Last year, reported art sales alone totaled $68 billion in transactions, surging to exceed pre-pandemic levels of activity. Why the growing interest?
Diversification makes sense, and the high-end art market has been known to offer impressive returns to investors, outperforming the stock market. Additionally, it exhibits low correlations to other asset classes during periods of economic stress.
But there’s a catch – multi-million dollar artworks are traditionally reserved for ultra-wealthy investors with heaps of liquid cash. Ordinary investors hesitate to venture into the closely guarded world due to steep price points and the market’s overall illiquidity.
The good news is that platforms like Masterworks are making fine art investments accessible to ordinary people through the fractional ownership model. With 16 exits to date, Masterworks has generated 45% annualized returns on average for its members.
But does every painting acquired by Masterworks hold the promise of strong returns? Do factors like economic decline and art market trends affect returns? How does the platform identify the right time for an exit to ensure maximum gains?
In this article, we’ll explore the answers to these questions and more. But let’s first take a closer look at Masterworks’s fractional investment approach.
Art Investing Made Easy: The Masterworks Fractional Ownership Model
With Masterworks, you don’t need a seven-figure (or higher) bank balance to invest in museum-worthy paintings by Picasso, Warhol, Basquiat, and the like. Instead, you can buy fractional shares of multi-million dollar artwork at a starting price of $20.
How does that work?
The company’s acquisition team uses proprietary data and predictive analytics tools to identify established artists, as well as emerging names, with high investment potential. Then, they purchase a painting and file an offering circular with the SEC. Once regulators securitize the piece, the platform’s community of users can buy fractional shares of the underlying artwork.
The affordable price point gives everyday investors the confidence to venture into the blue-chip art market, while the data-driven approach lowers the need to rely on guesswork and subjective views.
The appeal of fractional art investments is evident from Masterworks’s community of over 811,000 members. To date, the platform has acquired 344 artworks worth more than $882 million.
A Look at Returns: What Do the Numbers Say?
Masterworks typically holds a painting for three to ten years before selling it and distributing the profits to investors. In some cases, if the acquisition and private sales experts identify a good opportunity, they resell a painting after a short holding period. The platform deducts a 1.5% annual management fee plus a portion of the profits.
So, what kind of returns can you expect from fractional art investments on Masterworks? In 2022 alone, the investing app paid out profits worth $25 million to its user base. Additionally, eight of the last nine exits generated $13.5% annualized returns on average.
As of this writing, one of the top performers is a Cecily Brown piece that generated a colossal 77.3% annualized gain after a holding period of 259 days. Then there’s a Simone Leigh painting that yielded a mouth-watering 325% annualized return after a brief holding period of 36 days.
Other noteworthy exits include:
- A Cecily Brown piece held for 686 days generated 35% in returns
- A Banksy piece held for 378 days generated 32% in returns
- A George Condo piece held for 442 days generated 39.3% in returns
Even the worst-performing piece, a painting by Warhol, resulted in a 4.1% annualized return after a holding period of less than a year.
What do these numbers mean for novice investors who want to add blue-chip art to their portfolio? Speaking strictly empirically, Masterworks’s fine art investments usually yield returns in the high single digits or low double digits annually.
Besides earning returns from exits, you also have the option to sell your shares on the Masterworks app’s secondary market. It helps maintain the liquidity of your investments.
Word to the Wise: There Are No Guarantees
While Masterworks’s track record looks promising so far, it’s worth noting that past performance doesn’t always guarantee high returns in the future. At any given point, a painting’s value depends on several factors, including:
- The artist’s reputation and market demand
- Overall art market trends
- Buying patterns and preferences
- Historical significance
- Purchase price and holding period
While the high-end art market is typically resilient during financial downturns, inflationary pressures can impact resell prices. Moreover, buyers’ tastes change over time. Today’s in-demand artist markets might struggle to grab eyeballs in a few years.
Based on these factors, returns from a piece can fluctuate drastically from year to year. Also, different works of the same artist can generate varying returns, depending on historical importance and holding periods.
However, acquisition and private sales specialists at Masterworks closely observe the art market to assess demand and supply. That, combined with machine learning algorithms, helps them identify high-yield exit opportunities.
The Final Verdict
Data from Masterworks’s 16 exits shows that the platform holds the promise of high returns annually. The use of historical auction sales data, first-hand art market insights, and machine learning algorithms help ensure investors get the maximum value for their money.
However, all investments do come with risks. Several factors, including future art market conditions and buyer preferences, can influence resell prices.
It is, therefore, crucial for investors to familiarize themselves with the inherent risks of the art market. Additionally, it’s a good idea to diversify your portfolio with shares of paintings by different artists. If you’re a first-time investor, consider fine art as a supplement to traditional assets like mutual funds and stocks.