The British Rail Pension Fund’s foray into art is often used as an example of unusual alternative investment, in much the same way as Long-Term Capital Management’s implosion is wheeled out as an object lesson in how hedge funds can go horribly wrong. The fact that BRPF’s actions are still so much discussed some three decades after it took its decision underlines how unusual it was at the time, and how unusual it remains. Few, if any, big names have publicly followed suit. It is not immediately obvious why that should be so.
Peter Temple, an experienced and active private investor, an investment writer and former City analyst, refers to the episode in his recently published book ('Superhobby Investing', published by Harriman House).
“The British Rail Pension Fund put in £40m (e58.5m) into 2,400 museum quality works of art in the early 1970s as an inflation hedge,” recalls Peter Temple. At that time, the UK was experiencing labour unrest, power cuts and high inflation.
“It sold out gradually, the last items being sold in 2003, and is generally reckoned to have made four percentage points per annum above inflation over the period,” Temple adds. “It stopped putting money in actively when inflation-linked gilts were introduced in the early 1980s. More recently we have seen private individuals putting pension-type money that might otherwise go into the stock market into tangibles. People like Stanley Gibbons, coin dealer Spink and others also report great interest and a shortage of high quality stock. Some tangibles like forestry and premier cru Bordeaux are also natural homes for long-term money.”
While some might view art as too esoteric to be classed as a genuine alternative, those at the very top end of the market have no doubts as to its suitability. Indeed, the force of some arguments is so great that one might be led to wonder why the great and the good pension funds don’t form a consortium to take over every major art gallery and museum in the developed world and elsewhere. What would be the point in buying emerging market bonds, for instance, when a latter-day Elgin Marbles might be found somewhere for the taking?
Spencer Ewen, managing director of independent art agents and valuers Seymour Management, has two versions of his answer to the question of whether art is a suitable investment for a pension fund, “yes” being the short version while the longer seeks to explain why this should be so. “Primarily art is naturally illiquid and has no yield,” he says, sounding disturbingly like an investment banker rather than a refugee from TV programme, The Antiques Roadshow.
“Pension funds are long-term investors seeking capital growth, and the only serious way to deal in art is to deal over matter of years rather than months. Well selected art is most certainly something appropriate to pension funds.” The creation of specialist institutional funds to complement the very limited retail fund investment in art would certainly help the market move in that direction.
David Kusin, president of Kusin & Co, an institutional economic research firm that has focussed on the movement of fine and decorative art and antiquities, expresses similar views, but then he is a former investment banker. “Is art a suitable asset for a pension fund? The answer is absolutely ‘yes’,” he asserts. “Why? The primary reason is that the job of a pension fund manager is to diversify risk as broadly as possible. The area of art and antiquities as a special asset class has been defined statistically. We define art very finely. We have conducted rigorous quantitative analysis of, for example, how Barbizon 19th century French paintings correlate with traditional pension fund assets. We can show what $25m invested in art would do under different scenarios, and believe that investment in art is particularly well suited to pension funds, although we do tend to believe it’s unsuitable for individual investors unless they are already extraordinarily wealthy with portfolios on an institutional scale.”
Christopher Tsai, president and portfolio manager of Tsai Capital Corporation, echoes a number of these sentiments and elaborates upon the underlying market forces. An art collector himself, he believes that successful investing in art requires using some of the same tenets he follows as a money manager. He has delivered strong long-term performance for high net worth individuals and institutional clients over the past six-and-a-half years, successfully navigating portfolios through drastically different market conditions. Tsai Capital Corporation’s core investment product, Tsai US Large Cap Equity Growth, holds a five-star rating from Morningstar within the US equity large-cap growth managers category for separately managed accounts.
“While the art market is less liquid than the equity or bond markets and is often costly to trade in, pension funds generally have a very long term outlook. They can hold art for an extended period and benefit from the fact that art can appreciate significantly and perform closely to major benchmarks. For example, over a 30-year period from 1970, art has tightly tracked the performance of the S&P 500 Index (10.5% compounded annual growth rate for art versus 10.8% for the S&P 500 Index). Art also provides a source of diversification to any investment portfolio.
