 2010, the
Mei Moses was an impressive alternative to the S&P 500
which was up only 15%. Purchase prices for the
investment-grade art included in the Mei Moses range
from approximately $120,000 to an impressive $32
million. In six of the past ten years, the Mei Moses index
has surpassed the S&P 500 with average annual returns of
7.8% as opposed to 2.7% for the US index.
Since 2010, the number of Family Offices holding privately
managed art accounts with the fund has increased
exponentially. Today, a staggering 40% of The Fund’s
business centres on family office investors. More acutely,
for our privately managed accounts we are currently only
working with either family offices or private clients with
significant (family) wealth.
Of The Fine Art Fund’s privately managed art accounts
currently held by family offices, we estimate that there is a
50% divide between those who are investing for the
purpose of diversifying their financial portfolios, and those
who are investing fuelled by a love of art. In one instance
the fund is responsible for managing a considerable
existing collection of Old Master paintings. For those
clients seeking to invest for diversification purposes, we
always recommend that they assign no more than 5% of
their investable wealth to art as an asset.
With this rise in family office interest in privately managed
accounts, has come a change in the demographic of the
clients. At The Fine Art Fund, family office managers
investing in 2004 represented finances from
predominantly the UK and USA. Today, however, the
presence of managers from Saudi Arabia, Greece, Portugal
and the BRIC countries has increased vastly. In our
opinion it is the personalised account and services offered
through the private investment management option that is
in part responsible for this meteoric shift. Our increasingly
international family office client-base is symptomatic of
our global position in the market for privately managed art
investment accounts, and the specific and increasing
demand for this service amongst investors with private
capital.
The rise in art’s increasing attraction as a financial asset
may in part be due to Sotheby’s and Christie’s auction
houses where transparent auction practices and very often
ground-breaking realised prices for artworks captivate
clients on a global scale. Amidst the doom and gloom so
often reported on regional stock markets, a colourful
Maurice de Vlaminck with an estimated potential profit of
10, 15 or even 20 million dollars is certainly appealing.
At this early stage in the year we are already noticing
trends in regional market results, made visible by the artfinance institutional tools (websites, reports, etc.) that are
becoming more prevalent. The German and British art
markets are storming ahead in the ratings with important
sales being realised for Francis Bacon’s Portrait of
Henrietta Moraes, which sold for $33,664,122, Henry
Moore’s Reclining Figure: Festival which achieved
$30,127,386, and Gerhard Richter’s Abstraktes Bild which
sold for a realised price of $15,626,768. In February alone,
Germany’s market sales stood at an incredible $43.6
million.
In each privately managed account, internal diversification
across the disparate genres is advised, although a number
of our private accounts focus on individual emerging or
established markets. Looking at 2011, the growth rates for
the various genres were in keeping with traditional
developments. Old Master works and 19th-century art
increased quite humbly by only 4.8% while Post-war and
Contemporary art grew by 6.4%. In keeping with previous
records, the Impressionist and Modern Art genre achieved
the most impressive returns at 14%. With figures like
these, office managers are unable to resist the temptation
to cash in the equities and exchange them for etchings.
While it is evident, therefore, that art based financial
vehicles like managed art accounts can provide long-term
capital growth through the acquisition of tangible and
beautiful assets, a major concern for the family office
manager stems from an unfamiliarity with the art market.
Applying a resolutely financial mind to managing the Mei
Moses is inadvisable; swapping stocks and bonds for
Stieglitzs’ and Bonnards’ requires know-how. Financially
and artistically structuring an art portfolio is, therefore,
only one branch on the tree of the Family Office – art
manager relationship. A thorough due diligence process
and specific knowledge of the art market are both essential
components. The Fine Art Fund’s private account
management team combines a unique blend of finance and
art world expertise to maximise potential returns. It is this
amalgamation of capabilities that allow family office
managers to entrust funds in alternative assets like art.
Like investing in the stock market, there are risks and
rewards associated with investing in museum-quality art.
The Fund has become increasingly popular in the past
decade with family offices as our intricate knowledge of the
market, artistic provenance and links to the industry
ensure that the manager’s money allocated to our private
accounts is invested in the best works, at the right time and
for the right price.
The Operational Challenges of a
Family Office Investing in Art
Funds
Gil Brandes, Founder and Managing Partner with Art
Partners considers the challenges still ahead for family
offices to fully embrace art investment funds and the
operational complexity involved to provide the
transparency and control required by sophisticated
investors.
So, is art finally establishing itself within the family office
community as a valid asset class? For one thing when one
Google "art as an asset class" alongside "family office"
(when using Google results matches only exact terms), the
result is more than 1,000 url's. Although we are quite
accustomed to get millions of results in Google searches,
this is still an impressive number. Since closing our first
art fund back in September 2007, the starting point for our
discussion with family offices seems to have changed
considerably and there is now at least an agreement that
whether they believe in art as an investment or not, their
clients are more than ever tuned to such idea.
Why should a family office invest in art? Or to make things
a bit more difficult, why should a family office manager be
in favour of a client putting money into a painting that the
client does not really like (yet believes such painting is a
good investment), or into an art investment company?
