The latest status investment is showing signs of a bubble.

Art fairs like in Madrid, above, fan excitement about contemporary art and expand its market.
(Philippe Desmazes/Agence France-Presse )

By Sharon Reier | January 26, 2007|

When Marta Guitart, an art teacher, lived in her native Spain seven years ago, she brushed up on the latest trends in contemporary art by attending art fairs like ARCO in Madrid and Documenta in Essen, Germany.

But she didn't catch the collecting bug until December, when she visited Art Basel Miami Beach, a five-year-old art fair that mixes celebrities, high rollers, avant-garde works and late-night partying.

After Guitart returned to her home in New York, she realized she had developed the desire to own fine art, and regretted not having purchased a print by William Kentridge, a South African artist whose works deal with exploitation and colonialism.

European fairs, Guitart said, are "very casual, very businesslike — even a bit boring and stodgy." In Miami, by contrast, "you could definitely feel the party ambiance," she said. "There was an atmosphere of excitement and everyone wants to own something and bring home a little bit of that experience."

Contemporary art is not for everyone. But fanning the excitement that it generates and expanding the market is not difficult these days. As contemporary art prices leap from peak to peak, reflecting the sector's position as status symbol du jour for hedge fund managers, newly minted Russian and Indian billionaires and other masters of the financial universe, others are eager to spend tens of thousands for a chance to rub shoulders with the wildly rich and to get in on a booming market.

As of last summer, the segment of the Moses Mei Fine Art index that measures the performance of U.S. postwar and contemporary art rose 55 percent on an annualized basis for 2006, and by all indications from strong auction house sales in the second half of 2006, will remain strong when the update is published in February.

"Postwar and contemporary art are hot, hot, hot," said Moses, a professor at the New York University Stern School of Business, who first produced the index with a colleague, Jianping Mei, in 2001.

The market for these two categories of art, Moses added, "is getting close to too hot to touch."

By that, Moses means that it may be approaching a bubble situation. Moses lectured on art as an investment asset at Art Basel Miami Beach. The subject will also be on the agenda at the Gulf Art Fair that will be inaugurated in March in Dubai, where Sotheby's is scheduled to sponsor a multiday educational seminar on the development of contemporary art and the benefits of art in a portfolio. The Dubai organizers hope to attract Indian, Russian and European collectors who want to take advantage the low tax regime in Dubai and low European value-added taxes on works imported from outside the EU.

"There are three beauties in some sense in art," Moses said. "The beauty of the object; the joy of collecting and meeting with people and talking with people and the excitement of the hunt; and there is the diversification potential of art in a portfolio."

Owning provocative art confers a sort of social distinction. "If you own a piece of art work that is inscrutable to other people, it is a signal to them that you have sophisticated concerns about other things" besides money, said William Goetzmann, a Yale professor with his own art index.

No one described the social place of art ownership better than the author and satirist Tom Wolfe in "The Painted Word," his 1975 book. "Avant-garde art, more than any other, takes the Mammon and the Moloch out of money, puts Levi's turtlenecks, mutton chops, and other mantles and laurels of Bohemian grace upon it," Wolfe wrote.

But if great art transcends commerce, auction houses, art advisers at private banks and a new breed of independent art consultants — who do everything from locate and authenticate art works to explain the meaning and context of particular works to novice collectors — are increasingly employing financially oriented perspectives. There is increasing interest in art as an investment class: how it behaves compared with financial assets, and what qualities in a work of art are likely to make an emerging artist stand the test of time — and justify five-figure prices.

"There are certain criteria," said Noel Le Gall, a former gallery owner and contemporary art collector in France. "The auction houses who sell contemporary art say they can evaluate the names coming into the market — typically artists under 35 — by saying, 'He has six out of ten.'"