“It is important to note that the standard deviation of art is higher than the S&P 500 Index, but because art is not correlated with other asset classes like stocks or bonds, it can be used to lower portfolio risk (volatility). On the downside, transaction and holding costs can be very large. Over a 30-year period, they can equal 25% of the price paid for a work at auction. There are also insurance costs to keep in mind which can run $1.00-1.50 per $1,000 of market value (10-15 bps per year),”says Tsai.
“I would use art not only for diversification but also to control beta. The specific amount of assets_allocated would therefore depend upon the portfolio in question. I would set a cap, however, of around 5% because art is illiquid. While pension funds generally have a very long-term horizon, it is only prudent that there is a high level of liquidity should an unforeseen situation arise.”
Kusin disagrees on the percentages, and recommends that a pension fund should invest only 0.5% of assets in art of the 5-10% they should set aside for special assets in general, including private equity.
Despite the general bullishness, art does possess some limitations that aren't immediately obvious, he says. “One would think that publicity surrounding a certain area of the art market would support or even drive prices in that sector higher,” he says “That might be true in the short-term, but hype can destroy value over the long run if the fundamentals for sustainable appreciation are not in place. You also have holding costs that include product valuation, conservation and security, as well as limited liquidity. You often have holding periods of 10-12 years. You can’t liquidate as rapidly as publicly traded securities. Risk dispersal might be more difficult to achieve.”
It is also crucial that the perishability and fashionability of a piece of work be taken into account, Kusin adds. “For example, prices for the work of US artist Keith Haring have risen since his death in 1990 while Meissen porcelain prices plummeted in the 1980s in what was a very thinly traded market after a small band of major collectors died within a couple of years of one another. You need to consider the relative depth of any given market.”
There are other limitations too, as Seymour’s Ewen notes. “Art needs to be fresh to market; by which I mean that selling something every two years makes it less attractive than if it were only coming to the market once every 10 years. Investors must take a long-term view. And while there are indices available, comparables are very difficult.”
A leading index is provided by Jianping Mei of the New York University’s department of finance and Michael Moses, professor at the Stern School of Business at New York University. In their 2002 paper ‘Art as an investment and the underperformance of masterpieces’ they constructed a new data set of repeated sales of artworks and to estimate an annual index of art prices for the period 1875-2000. “Although the Mei/Moses Index contains less data quantitatively than some, it can be a much more reliable guide to the general mood of the market as it only measures pieces that have sold twice at auction,” says Ewen.
“We have 7,000 comparables in our database of repeat sales of the same objects sold more than once,” says Mike Moses. The index is based on three clear categories, Impressionist and Modern art, Old Masters and 19th century, and American before 1950, which between them account for 80% of transactions in New York.
Contrary to earlier studies, Mei and Moses found that art outperforms fixed-income securities as an investment, and is on a par within the US from the 1950s until the present. “Art is also found to have higher volatility but lower correlation with other assets, making it potentially more attractive for portfolio diversification than was discovered in earlier research,” Moses said.
According to the Mei/Moses Fine Art Indices both art and stocks showed strong gains in 2003. After three years of, at best, weak results the total return for the S&P 500 broke into the positive column with an impressive increase of 28.7% last year. While the Mei Moses all art annual index had outperformed stocks over the prior three years its growth of 21.7% this year could not quite keep up with the S&P 500. However, art continued to easily outperform 10-year US treasury bonds and 90-day US treasury bills which both showed a total return of less than 1% last year.
Turning to more tangible matters, art is also one of the longest-lasting investments available, adds Moses. “There’s a high proportion of work still around from the 1500s. It is a true invest-and-hold security and long-term preserver of wealth. You can’t say that about much else these days, when a company can be literally here today and gone tomorrow. The most important thing for a pension fund, though, is a really long horizon. Our data show that the longer you hold a work of art, the less the value deviates from the mean return. The scatter plot for zero to five years shows returns all over the map, while at 25 years returns are very much within a relatively small band round the mean.”
The main point of discussion for Moses then, is if a pension fund finds the risk, return and diversification aspects of art appropriate for its members, is how to go about it, given the lack of vehicles through which it might invest. The time is right, it seems, for the art world's equivalent of the real estate investment trusts.

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