Art Market Monitor

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An Art Fund Revealed

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angus-murray-biggerIn 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.

When Bottom-Fishing is a Bad Idea

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Here’s a story from Bloomberg about a money manager called Castlestone Management Ltd. opening an art fund. [Update: An earlier version of this post used the adjective “suspicious” to describe the Bloomberg story. That was a poor choice of words and unfair to Castlestone. Angus Murray, the principal of Castlestone has written a response that will be posted below.]

The Collection of Modern Art fund is open to people with as little as $10,000 to invest and will buy the work of artists such as Banksy, Damien Hirst and Willem de Kooning, Castlestone said today in a statement. It is the only open art fund for individuals and will start investing at the end of May with $25 million under management, the firm said.

“With a low threshold this is an unusual investor base,” said Anders Petterson, founder of ArtTactic, a London-based art- market researcher. “Opportunities are presenting themselves, and if you have a fund that can take advantage of them it will be fantastic.” [ . . . ]

The new fund will buy art while it’s cheap, hold onto it for eight years and then sell the portfolio when the economy has recovered and prices are higher, Castlestone Chief Executive Officer Angus Murray, the fund’s manager, said in an interview.

“We are being opportunistic,” he said. “Art is an area where assets got oversold. Our investment strategy is to buy it at a sensible price and then sell it for more later, rather like private equity.”

During the height of the art boom, several funds emerged but few have shown any real ability to produce returns. What makes these funds suspicious in general is the fact that there are already a number of firms out there seeking to buy art that is undervalued and hold it until they find buyers willing to pay a premium. The firm takes the profit on those holdings, which can last from months to many years. They rarely have to divulge their investment returns because these firms–sometimes known as art dealers–are usually privately owned or partnerships.

An art fund might improve on this model by increasing the size of the pooled capital. But so far, no one has shown that a dealer’s margins are scalable. Otherwise, we wouldn’t witness the occasional intemperate email from Larry Gagosian about how hard he has to work to move the canvases.

More to the point, alarm bells should ring when someone points to private equity as a model in 2009. A product of the credit crisis, the private equity industry is suffering through a severe bout of indigestion that will separate the disciplined operators from the easy-money opportunists.

When sums as low as $10,000 are being solicited in the art world the clanging should get even louder. Why would lowering the barrier to entry help the investor now when prices are lower and $10,000 can get you a decent work of art again (maybe?) Investing in art–buying low, selling high–doesn’t scale very well. So raising a larger pool of capital won’t allow one to make more money from art. If it did, the auction houses would not be laying off so many folks.

Angus Murray responds:

There are some financial facts and investment fundamentals that might have been missed in your article. Collection of Modern Art is an open-ended mutual fund that is valued monthly by an independent administrator (I accept that just like a property fund this will never be perfect) and managed by and SEC registered and FSA regulated investment management company that has been running since 1996. It has been set up with and will be opened to investors on May 31, 2009 with an existing portfolio of art in the Fund. The works of art will have all been valued independently by two auction houses and the Fund will have audited accounts dated March 31, 2009. The reason that the Fund has been opened to retail clients investing amount as low as $10,000 (advised by financial advisors) is based on Modern Portfolio Theory. Art should have a maximum weighting of approximately 7% of a portfolio to add to diversification and enhance returns. If the minimum investment was $100,000 you would need an investment portfolio of approximately $1,500,000. Unless you wish to only allow the very wealthy to be able to buy art as an investment you need a low minimum amount. More importantly the Fund does have an investment horizon of 8 years that is similar to the model of a private equity fund but allows monthly redemptions. What is different is the fundamental structure relative to that of a private equity fund as not leverage is used within the Collection of Modern Art. Private equity funds used excessive leverage (debt to equity ratio or gearing). This is the main reason that their returns suffered recently when asset prices declined. The cost of buying and selling art and the nature of the investment result in a long term investment time horizon. Castlestone Management has been short listed by Hedge Fund Review 2009 for the Best Global Macro Hedge Fund and I hope as a result of our professional (and factual) understanding of finance combined with the experience of the art experts that we have employed will be mutually rewarding to our investors. Sincerely, Angus

Castlestone May Buy Banksy, Hirst With Art Fund for Individuals (Bloomberg)

Art Funds: Who's Left Standing?

