As investors look for opportunities beyond stocks and bonds, new asset classes are starting to garner a ton of attention. One of the most interesting for many high-net-worth individuals has become fine art. Investment in art has long been a staple of wealthier families. But recently, art has become a wealth management tool and is now considered a viable asset class.
And that includes deriving income from the sector.
With new asset-backed bonds (ABS) being launched covering the asset class, investors of all stripes now may have an opportunity to participate in the market and make some decent monthly income as well.
Don’t forget to check our Fixed Income Channel to learn more about generating income in the current market conditions.
A Huge Market With Non-correlated Returns
Art’s beauty may lie in the eye of the beholder. But that hasn’t stopped the asset class from going mainstream and producing some steady returns for its owners. According to Citigroup, fine art has managed to deliver annualized returns of 5.3% between 1985 and 2018. Contemporary art—or art created post-World War 2—has done a bit better, recording a 7.5% annual return. Works by particularly famous painters—Picasso, Warhol, Koons, Basquiat—have done even better. Since 2000, these blue-chip artists—via the ArtPrice 100 index—have managed to outperform the S&P 500 by over 250% since 2000.
Those returns have been pretty steady and non-correlated as well. Looking at art versus a variety of traditional asset classes, Citigroup found that art doesn’t function like anything else. Between 1985 and 2021, contemporary art managed to show just a 0.04 correlation with development market stocks. When looking at investment-grade fixed income, art only showed a 0.15 correlation. The asset class with the strongest correlation to art? That would be commercial real estate. But even then, it was just a 0.21 correlation to fine art.
Finally, art has been pretty resilient to inflationary trends as well, performing well and seeing sales increase during periods of 3%+ CPI readings.
With its appeal, it’s no wonder Deloitte estimates that over $1.5 trillion worth of high- and ultra-high-net-worth investor assets are parked in fine art.
The Income Problem
The problem with buying a painting or sculpture is that it doesn’t throw off any cash flow. It derives value based on what someone is willing to pay for it and its store of value. The only way to extract that value is to sell it. With many investors not willing to sell their Van Gogh, art lending has emerged as the answer to the problem.
With art lending, private equity firms and banks with large wealth management units will lend a collector up to 50% of a collection’s value. The loan is back-stopped by the art. So, if the borrower can’t pay, Bank of America gets the paintings. The benefit for the borrower is that art’s steady value allows them to borrow at rates lower than other lines of credit. Deloitte estimates that over $31 billion in loans have been backstopped by fine art.
Here is where it gets interesting for regular joes. Just like almost every other asset class, lenders of fine art loans have started to remove these assets from their books through securitization and sales. Asset-backed bonds (ABS) exist for a wide variety of loan types, including car loans, credit card receivables, student loans, and home-equity loans. The bonds are backed by the cash flows and underlying portfolio of loans.
Now this process is coming to the art market. Following the lead of KKR with music royalties, art dealer/auction house Sotheby’s is now looking at launching an ABS backed by art collections and personal loans. This would be the first of its kind and Sotheby’s estimates that art lending and the ABS market for these products could grow to more than $400 billion as Goldman Sachs, J.P. Morgan, and other art-focused lenders begin the process.
Even if they don’t want to create an ABS, individual art loans are being sold to investors. For example, alternative credit platform YieldStreet now offers two different funds that invests in art-backed loans.
Looking Toward the Future
Given art’s differences versus a lot of other asset classes, the growth of art loans and ABS backed by these loans could have a lot of appeal for fixed income investors. The bonds should offer a high yield, while still offering some stability given art’s steady appreciation.
The only problem is waiting to get exposure. Right now, investing in art-backed loans is still reserved for high-net-worth individuals. But as more ABS and products launch, regular retail investors should be able to get their hands on these bonds. Additionally, as the market grows, we should see them in many ABS-focused ETFs and mutual funds as well.
Investors may want to jump on the opportunity when they arise. Art is a unique asset class and art loans make for a unique fixed income investment.
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