Art funds picture healthy profits but risks loom

Art investing is firmly back in fashion as prices soar for paintings from Old Masters to edgy contemporary works, and a range of new art funds is hoping to attract investors with promises of big returns.

The price of fine art going under the auctioneer's hammer is booming. The total value of worldwide auction sales rose 15 per cent to US$4.2 billion ($6.8 million) in 2005, when a view of Venice by Canaletto ranked as the year's top sale at US$29 million.

Fine art prices have climbed about 58 per cent in the past 10 years, but contemporary works have performed better, shooting up by about 81 per cent, according to research firm Artprice.com.

The art funds draw on extensive industry experience and buying power, but are hard to value as they have to contend with substantial hidden costs and a notoriously fickle market, experts say.

"You don't wake up one morning, look at the FTSE, phone your broker and say get out of industrials and into impressionists," said consultant Jeremy Eckstein, who advises on investing in art. "If you're buying shares, you can sell them and know what price you're going to get. You can't do that with art."

About six art funds are hoping to get off the ground, but in spite of a flurry of publicity in the past year, Britain's The Fine Art Fund is the only fully-fledged venture open for business to investors with at least US$250,000 ($402,400) available.

"We've been averaging returns on sales to date of around 35 per cent in the last 12 months," said chief executive Philip Hoffman, former Christie's European deputy managing director.

The fund has spent about 30 per cent of its money on Old Masters painted between 1300 and 1800, and another 30 per cent on post-1960 contemporary art more popular with younger buyers, and 25 per cent on impressionist works.

Industry sources say it is planning to raise up to US$100 million for a second fund, although Hoffman declined comment.

Returns look attractive but some say art is a risky, unregulated market and funds may find it hard to guarantee good profits in a narrow timeframe, particularly if trading is done through auctions, where commissions can be as high as 20 per cent.

Unlike traditional investments, there are no annual dividends and it can be almost impossible to calculate the true value of the works that a fund has in its portfolio until it is liquidated at the end of the investment period.

"With art you can't make forecasts on the same basis as you would with financial investments," says Karl Schweizer, head of UBS's art banking division.

"You have to do your homework before you take your risk as an investor."

The China Fund wants to raise US$100 million to buy imperial ceramics dating from the 10th century Song dynasty and 20th century Chinese paintings, exhibiting its best pieces in a museum and offering compound returns of 12 to 15 per cent.

Some wealthy investors are opting to form loose syndicates to buy art and cut out the cost of setting up a fund, which Peter Stephens, chairman of art advisers Seymour's, calculates can reach about 7 per cent of the funds raised with annual running costs of about 2 per cent of assets on top.

But the concept has suffered some early setbacks.

Hopes of drawing hefty investment into the market received a blow last year when Dutch investment bank ABN AMRO scrapped plans to launch a "fund of funds".

"Any new asset class has always had difficulties.

"If you look back to the emergence of hedge funds, there was a huge scare and the first people who entered were basically ultra high net worth individuals," said the China Fund's Maria Lam.

- REUTERS