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The Art Newspaper conducts a tour of the art fund universe. The report isn’t very encouraging [All bullet points are quotes from The Art Newspaper]:

  • The London-based Art Trading Fund, which launched its second fund in May 2008, has had to “delay” its plans as it was “unable to raise the necessary amounts”, co-founder Chris Carlson said. The fund aimed to raise $50m to invest in contemporary art and boasted Mr Saatchi as one of its consultants.
  • Meridian Art Partners, a New York-based fund that aimed to raise $100m during 2008, has also run into difficulties. Co-founder Andrew Littlejohn said that it became apparent towards the end of 2008 that the drop in confidence “precluded most investors from being interested in longer-term investment vehicles”, particularly something that is “as esoteric as art”.
  • Philip Hoffman, who launched the London-based Fine Art Fund five years ago, says his funds are a success, although his returns cannot be independently confirmed.
  • Dean Art Investments, which aimed to raise $50m, is also said to have been unable to attract the necessary capital.
  • Market sources add that a planned €100m fund—a joint venture between Phillips de Pury and Milan-based Advanced Capital that announced its intention to launch last summer—has also found it difficult to get investors. [ . . . ] But Advanced Capital said it has been waiting to get the green light from the Italian authorities before beginning the official marketing process, so its launch date has not yet been announced.

Downturn Hits Art Investment Funds (The Art Newspaper)

Salmon: Art No Longer an Asset

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In a hasty attempt to pre-empt reality, financial blogger Felix Salmon uses his brand-new Reuters perch to declare the “Death of Art as an Asset Class.” This sweeping generalization is based upon this news that UBS is shuttering its art advisory business even as it continues the sponsorship of Art Basel that caused it so many recent legal headaches.

Here’s Salmon’s logic-leaping take on UBS:

UBS was always well placed to be the last man standing in the inevitable shakeout of art-advisory departments in investment banks. It had the most rich clients, and it invested by far the most money in pushing itself as the only bank which could manage both dollars and Diebenkorns. So this announcement is pretty shocking — but also a little heartening, to those of us who love art for its intrinsic rather than its monetary value.

How UBS’s decision would hearten those “who love art for its intrinsic” value, Salmon doesn’t explain. Continue Reading

$300 Million in Art Loans: Tip of the Iceberg?

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Colin Gleadell takes the New York Times story about art loans a little further by giving us some figures. Combining his numbers for Art Capital Group and Sotheby’s Financial Services, Gleadell gives us almost $300 million being loaned against art this year. The story doesn’t clarify whether the lenders are talking about loans outstanding or loans made that year. Either way, although Sotheby’s and ACG are fairly big players in the business, they cannot represent more than a plurality of the business given that other financial institutions like investment banks and hedge funds got into this business in recent years.

Gleadell starts with the size of Ian Pecks loan book:

Last year he loaned out $80 million on art, and this year anticipates that the figure will be closer to $120 million. [ . . . ] While Peck, and a select group of banks (Citibank, or the Bank of America’s US Trust, for example) tend to make loans described as “term loans”, which free up cash for clients without any commitment to sell, the major auction rooms prefer to lend by making advances on art that they will subsequently sell.

Sotheby’s Financial Services is probably the biggest player in the art loan market. In 2004 it lent $92.3 million on art, a figure which rose to $208 million in 2006, but has since stabilised at about $176.5 million a year. Managing director Jan Prasens points to the essential conundrum. “People need liquidity, but the traditional sources of capital are drying up. There has definitely been an increase in demand. We are lending, but we are extremely selective. Our capital is precious.”

Any guesses on how much money is currently loaned out against art collateral? $1 Billion? More?

Does Art Make Good Collateral? (Telegraph)

Australia Backstops Its Art Market

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The Australian runs a fascinating profile of the country’s Artbank, an institution consciously constructed to support the art market in times of trouble. Geoffrey Cassidy, the organization’s head is front and center:

Established by the federal government in 1980, Artbank has grown into one of the nation’s largest collections of contemporary Australian art. It rents to private, corporate and public bodies for a fraction of the purchase price. “We’re about supporting the art market generally and artists in particular,” Cassidy says.

But as the art market contracts as part of the global financial crisis, Artbank is preparing to take an active role by helping stabilise the sector. While other buyers are expected to cut back on spending to adjust to the downturn, Artbank will maintain its purchasing rate at present record levels. Cassidy says the move will work as a kind of stimulus package for Australian art.