Among those criteria, Le Gall said, are that the artist must be in a good gallery — "good" in this context meaning one that has the recognition of Sotheby's and Christie's, the Macy's and Gimbels of international auction houses. The artist's work should have been reviewed by an art critic, particularly museum critics, and purchased by two known and respected private collectors, preferably with one in Europe, like Charles Saatchi, who once led an advertising empire and is now viewed as the top collector of contemporary art in Britain.

It is also a good sign if the artist's work has been shown in the Venice Biennale, one of the premier exhibitions, or if the artist is considered to be part of a community — the black community, the gay community, the Jewish community — which can ensure a strong market.

But some veterans of the art world are quick to dismiss such checklists.

"They are used for reassurance," said Martin Guesnet, associate director of contemporary art at the Paris auction house Artcurial. "There have been 10,000 works of art shown at the Biennale"— the implication being that not all of them can attain lasting value. In fact, as a rule of thumb, nine of 10 works bought by collectors are eventually consigned to the aesthetic dust bin.

And as the sale price rises, so does the penalty if the art work does not hold its value. "You can't know if the $30,000, $40,000 or $100,000 you are paying will be worth 10 times more 10 years from now," Guesnet said. Works by some contemporary artists like Julian Schnabel, who was acclaimed as a darling of the art world in the 1980s boom, are selling in the range of $150,000 to $200,000 a painting — about the same prices they fetched nearly 20 years ago.

By contrast, as the contemporary art sector booms, paintings by Andy Warhol — once thought to be an evanescent fad — are selling for Picasso-like prices. Late Picassos, which Guesnet said were hard to sell five years ago, are fetching handsome sums. And the work by minimalists like Donald Judd, Carl Andre and Sol Lewitt have multiplied in price over the past decade.

Unsurprisingly, there is increasing worry that there is a bubble ready to pop. And that is where the art indexes may provide some guidance.

Goetzmann said his art market index performance generally lagged behind financial markets by about a year and, in the long run, outperformed the bond market but not stocks. By his measure, Goetzmann does not see the art market as ready to deflate, in part because the financial markets are still doing well.

Moses at NYU arrives at the same conclusion, but for different reasons.

"My definition of a bubble is if the market has been growing by 30 percent a year for the last five years," he said. By that definition, the Standard & Poor's 500-stock index was a bubble between 1995 and 2000; the Nikkei 225-stock index and the Moses Mei Fine Art Index experienced their bubble years between 1985 and 1990. Both periods were followed by steep drops in prices.

And today? The art index, Moses said, is growing below 30 percent in all collecting categories. "But I think we are getting close to it. We will have growth rates in the 20s compounded over five years. I am not sure at this instant it is too hot to handle, but it is getting there."

Moses believes that art has a place in an investment portfolio because it is noncorrelated with financial markets, and therefore constitutes an alternative asset which mitigates risk.

Experts with their feet on the ground in the art world are similarly skeptical that the contemporary art may soon implode, even though prices are starting to look unsustainable. As Guesnet put it, "There is huge money around."

Twenty years ago, he said, the market was dominated by U.S. and Japanese buyers. Today, the market is global, with new money from China, India and Russia joining the chase and, often, pushing up the prices of art from their countries.

Another difference is in the way art purchases are financed, Guesnet said. Twenty years ago, he said, many large purchases were made on credit: Van Gogh's "Irises" sold in the 1980s for a record $53.9 million including auction commission and was bought with the help of a bank loan and a $27 million loan from Sotheby's that was never repaid. All-cash purchases mean fewer forced sales if the market changes.

Also, the art market is more transparent than it once was. Whereas before collectors could compare prices only by attending auctions and reading expensive catalogues, today information is readily available online. "People can look at the prices," Guesnet said, and if a certain artist is commanding $1 million, "they see everyone is paying the same."

Finally, lifestyle marketing — the idea that you need certain accouterments to reflect your station in life — is alive and well in the art world today. "The marketing didn't exist 20 years ago," Guesnet said. "Now it is part of a community; part of the excitation. It is a very important element."

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