In an earlier post, we expressed skepticism about Castlestone Management’s recently announced art fund that will be open to investors with as little as $10,000 to allocate toward art as an asset class. Angus Murray, Castlestone’s managing principal and founder, got in touch with Art Market Monitor and we’ve had several conversations outlining our positions. In the interest of furthering the conversation about art funds and their prospects, let’s recap that conversation and then present an interview Angus Murray did with Bloomberg UK last Friday.

Castlestone began its life as a family office and evolved into an alternative asset manager with strong disposition for real assets like commodities and gold. Art, for Mr. Murray, is another real asset, one that has been under-utilized by finance professionals.

Murray has bought art for other clients and now wants to accomplish two things with his new art fund. He wants to track inflation by investing in art and he wants to offer, through his fund-raising network, investors with little or no interest in art the ability to allocate a small portion of their own money to the asset class.

Murray feels that previous art funds have come at the problem with too much focus on the art and not enough experience in the field of asset management. He seeks to create a portfolio of art that efficiently tracks broader art indices. Their goal is to own 50-60 works that will can be sold in 8 years time at a price that yields something like 7% after fees. So he cares less about competing with private dealers who are seeking a greater return and more about hedging inflation.

He also hopes that his fund will have a public profile and act in the way that any well-known collection does to the point that his fund might begin to add value through its provenance.

All of that is interesting and appealing. Our skepticism comes from the nature of art and the limited tools available to an investor. Currently, there is no strongly reliable art index and there has been little public evidence of successful art funds. (There may be ample private evidence but that has not been circulated in a meaningful way.) So Castlestone has the potential to be a pioneer in this field. In the process, they might help build the institutional framework necessary to create more art funds. But that will take time. It will also run headlong into the art world’s own resistance to seeing works of art treated as an asset class, but that’s a subject for another time.

The interview is below minus the opening section dealing with oil and commodities prices which you can see on the video.

Interview with Angus Murray

John Dawson I’m now joined by Angus Murray, the founder of Castlestone Management which now has $700m in assets. Angus joining the managers, the Aliquot Active Commodity Index Fund. [ . . . ]
John Dawson Don’t go away Angus, because contemporary art prices have slumped by half over the past six months. Wealthy buyers are drying up as even the rich and super-rich feel the pinch of this credit crunch. Castlestone Management is looking to capitalise on that and is setting up a fund to snap up art bargains from Banksy to Damien Hurst. The goal is to hold investments over a longer timeframe, in this case eight years. The fund will launch at the end of May and has raised so far $25m, that’s so far. Now back to the man behind that, of course, Angus Murray, again a busy man of course, you’ve got commodities in one hand and art in the other hand. What do you prefer, Angus, where’s your heart?

Angus Murray Yeah, but they’re both real assets. They’re the both the same underlying actual asset. Art is an irreplaceable, unleveraged real asset, gold is an unleveraged real asset. They’re both rising because the value of money, or they both will rise because the value of money is going to fall. You can’t pump this much money into the economies as we have done, not only recently but in the last 20 years, and not have the value of money depreciate. So art, like most other asset classes, has declined, you said by about 50%, we would have thought by 30-34% or thereabouts.

John Dawson Up to 50%.

Angus Murray Yeah, okay, up to 50%, that would be fair. Particularly in contemporary art, perhaps post-war
and impressionist not the same degree. We hope to complement the financial skills that Castlestone Management has on risk management and asset management with those of hiring people in the art world that really understand art in detail. If we then combined art as an asset class, hold it over a long period of time, it should perform in line with all other real assets.

John Dawson People often read the papers, etc, and art is the next bubble to burst because some of these
paintings, for example, are being sold for exorbitant prices. Is that a fair thing to say? Because some of these, it really is so high in this credit crunch, it doesn’t seem realistic for it to last any longer.

Angus Murray Well let’s assume that it’s already come down, contemporary maybe by 50%, impressionist by
30%, that’s a pretty big break already.

John Dawson Sure.

Angus Murray In line with say developed equity markets around the world, emerging markets crashed a little
bit further than that, commodities came down a little fast and maybe because of the dollar’s appreciation which pushed commodities even down further. So I would indicate that like gold having come from $1,000 an ounce to $700 and then bouncing, art has probably done or is doing the same type of thing. It will just take maybe the next six to twelve months to see those prices begin to rise. But nearly every other major asset class has now shifted up by 30%, and art has yet to do that. So it’s probably an asset class that is trailing behind the economics of expectation which we get factored into equities, and art will begin to do that over the next six to twelve months.

John Dawson So you launch this fund end of May, minimum investment starts at $10,000 or £10,000, which one is it?

Angus Murray It depends on which currency you’re investing in.

John Dawson That’s a bit unfair on the pound isn’t it?

Angus Murray But it’s about the same. It’s about the same these days. We started the fund …

John Dawson What’s the return projection that you have?

Angus Murray If the world has been printing money since the 1970s at about 7% per annum, I’d say 7% per
annum, it’s just a real asset. We actually started the fund itself back in November 2007 and have since then purchased, and will purchase US$25m worth of art. I couldn’t ask you to put in £10,000 and, which you’d have to do through a professional financial adviser.

John Dawson You could, but I wouldn’t have it to give you to you!

Angus Murray You would need to, when the money comes in you would need to have an already fully diversified art portfolio. So we had to start a fund with a fully diversified portfolio already, hence why the requirement was to start with $25m of art, which will be May 31st, so that if you do decide to invest you have a diversified portfolio.

John Dawson How much attraction have you had from clients, new clients?

Angus Murray There’s been a lot of what I would say interest. Some of it I’m sure is very sincere.

John Dawson Interest or, okay, right, go on.

Angus Murray Some of it I think is sincere, people who genuinely understand and believe in the asset class,
some of the people will probably be it’s more about novelty and general interest. What we’re trying to do though is to buy an hold the art. I believe it would be statistically improbable that I could buy and sell art given how much it costs to buy and sell it, and beat an index, a little bit like an ETF almost always beats and actively managed manager because of the cost of trading and human error, so we really want to buy the asset, hold it over eight years and then sell the asset very well. Therefore it should as a real asset outperform.

John Dawson Thank you very much indeed. Good luck with the fund.

Angus Murray Thank you.

John Dawson Launching a fund in this market is always quite hard but good luck with that. Angus Murray there, from Castlestone Management.