Ivan Lindsay gives an excellent history lesson on art as an investment on Spear’s Wealth Management. He tells succinctly the famous story of the British Rail Pension Fund and puts it in context:
Although modern art funds come out with a bewildering array of figures, the only pension fund which has made a serious foray into the art market and published figures was the British Rail Pension Fund, which invested around £40 million in art, or around 3 per cent of its holdings, from 1974 via Sotheby’s, which gave free advice as long as the acquisitions and sales went through it. The fund acquired a collection of 2,400 pieces, including Chinese porcelains, African tribal art, Old Master and Impressionist paintings, Limoges enamels, and gold and silver objects. When it sold these objects between 1987 and 1999 the portfolio wound up with an annual compound return of 11.3 per cent, but the gains came primarily from 25 Impressionist paintings, showing the importance of a diversified art collection from an investment viewpoint.
The pension fund’s investment was made against the backdrop of 17 per cent 1970s inflation and had three distinct advantages over modern ‘art funds’ in that it had unlimited funds so it could afford the best items, access to the entire market (albeit through Sotheby’s) and unlimited time to hold the objects. The conclusion many drew was that art proves successful as an investment only if held for the long term. Maintenance and transaction costs are simply too high for it to be a short-term investment.
So, in answer to the original question of whether art is a genuine hedge against inflation, the answer would appear to be a qualified yes, in some cases, and only when buying with the knowledge of someone on the inside. In some decades it outstrips stocks and bonds and generally exceeds inflation. It normally outshines gold, although probably not in the past decade, when gold moved from $200 an ounce in 2000 to over $1,300 in 2010.
Go Figure (Spear’s Wealth Management Survey)