By Kathryn Graddy
In the fall of 2018, a Banksy work, “Love is in the Bin,” sold for $1.4 million.
Now the original buyer has put the work up for sale, and it’s expected to fetch over $5 million —that would amount to a return of more than 250% on the original investment.
What if, instead of the art market’s being the sole purview of the deep-pocketed, everyday people could buy shares of a pricey piece of art and sell the shares as they please?
That’s exactly what a new platform, Masterworks , seeks to do.
Art investment funds have existed for over a century. Masterworks, however, has put a new twist on an old practice, in that the platform allows individuals to buy shares of specific artworks in $20 increments. Investors can then sell these shares in an easy-to-use secondary market or wait until Masterworks sells the piece and receive pro rata proceeds.
For nearly 10 years, I’ve taught a course on economics and the arts with art historian Nancy Scott . In this course, we spend time discussing the history and profitability of art investing, both in theory and in practice .
For those thinking of purchasing art purely for investment purposes, it’s important to understand how art investment funds have traditionally worked, and whether experts believe it’s a good investment.
The French pool their resources
An early art investment fund was called The Skin of the Bear (La Peau de l’Ours), which was based in France during the beginning of the 20th century.
The name comes from a French fable that contains the aphorism “never sell the skin of the bear before you’ve actually killed it”—the French equivalent of “don’t count your chickens before they hatch”—and it alludes to the fact that investing in art can be a risky endeavor.
Partly intended as a means to support emerging postimpressionist artists, such as Picasso, Matisse and Gauguin, the fund was run as a syndicate in which a small number of partners each contributed identical amounts to purchase a collection of paintings.
Businessman, art critic and collector Andre Level managed the fund and arranged the paintings’ sale. After the paintings were sold, he received 20% of the sale price for his work. The artists received 20% of the fund’s profits on top of the money they received from the original sale. The investors would then receive the rest in equal proportions.
This concept—returning a proportion of the sale price to the artist—is known as the droit de suite, or artist’s resale right . Versions of this are now law in most parts of the Western world other than the United States.
This first art fund was a success. It created demand for new artworks and supported innovative impressionist and modern artists, while providing a sizable return to its original investors .
Not all funds are equal
Another famous investment in art was made by the British Rail Pension Fund .
This fund was established in 1974 to manage a small proportion of the company’s employee retirement holdings, and the objective was to buy works of art over the course of 25 years before selling them off. The fund earned 11.3% in compound returns annually, but because of high inflation during much of that period , the actual gains were much lower.
Other notable art funds ended up as failures . Banque Nationale de Paris’ art fund sold its investment in 1999 at a loss and a fund run by British art dealer Taylor Jardine Ltd. did the same in 2003. Britain’s Department of Trade shut down The Barrington Fleming Art Fund in 2001 after determining it was set up under fraudulent circumstances . And Fernwood Art Investments, founded by former Merrill Lynch manager Bruce Taub, failed to even launch after Taub was found guilty of embezzling his investors’ funds in 2006.