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Aug 01, 2022

Myth buster: Art as an asset class

Article by Elite Risk Acceptances

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There are many misconceptions about what it means to collect art: Art is collected for the sake of it rather than to make money, while those who do make money from art are just lucky; to be a bona fide collector you need over 200 artworks, and the most commonly held misbelief, collecting art is only for the super-rich.

“These ideas couldn’t be further from the truth,” believes Karabo Morule, founder of Capital Art. Capital Art is an art technology company and provides a service that makes it easy and affordable for art collectors to manage their collections and track the value of their artworks, not only as part of holistic wealth management but also to preserve financial value and cultural significance for future generations.

“We cannot underestimate the value of art as an asset class.”

Morule spoke about this topic at the recently held Elite Wealth Conference, hosted by Elite Risk Acceptances, a specialist high net worth insurer and subsidiary of Old Mutual Insure.

“I am often surprised that many people don’t realise how much of their wealth is wrapped up in the artworks they own. And yet, it pays to the know the value of a collection. On the Capital Art platform subscribers who have been getting valuations have seen an average of a 35% increase in the value of their art collections relative to the acquisition value and that average represents a range from 5% for a newer collector to 95% for someone who has been collecting quality artworks for some time. And these results are likely to compound over time,” said Morule, who encouraged both novice and experienced collectors to  know the value of their art portfolios.

Tarina Vlok, MD at Elite Risk Management, said that not having artworks valued regularly has implications for insurance strategies.

“Insurance is critical for collectors to protect against being out of pocket if a loss or damage occurs,” said Vlok. “It can come as a huge shock when it comes to claims stage and there are gaps in the insurance policy because there was no valuation done, which can be a very sore point for a collector.”

Morule also added that the value of advice cannot be underestimated as part of this process. “Advice is critical because only an adviser can assist with unpacking what is best for the client's needs based on the value of an artwork.”

She said that art can form an important diversification tool in wealth management. “This doesn’t mean you need to be super wealthy to collect art, but it does mean you can use art as a way to grow wealth.”

She says, however, that oftentimes buyers of art – whether amateur or experienced – don’t even know that they have acquired a piece of value.

According to a news story that appeared on CNN, in 2021 a Chinese bowl that was bought for $35 at a flea market, was sold at an auction for $721,800. The man who bought it from the flea market sent photographs of it to specialists, who identified it as a piece of art with historical significance circa the 15th-century.

“While such a return is the exception rather than the norm, it shows the importance of researching the piece before or after you acquire it, documenting its details, and then regularly tracking its value,” said Morule. She added that this process is also important because you may discover that the piece is actually a fake, and so it is worthless.

Vlok added that this is also important for insurance, as the replacement value is agreed by the art buyer or collector and insurer before a loss occurs.  This agreed value is then what will form the basis of the compensation in the event of a loss. “In other words, it is not how much you spent that counts, but how much it would cost to replace it.”

Morule had the following tips for art lovers on how to better manage their collections:

  • Buy what you like. You may hold onto a piece for a long time before realising its value, as is the case with many illiquid assets.
  • Art is much like a physical asset like a house in that it needs care and maintenance. For example, make sure it is in a proper frame if it is a painting.
  • Another critical action in preserving the value of art is collection management, which is the process of documenting everything about the artwork, like the title, artist, when it was created and from whom it was acquired.

Remember to keep the invoice and/or certificate of authenticity as this may be needed by your insurer, a lending institution, any prospective buyer, or your heirs.

“Tracking the history of ownership or provenance of the art is also vital. This is why NFTs, or non-fungible tokens, have become so popular; they enable artists to register their works using blockchain technology, creating a unique digital asset, and they allow artists to prove they are the creators of certain work. Provenance is visible and fully trackable.”

But, she said, while determining the price of NFTs works like any other artwork in that it is determined by a willing seller and a willing buyer, buyers of NFTs must be proceed with caution.

In 2020, Jack Dorsey, the founder of Twitter, created a non-fungible token (NFT) out of his first-ever  tweet and sold it for $2.9 million. This year the owner tried to sell it on auction, and only managed to secure a bid of $290; if sold, it would have meant the NFT had plummeted by 99% in value.

Morule said that while NFTs are a new and upcoming yet highly technical space for art, it does have exciting potential given its blockchain technology and there are certainly risks given the nascence of the technology and the ecosystem.

For Vlok, the insurance implications of NFTs are more complicated.

“NFT is an emerging sector, with many uncertainties when it comes to risk identification. The research done to date shows the biggest risk for NFT’s could be losing your access key, and hacking. Hacking could be an issue and will require specialist reinsurance. But the real risks are still to emerge. Insurance will not be able to contribute to loss of value, like in the example of the Twitter post NFT,” she concluded.

The Elite Wealth Conference 2022, with the theme ‘Dare to dream’, was held on 19 July and offered a rare opportunity to delve into the unique challenges and opportunities facing South Africa’s affluent. The headline speaker, Vusi Thembekwayo, world-renowned public speaker, award-winning investor, and accomplished author, gave an inspiring talk on how to create opportunity from circumstance.  He was joined by an array of international and local public figures such as, Anthea Gardner, Managing Partner of Cartesian Capital, Nicky Weimer, senior economist at Nedbank, as well as Taryn Tomlinson, a wheelchair-bound adventure speaker. Presentations unpacked a broad range of topics and valuable insights on investment trends and what the future holds for the affluent in South Africa.

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