If you’re looking for an example of a sector pension funds should avoid, first impressions suggest fine art is hard to beat. Prices are difficult to predict, pieces can take ages to sell and trading costs and insurance are high. Annual dividends are non-existent, periods move in and out of fashion – and the list goes on.
A report by Commerzbank on returns from fine art suggests real returns, across the board, are close to zero in the past 25 years. Yet, at the top end of the market and in certain sectors, the figures show it is a wise investment, after all.
Philip Hoffman, a former Christies finance director now launching an innovative $350m art fund, estimates the top 2% of the market according to value has produced compound returns of 12% in recent years. Figures from the Zurich-Art Market Research Art and Antiques Index show contemporary pieces have doubled in value since 1995.
Nevertheless, corporates typically buy art on the quiet, driven by an enthusiastic chairman or chief executive and use it to decorate their offices. Says Mark Poltimore, senior director at Sotheby’s: “The city has inherent problems with art. One, it doesn’t really understand it and, two, art doesn’t behave like stocks and shares.”
Apart from corporate collections such as Flemings’, the British Rail pension scheme stands as the only institution to have made a significant investment in art. During the 1970s, with the stock market sickly, it decided to spend £40m (e56m) on pieces ranging from decorative arts to works by Old Masters and Impressionists as well as tribal art.
This foray is often portrayed as disappointing and it did indeed underperform equity markets. Put in perspective, however, the figures are more impressive. Estimates of the portfolio’s return range from 5% to 13%, depending on who you talk to. The impressionists returned 21% and one painting of Venice by Monet, bought for £250,000 in 1979, fetched £6.9m in 1989.
There are thousands of examples of outlandish profits and silly money. One collector with the foresight to buy Jeff Koons sculpture of Michael Jackson with pet chimp Bubbles for $250,000 in 1991, sold it 10 years later for $5.6m (e4.9m). One of the biggest stories last year in the art world was the sale of Rubens’ ‘Massacre of the Innocents’, previously misattributed to Jan van den Hoecke, for £45m – almost six times the upper estimate.
But investors ought to be under no illusion as to what they’re getting into; these examples are publicised because they are so extraordinary. In practice, tracking and predicting prices and returns on various categories is notoriously tricky.
For investors trying to follow the industry, Art Market Research produces over 500 performance indices, ranging from Old Masters to French Impressionists to Art Deco jewellery. They can also check with artprice.com, an online database that collects, processes and analyses results from almost 3,000 auction houses.
Some of these figures are of course predictive, given that rarity often affects auction results. As Clare Pardy of specialist insurer AXA Art suggests, putting a fair value on a Regency chest of drawers is easier than predicting the hammer price of a Titian.

Whereas large companies have hundreds of analysts tracking their equity and any market information is likely to be priced in, art prices depend on factors difficult to quantify – condition, provenance and previous ownership. “For a picture it is far more difficult to put a real value on to it,” says Rolf Elgeti, author of the Commerzbank report. And the old cliché still applies to sale prices: it depends on who’s there on the day, how much they want the piece and how much they have to spend.
For any fund investing in art, the advice from any dealer or professional is invariably the same – spend as much as you can afford, go for top quality and buy something you love. A first-rate piece by a relatively unknown artist is a better investment than a second-rate piece by a well-known artist.
During the 1980s, for example, Japanese investors indiscriminately paid over the odds for works by Renoir, a prolific yet inconsistent painter. The best examples, according to Sotheby’s Poltimore, have probably doubled in value while the second-rate ones, which are numerous, are worth nearer a tenth of their 1980s price.
Investors also need to be aware that, like equity markets, the art world demonstrates sectoral characteristics. At present contemporary art is in vogue, as are 20th century paintings, Old Masters, the Impressionists and 18th century French and English furniture.
English portraiture was deeply unfashionable during the 1970s, 1980s and 1990s but is making a steady revival. A Reynolds with a guide price of £300,000–500,000 recently fetched £2.4m at Sotheby’s; 20 years ago it might have just broken six figures. Demand for Victorian paintings has dropped recently, leading many to suggest the sector now looks cheap.
Another unattractive burden is the cost of trading. Dealers’ commissions and buyers’ premiums are substantial, as is insurance. And unlike equities, art doesn’t produce an annual financial dividend, only an ongoing aesthetic one. Art leasing, whereby collectors rent out their portfolio, is one way of earning money from paintings although many corporate collections instead lend paintings to galleries and public exhibitions.
If these considerations aren’t a sufficient deterrent, then there’s the small but very serious risk of deterioration. Many of Joshua Reynolds’ paintings have a ghostly appearance, not by design but due to his sloppy approach to mixing paint. Some contemporary British painters have used household gloss that is now cracking off canvasses and one famous artist is reputed to have a team that flies around the world patching up collages sold in the 1970s.
More seriously, research by scientists at Basle University shows the instability of colour photographic materials means some images will eventually disappear. Works by the world’s best photographers, which change hands for well into six figures, may, in a few decades, literally be worth the paper they are printed on.
On balance it’s perhaps understandable that funds have shunned art. Yes, there are examples of fantastic returns but for institutions with strict asset liability management, like insurance companies or defined benefit pension funds, these assets aren’t ideal. Art bears little or no resemblance to the world of equities and bonds and, as Sotheby’s Poltimore says of the industry: “it’s a minefield.”