Masterworks opens the door to owning shares of fine artwork

By LISA KLEIN

Contemporary art appreciators the world over, from all-out enthusiasts to novices, may dream of owning their very own Warhol. But they may not have the wall space – or the multi-millions in cash – to actually buy one of the artist’s pop art pieces. Still others know next to nothing about art but are looking for unique ways to diversify their investment portfolios.

These are seemingly disparate dilemmas that New York-based Masterworks is hoping to solve by treating the fine art market like the stock market – analyzing works like companies and allowing individuals to buy shares of them.

“As a result of what we are doing, there are many more individuals now who are becoming educated on and investing in the art market, something that they may have had less experience with before,” said Allen Sukholitsky, chief investment officer at Masterworks.

Painting a portfolio

Aside from a lack of art-world knowledge as a starting point, dropping $50 million on a single painting is daunting to some and prohibitive to most.

Masterworks set out to remove that barrier, launching in 2017 as the first company of its kind to offer up shares of blue-chip artwork, allowing anyone to both diversify their portfolio and own a piece of a Banksy.

“Although the art market has existed for centuries, longer than most other asset classes, investing in art has been challenging for the majority of investors because the price of a single painting can cost millions of dollars,” Mr. Sukholitsky said.

“Similarly to how public companies are ‘fractionalized’ on the stock market, we fractionalize multi-million-dollar paintings, which allows many to invest in art for the first time.”

The company specializes in post-war and contemporary works by the likes of Andy Warhol, Jean Michel Basquiat, Yayoi Kusama, Banksy, George Kondo and Cecily Brown, which it purchases and then files offerings with the U.S. Securities and Exchange Commission (SEC) to allow individuals to buy shares.

While art is known for being personal and subjective, Warhol himself always calling into question what even counts as art, Masterworks devised an objective system for deciding what works it will purchase and offer to investors – another first.

“The first project at Masterworks, when the company was founded, was to digitize over 70 years’ worth of art market data and to start analyzing it to make decisions about which artists and paintings to invest in,” Mr. Sukholitsky said.

“It’s not that different from how analysts on Wall Street analyze data to decide which companies to invest in.”

The Masterworks research team selects artists that have momentum and end up purchasing less than 3 percent of the pieces on offer.

Investors choose their own pieces to buy shares of and should consider not only whether the art speaks to them, but where the artist is in his or her career. Those who are still living and painting may see a larger price appreciation for their works, but also carry more risk, while those who have passed will have a steadier price without as much risk.

The team at the company’s gallery will wait about three to 10 years until they feel the time is right to sell directly to private collectors, after which investors receive their share of the proceeds.

“The right time to sell a painting is very specific to the painting and the artist’s particular market,” Mr. Sukholitsky said.

“If we think that a market is becoming overheated, we may consider selling a painting,” he said. “If an art collector approaches us and is willing to pay a premium to the fair value of the painting, as has taken place with our paintings several times, then we may also consider selling.”

The art market has proven a worthwhile addition to any investor’s portfolio, showing almost zero correlation to most other asset classes and holding steadier that other classes during economic changes, making it a good choice for diversification.

Additionally, since 1995 post-war and contemporary art has outperformed the S&P 500, U.S. Corporate Bonds, gold and real estate with a compound annual growth rate of 14 percent (the S&P’s rate is 9.5 percent).

So far, Masterworks has capitalized on this promising market by purchasing 344 artworks and its membership has grown to more than 800,000.

“Our firm has grown considerably over the last several years – we now manage almost $1 billion in investments on behalf of self-directed investors,” Mr. Sukholitsky said.

“In contrast, for most of history, the art market was dominated by ultra-wealthy individuals and families around the world. So as our investor base and demand for art investments continue to grow, we believe the impact on art prices could be a positive one.”

For more on Andy Warhol and the pop art movement, read Pope of pop in the latest issue of Luxury Portfolio magazine.