Art of designer dealing
The team is back from holiday and we look at the equity markets rise. Yet how many months ago were people talking about bath-shaped and U-shaped recoveries? How many bears talked of L shapes?
And now the beginnings of a Churchillian V-shaped shadow casts itself over our conversations in Amsterdam. "Not sustainable", "where are the earnings?", "it will end in tears" are reactions from our offices across Europe. But then the markets are never wrong, it is only us who are wrong when we pontificate too much. We pension fund directors just manage our exposures using the very best of inspirational guesswork disguised for our various audiences as macro analysis and asset liability matching.
And so in this new age of recovery we decide to investigate investment in art. As you know, most investment directors are never the first to do anything new. That would be too risky. Like the very best of the most immobile bureaucrats, we wait until it is safe. But because some of our peers have already taken the plunge into the Hockney pools of modern art, we decide to do some analysis. The conversation with our investment consultant is brief. "There is no income stream, how could we possibly have a view? Analysis is based on taste and fashion. Value cannot be ascertained by research. It is not like equities or bonds, Pieter." "So art is uncorrelated - is that not a good thing?" "Well yes."
Our inclination was to hold the physical, or rather to look at the pictures on our post modernist white washed walls at our Amsterdam offices. My colleague Jan and I travel to London. We visit two auction houses. The seemingly transparent open bid system appeals rather more than the OTC trades. We are quickly educated.
"As an institution you should consider various art investment funds." "Who manages them?" "Experts." "How do we judge them?" "Ah, that is difficult." "How do they choose to buy and sell?" "By their knowledge of the market." "How liquid are the funds?" "There could be lock-up periods of five to 10 years." "Ah." "It is like private equity, there is fund raising, the investment in the best of art and perhaps an income when renting it out, and finally the trading during the course of the life of the fund."
"Is there an index by which we can track and compare the trading ability of the various managers?" "Mr Mullen, the problem is that although we can track price movements of works of art, this is not what you might describe as an efficient market. There is considerable volatility, most notably because fashion changes." "But the managers of the funds, they have a pretty good idea of what will sell, and what not? Do they have information and know what is going on?" "Well yes, they tend to be well connected and know who wants what."
"Perfect." "Why perfect?" "Because insider dealing can help produce positive returns and we all need a bit a bit more of that."
Pieter Mullen is investment director at Wasserdicht Pension Funds