“We come into our own now,” he says. “This is what we’re all about.”

Cassidy says Artbank’s prospects are healthy: the agency became self-funding in 1992 and its collection is valued at more than $35million. The amount it spends on art — it buys only from living Australian artists — has increased to a record $1 million in the present financial year. He leaves open the possibility that Artbank’s purchasing budget will remain static next year. But he says it is unlikely to go any lower than its present level regardless of any looming recession.

“We see ourselves as supporting not just the artists but the art market as well. It’s about keeping the whole system strong,” Cassidy says. “When everything is booming and everyone is selling their work, we’re not as important. But if other people have pulled out, we’re still going to be out there doing it.

Artbank Ready to Lend a Hand (The Australian)

Is This a Good Time for a €100 Million Art Fund?

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According to the Financial Times, Robert Tomei–who runs an Italian private equity firm called Advanced Capital–has raised €100 million in co-operation with Phillips de Pury:

The fund will mostly buy contemporary art, but will also invest in photography and design. Mr Tomei is a keen art collector himself, as well as chairman of the investment committee of the Peggy Guggenheim Foundation and board member of the Tate Museum in London and the New York Museum of Modern Art. He and Phillips de Pury have already shown they can make money from art, having made 16 per cent-plus annual returns on the three previous art funds they advised.

Indian Private Equity Firm Claims Madoff Fallout Helpful [sic] (Financial Times)

Phillip Hoffman Talks His Book

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The Times of London has a brief story on The Fine Art Fund’s Phillip Hoffman’s interest in making a move on the declining market:

Hoffman said he expected prices for some art categories – modern and Impressionist works in particular – to fall by as much as 30% this year. “I am now regularly being approached by wealthy individuals or family estates that are looking to sell art without the publicity of going to auction,” he said. “Unfortunately, at the moment their expectations on price are way too high.”

Evidence is mounting that after years of spectacular growth, art prices are falling. The Mei Moses index, which tracks auctions, suggests prices fell by 4.5% last year, after five years of growth averaging 20% a year. Artprice.com, which also tracks auctions, said that the proportion of works worth more than €1m (£882,000) left unsold increased sharply in the second half of last year.

Hoffman said some art owners would have to accept big losses if they needed a fast sale.

Fine Art Fund Group will cash in on falling prices (Times of London)

KiptonArt

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Kipton Cronkite is head of investor relations for alternative investments (say that three times fast) with Bank of America. He’s also on the art and party circuit. Suddenly, he seems to be everywhere (here he is in Vanity Fair.)

At Art Basel Miami, he hosted a party with Asprey sponsoring, for his company KiptonArt. Barron’s profiled him recently:

He pulled together a blue-chip panel of art-world experts and had them screen artists who had submitted portfolios of their work online. The artists seen as most promising would get help from those experts to get to the stage where their work could be exhibited in a gallery.

Cronkite’s Website, KiptonArt, now has 650 registered artists, and has hosted more than 30 events to bring together young artists and collectors. “Some are [now] getting representation at great galleries,” Cronkite says.

So we’re curious to hear more about their success stories.

Who Are The Speculators?

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At a panel discussion led by Lindsay Pollock a few months ago, Roland Augustine, the president of the ADAA, casually described the majority of contemporary art buyers as “speculators.” Put aside the strangeness of a trade association head branding the bulk of his industry’s customers with a perjorative.

Focus on the issue of speculation. Can the majority of art buyers in 2007 and 2008 really have been speculators? Who are these people and can no one identify a single one of these speculators?

The subject comes to mind again after last week’s report on the Phillips de Pury sale contained this quote from an art advisor [emphasis ours]:

Grotjahn’s colorful early painting, with a low estimate of $400,000, didn’t find a buyer. Another work — a fiery orange butterfly painting — fetched $458,500 against the estimate range of $450,000 to $650,000.

In 2003, paintings by the Los Angeles-based artist cost around $20,000, said his New York dealer Anton Kern. In May, one of his canvases fetched $1.2 million at Phillips in New York, setting an auction record for the artist.

“You can’t have increases like that unless people are buying for investment purposes or everyone is leveraged,’‘ said Cristina Delgado, a New York art adviser, before the auction. “We need to come down to prices in the art market before everyone began leveraging, probably another 30 to 40 percent.”Continue Reading

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