Sunday, April 9, 2017

"Keynes’s Art Collection Shows Why Art Investing Is Like the Lottery"

Regular readers know Professors Dimson and Chambers for their work on Keynes' investment performance as Bursar of King's College (we have a lot of links, use the search blog box if interested) but we also have some of Professor Spaenjers papers, a couple links below.

From Artsy:
The famed early-20th-century economist John Maynard Keynes is perhaps best known for challenging the reigning orthodoxy that free markets generate full employment, arguing instead that the state has a role to play in helping moderate the swings of business cycle. His work—not just theoretical but practical, in the many roles he assumed on behalf of the British government—laid the foundation for modern macroeconomics. His ideas still influence policymakers today, especially those calling for government spending, or stimulus, in times of low economic growth.

But that was just one facet of this mustachioed polymath who often spent his mornings working in bed, propped up by pillows and surrounded by books and papers, and nights dashing about London with its famed Bloomsbury Group, a group of artists, writers and thinkers that included the likes of Virginia Woolf and E.M. Forster. Keynes was an art lover and supporter, a friend of artists, and a canny art collector, whose collection of 135 works was bequeathed to Cambridge University’s King’s College.

It’s that slice of his extraordinary life that economists David Chambers, Elroy Dimson, and Christophe Spaenjers studied for their working paper, “Art Portfolios,” to better understand the long-run performance of art as an asset class. Keynes’s “portfolio,” or art collection, was amassed for less than £13,000. By 2013, it was valued at over £70 million, for an annualized real rate of return of 4.2% over the past half-century—virtually matching the performance of the total return on equities over the same period. So what does their analysis tell us about the art market?

By analyzing the performance of Keynes’s collection, and comparing it with the simulated performance of thousands of hypothetical art portfolios, they found that the art market was structured much like a lottery, with relatively few winners (artists and their collectors) reaping enormous gains, and the bulk of artists marginal to the overall value of the market. This will be entirely unsurprising to anyone who has stood on an Christie’s or Sotheby’s saleroom floor or perused the aisles of major art fairs like Art Basel or Frieze.

The art market has also largely eluded various attempts to estimate, measure, and index it. Historically, around half of transactions happen in the private market (in recent years that figure has crept higher), but publicly available auction records only include prices for works that successfully find a buyer. This can skew estimates of returns in auction-based indexes, although the exact nature of this bias is still being studied. In addition, consignors tend to sell works at auction when they expect a high return, meaning that auction-based indexes may overestimate returns due to this “selection bias.”

Keynes’s portfolio is somewhat unique in entirety avoiding these pitfalls, according to the authors. “It is one of only two complete, or near-complete, financial records of an art collection from initial purchase to final valuation,” they wrote, adding that it is the only one that also includes valuations at other intervening points in time. The other, the collection of Victor and Sally Ganz, auctioned at Christie’s in 1997, was noted for its “extraordinary financial value,” while Keynes’s collection, by contrast, had no particular renown. It also came with extensive documentation of the purchases and why he made them.

“To our knowledge this was the only one where we could really observe purchase decisions by an art portfolio, then track the value of the collection’s items over time,” said Spaenjers, an associate finance professor at the business school HEC Paris. “You see all these decisions being played out over many decades.…You can see how his purchase decisions changed with his personal fortune.”...MORE
HT: Marginal Revolution

Here's the latest revision of "Art portfolios" at SSRN (33 page PDF download)

It was sometime during the market meltdown in September 2008 that I lost my mind.

Here's a post from a half-decade later that could probably be used in a competency hearing to show I had still not recovered:

Are collectibles good long-term investments? "The Investment Performance of Emotional Assets" 

September 11, 2013
On Monday we posted a short bit on collectibles, riffing off a Quartz piece:
Cars, coins and stamps are now more profitable luxuries than art, wine and jewelry (there's an ETF for that)

Which we got timestamped just before Izabella Kaminska had three FT Alphaville posts:
A classic car bubble?
The art of myth-making
The growing scarcity of scarce markets
Addressing respectively 1) the Knight Frank luxury investment index; 2) the intangibles that go into valuation with a look at contango in the market for water from the Grotto of Massabielle in the Sanctuary of Our Lady of Lourdes, France and 3) a meta-analysis of the attributes of markets in non-standardized goods.

She is such a show off.

So today we visit with Elroy Dimson, one of the few economists I've ever come across who has the market feel of a trader and the soul of a poet intellectual chops to be the Chairman of the Strategy Council for the Norwegian Government Pension Fund, you know, the big one.

In his spare time he is part of the hot new boy band Dimson, Marsh and Staunton who do the Global Investment Returns Yearbook for Credit Suisse.

Via the Social Science Research Network:

 The Investment Performance of Emotional Assets
 Elroy Dimson
London Business School; University of Cambridge - Judge Business School

Christophe Spaenjers
HEC Paris - Finance Department

September 2, 2013

Risk and Uncertainty in the Art World, Forthcoming
We assess the long-term financial returns from high-quality collectible real assets, and review the unique risks that are associated with such investments. Over the period 1900-2012, art, stamps, and musical instruments (violins) have appreciated at an average annual rate of 6.4%-6.9% in nominal terms, or 2.4%-2.8% in real terms. Despite the similarity in long-term returns, short-term trends can vary substantially across these different types of emotional assets. Collectibles have enjoyed higher average returns than government bonds, bills, and gold. However, it is important to recognize the quantitative importance of transaction costs in collectibles markets. In addition, price volatility is larger than is suggested by conventional measures of risk, and these assets are also exposed to fluctuating tastes and potential frauds. Yet, despite the large costs and many pitfalls, investment in emotional assets can pay off, because of the non-financial yield they provide. 
Free download (19 page PDF)

Professor Dimson is not a newbie when it comes to collectible markets, in one of his papers:
Ex post: The investment performance of collectible stamps
Elroy Dimson and Christophe Spaenjers
he looks at returns based on Bill Gross' $100 million collection.

Speaking of not being a newbie to the subject, a couple weeks ago Ms Kaminska preceded the three posts linked above with a deep dive into the scarcity/abundance questions raised by advances in mechanical reproduction and 3D copying and how the answers to those questions intersect via pricing while touching on the metaphysical, almost spiritual regard some people have for provenance and authenticity:
What is the value of unique?
and which reminded me of the most valuable automobile in the world, a Rolls-Royce motorcar, insured for $57 million, and another Roller which sold for £168,000. I leave it to you to decide which is the better value....MORE

Here's the motorcar that was first called the Silver Ghost, registration no. AX 201, now insured for £50m.

And here's the 1923 recreation, registration no. AX 198:

Auctioned at RM Sotheby's as Lot 132 in October, 2010. Sold for $265,877

So which is the better value?

Possibly also of interest:

Elroy Dimson and Christophe Spaenjers