Myth buster: Art as an asset class

There are many misconceptions about what it means to collect art: Art is collected for the sake of it rather than to make money, while those who do make money from art are just lucky; to be a bona fide collector you need over 200 artworks, and the most commonly held misbelief, collecting art is only for the super-rich.

“These ideas couldn’t be further from the truth,” believes Karabo Morule, founder of Capital Art. Capital Art is an art technology company that provides a service that makes it easy and affordable for art collectors to manage their collections and track the value of their artworks, not only as part of holistic wealth management but also to preserve financial value and cultural significance for future generations.

“We cannot underestimate the value of art as an asset class.”

Morule spoke about this topic at the recently held Elite Wealth Conference, hosted by Elite Risk Acceptances, a specialist high net worth insurer and subsidiary of Old Mutual Insure.

Tarina Vlok, MD at Elite Risk Management
Tarina Vlok, MD at Elite Risk Acceptances, a subsidiary of Old Mutual Insure

“I am often surprised that many people don’t realise how much of their wealth is wrapped up in the artworks they own. And yet, it pays to know the value of a collection. On the Capital Art platform, subscribers who have been getting valuations have seen an average of a 35% increase in the value of their art collections relative to the acquisition value, and that average represents a range from 5% for a newer collector to 95% for someone who has been collecting quality artworks for some time. And these results are likely to compound over time,” said Morule, who encouraged both novice and experienced collectors to know the value of their art portfolios.

Tarina Vlok, MD at Elite Risk Acceptances, a subsidiary of Old Mutual Insure, said that not having artworks valued regularly has implications for insurance strategies.

“Insurance is critical for collectors to protect against being out of pocket if a loss or damage occurs,” said Vlok. “It can come as a huge shock when it comes to claims stage, and there are gaps in the insurance policy because there was no valuation done, which can be a very sore point for a collector.”

Morule also added that the value of advice cannot be underestimated as part of this process. “Advice is critical because only an adviser can assist with unpacking what is best for the client’s needs based on the value of an artwork.”

She said that art can form an important diversification tool in wealth management. “This doesn’t mean you need to be super wealthy to collect art, but it does mean you can use art as a way to grow wealth.”

She says, however, that buyers of art oftentimes, amateur or experienced, don’t even know that they have acquired a piece of value.

According to a news story on CNN in 2021, a Chinese bowl bought for $35 at a flea market was sold at an auction for $721,800. The man who bought it from the flea market sent photographs to specialists, who identified it as a piece of art with historical significance circa the 15th century.

“While such a return is the exception rather than the norm, it shows the importance of researching the piece before or after you acquire it, documenting its details, and then regularly tracking its value,” said Morule. She added that this process is also important because you may discover that the piece is actually a fake, so it is worthless.

Vlok added that this is also important for insurance, as the replacement value is agreed by the art buyer or collector and insurer before a loss occurs. This agreed value will form the basis of the compensation in the event of a loss. “In other words, it is not how much you spent that counts, but how much it would cost to replace it.”

Morule had the following tips for art lovers on how to better manage their collections:

  • Buy what you like. You may hold onto a piece for a long time before realising its value, as is the case with many illiquid assets.
  • Art is much like a physical asset, like a house, in that it needs care and maintenance. For example, make sure it is in a proper frame if it is a painting.
  • Another critical action in preserving the value of art is collection management, which is the process of documenting everything about the artwork, like the title, artist, when it was created and from whom it was acquired. Remember to keep the invoice and/or certificate of authenticity, as this may be needed by your insurer, a lending institution, any prospective buyer, or your heirs.

“Tracking the history of ownership or provenance of the art is also vital. This is why NFTs, or non-fungible tokens, have become so popular; they enable artists to register their works using blockchain technology, creating a unique digital asset, and they allow artists to prove they are the creators of certain works. Provenance is visible and fully trackable.”

But, she said, while determining the price of NFTs works like any other artwork in that it is determined by a willing seller and a willing buyer, buyers of NFTs must proceed with caution.

In 2020, Jack Dorsey, the founder of Twitter, created a non-fungible token (NFT) out of his first-ever tweet and sold it for $2.9 million. This year the owner tried to sell it at auction and only managed to secure a bid of $290; if sold, it would have meant the NFT had plummeted by 99% in value.

Morule said that while NFTs are a new and upcoming yet highly technical space for art, it does have exciting potential given its blockchain technology, and there are certainly risks given the nascence of the technology and the ecosystem.

For Vlok, the insurance implications of NFTs are more complicated.

“NFT is an emerging sector with many uncertainties regarding risk identification. The research shows that the biggest risk for NFTs could be losing your access key and hacking. Hacking could be an issue and will require specialist reinsurance. But the real risks are still to emerge. Insurance will not be able to contribute to loss of value, like in the example of the Twitter post NFT,” she concluded.