MANY of the visitors to next week’s London Art Fair in Islington will take a fancy to something, gulp a bit, dig out their credit cards, snap up a painting and give it pride of place on a wall at home. Art, generally, is for viewing and feasting on — if it appreciates in value that’s an added bonus.
But price appreciation is the only goal of visitors to an anonymous Georgian townhouse behind The Dorchester hotel in London’s Mayfair — home to the only art investment fund in the world.
The Fine Art Fund and its manager, Fine Art Management Services (Fams), cater for investors who for the most part have no interest in paintings but believe that art, carefully picked, can create a decent financial return and help to diversify their portfolios.
From Old Masters through to contemporary art, the fund buys paintings, stores them in a high-security warehouse in Geneva and sooner or later sells them, hoping to make a profitable turn in the process.
Philip Hoffman, who runs the fund, says of his clients: “They’ve no interest whatsoever in art. They’re looking at the paintings as a diversification of their investments.”
Clients have to be rich: the entry price for this particular club is $250,000 (£140,000). They are all individuals. Pension funds, while occasionally flirting with art as an asset class, have shied away (despite the respectable 11 per cent annual return made by the British Rail Pension Fund from art in the 1980s and 1990s). Clients tend to be foreign. The fund boasts investors from the United States, Spain, Portugal and Chile, some of which offer tax breaks for art investors.
Hoffman, a former KPMG accountant and former Christie’s executive, is a bullish cheerleader for art investment. He delivers endless statistics about the golden prospects for art and the wave of buying power that will, he hopes, push prices higher. “Four thousand individuals in the world are looking to spend at least $10 million a year on art,” he enthuses. “The Getty Museum alone has $80 million to $100 million a year to spend.”
Hoffman is an encyclopaedia of information on paintings that have soared in value over the years. “One of my clients bought a Canaletto for £36,000 in 1976 and he sold it for £1 million in 1991,” he recalls. He tells of a chum who bought a thousand Daumier prints for just one French franc each in the 1950s and sold them for about £1,000 each in the 1990s.
But for all his enthusiasm, it has been hard getting the fund off the ground. The late Lord Hanson and Charles Wigoder, the tycoon behind Telecom Plus, the phone company, were among eight private individuals to bankroll Fams and provide seed capital to the fund. The fund’s chairman is the former Arts Minister Lord Gowrie, while another director is the billionaire Bruno Schroder, who controls the fund management group Schroders. Even with these rich backers, it took three years and 1,400 meetings with prospective recruits before Hoffman was ready to launch. The aim was to raise $100 million to $350 million. In fact, the fund attracted much less — perhaps just $30 million to $40 million, according to one outside estimate), with fewer than 50 direct investors.
However, art market insiders say that Hoffman has done well to achieve even this. Investment banks and others have in the past flirted with art funds and thought better of it, ultimately put off by the considerable hurdles. ABN Amro announced plans for a fund of art funds two years ago but abandoned the project when it could find only two suitable potential funds to invest in. One was the Fine Art Fund. The other was the China Fund, which aims to invest in oriental porcelain but is still today on the drawing board.
Karl Schweizer, head of art banking at the wealth management arm of UBS, the Swiss bank, says: “I’m not sure the set-ups I’ve seen so far will end in success. I see structural problems with a lot of them.”
Selina Skipwith, who manages the Fleming art collection in London, funded by the super-wealthy banking family, is also sceptical. “There’s a lot of talk, but very few actual funds,” she says. People who want to buy art generally want to see it and enjoy it, she says. Coutts, too, is sceptical, advising its well-heeled clients to buy art only because they like it and otherwise to steer clear of it as an investment proposition.
The doubts are understandable. The market is highly illiquid. It is prone to fads and fashion. Paintings generate no income, unlike shares and bonds, which pay a yield. The transaction costs can be huge, with auctioneers taking large commissions. Add in storage and insurance costs, and mainstream investments start to look very much simpler and enticing.
Hoffman argues that Fine Art Fund is structured just like a private equity fund, where investors become partners committed for ten years, which reduces the liquidity problem.Costs are kept to a minimum by mostly buying and selling privately, so cutting out the auctioneers.
With millions in buying power, the fund is able to move opportunistically, for example, by buying from distressed sellers. “We’re looking for vulture-type deals,” Hoffman says.
As for the perceived conflicts of interest, the fund’s expert advisers and consultants are encouraged to be co-investors on the individual paintings they advise the fund to buy. “It focuses their minds and allies their interests with ours,” Hoffman says.
Charges, however, are high compared with conventional equity funds. Fams levies a 2 per cent annual management charge on the fund and, like a hedge fund manager, takes 20 per cent of the profits over a hurdle return rate of 6 per cent. Investors also indirectly shoulder heavy legal costs and capital-raising fees.
Hoffman believes his team of in-house experts and outside consultants will enable him to achieve a much higher return than the overall art market. He says that the fund has already made an 80 per cent return after buying one contemporary work of art and selling it just 16 weeks later. A share in an Old Master was bought for €1 million and sold for €2 million 12 months later.
The aim is to achieve returns of 10 to 15 per cent a year. Hoffman says that net asset value is up since the July 2004 launch, but declines to give figures. However, he says that profits on artworks bought and sold within 12 months are running at 35 per cent.
Unlike the share market, there is no such offence as insider dealing in the art world. The value of a painter’s work can soar if a museum or reputable dealer decides to hold an exhibition of their work. Those who discover the fact first can profit by snapping up the artist’s work before the news breaks. “We have our ear close to the ground,” Hoffman says. “We have a very good idea of what exhibitions are coming up in the next 12 to 24 months.”
He declines to say what painters the fund is backing, with one exception. It is a major investor in Ed Ruscha, a well-established American West Coast artist who Hoffman is convinced is about to soar in popularity and value.
His confidence extends far beyond Ruscha, however. Fams, he says, is planning to launch a second art fund by the beginning of March.