After all, art is still regarded as illiquid. Equally, there is
difficulty to validate the value of an investment managed
by a third party fund manager in an asset class which the
family office has little expertise in or control over.
Having spoken to some of the family offices whose clients
have in fact invested in an art investment vehicle, it is clear
that not all of them would vote in favour of a client's
decision to make such commitment. When pushed harder
with questions and comparisons such as art to real estate,
one soon realizes that not too many of the officers within a
family office have gone through any major learning curve
of the art market (there is nothing unusual in that – it is
after all a niche market). Many believe, and to a certain
extent justifiably so, that in the art market players make a
special effort to tell only the positive stories about the very
exceptional works of art that come to auction.
Based on our experience, the primary element in a family
office's confidence in perceiving art as a true option for
investment is their ability to acquire sufficient knowledge
about the market and confidence in an art fund manager.
Such confidence will largely depend upon a family office's
ability to run checks and balances on the market
information received from the art fund manager, whether
in the capacity of monitoring an existing investment or in
the role of evaluating a potential commitment by a client.
After all, one of the key advantages many of the family
offices highlight when pitching to a client are their
investment due-diligence skills. As for specific operational
requirements, first, the family office must be able to
account for and support the valuation of the art works that
art funds typically hold, not only for accounting purposes,
but for risk analytics and reporting. Validating those
positions is also crucial and a robust process must be in
place to reconcile transaction and art holdings provided by
art fund managers on a timely basis. The operational
platform must support a daily operating environment to
ensure that the information is current to support
meaningful portfolio analysis.
Recently, we’ve seen an influx of multifamily offices which
borrow their mission and structure from the single family
office. The origins can vary and range from two families
that discovered they had similar investment goals; or a
single-family office that invited other families to join it as a
way to share infrastructure costs; or a boutique advisory
firm with a small, select list of clients. But the end result is
an organisation that handles the various financial,
planning and lifestyle needs of several unrelated affluent
families.
As more affluent households choose to work with family
offices for an integrated approach to managing their
wealth, it will become more critical for their service
offerings to evolve in ways that can better meet the needs
of a broader cross-section of wealthy clients. Investment
strategy and portfolio construction get more complex as
wealth increases and outsourcing specialist relationships
with art fund managers may eventually become an
essential part of a successful family office.
Equally important, there are a number of resources
available to family offices to assess an investment in art.
These include the following: (I) accumulate art market
data from Bloomberg and financial newspapers, as these
are now being published regularly post auction seasons;
(ii) monitor a bell weather such as Sotheby's which
regularly publish its results as a public company (that
includes buy/sell recommendations from major
investment houses); (iii) obtaining access to art market
data sites that provide instant and accurate information
about historical auction prices. Alternatively, you can
attend any one of a number of art investment courses and
conferences held each year.
Family office managers are quite honest about how they
view the art investment story evolving. The more they see
their clients considering it, the more they will vote in
favour of the idea (conceptually of course – manager
selection and terms and conditions are of course of major
importance). And the general economic climate is a key
factor. Fund managers that present potential investors
with plans to produce 30% Net IRR over the life of a fund
will find it difficult to get tail wind from the family office
that supports such investor. In a world where getting 5%
annual rates for major currency deposits has become
almost impossible, one can understand how difficult it is to
convince wealth managers that producing 30% IRR is
viable. So what would pass well the confidence hurdle?
Managers aiming at low double digit returns may convince
prospects and their family offices that such results are
possible. However if and when interests on deposits and
U.S. government bonds pass the 5-6% per annum, pitching
for 10% in an art investment fund may become very
difficult again. This dilemma is unresolved for now.
If art will serve as good alternative for the years to come,
proving to be relatively uncorrelated to other asset classes
and becoming more and more transparent will achieve
greater acceptance from the family office managers'
community.
The balance is shifting gradually, but the burden of proof is
still on the art fund managers' shoulders. Eventually, true
and actual results coupled with distributions, will serve as
key success factors in building confidence in what is still a
very new industry. If the numbers will be there, the family
offices will follow suit more comfortably.
About Fine Art Wealth Management
Fine Art Wealth Management (FAWM) is the first wealth
management consultancy dedicated exclusively to art,
collectibles and other investments of passion as an
alternative asset class and the disciplines required to
analyse this complex field of investment. We are wealth
structuring specialists in art assets and the leading
provider of intelligence on art investment vehicles.
Disclaimer
The information provided in this publication is intended
for information only and is taken from various sources; as
such we do not guarantee its accuracy or completeness. No
statement in this publication is to be construed as an
invitation to invest in art funds. The information provided
must not be taken to be investment advice and we make no
recommendations or advice relating to any particular fund,
fund manager or fund performance. Accordingly, we do
not accept any liability for any investment decisions you or
any third party takes in relation to the information
provided in this publication. Such information does not
constitute an offer to sell or a solicitation of an offer to buy
any securities, investment products or investment services.
Published by Fine Art Wealth Management Ltd
First Floor, Vintage Yard
59-63 Bermondsey Street
London SE1 3XF
2—4 Great Eastern Street
E. [email protected]
T. 44 (0)20 7565 1878
W. www.fineartwealthmgt.com

Art Fund Tracker

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