This article is sponsored by Masterworks. All opinions are my own.
Conventional investments like stocks and bonds (including mutual funds that invest in stocks and bonds) are the core of most portfolios. While alternative investments provide opportunities for diversification, and in some cases, higher upside, many alternative investments have traditionally only been available to the wealthy. However, alternative investments have become more accessible to the average investor, which means there are more options available for everyone.
Some examples of alternative investments include:
- Real estate
- Private equity
- Venture capital
- Hedge funds
- Collectible assets like art, wine, or coins
Fine art is one example of an investment that has traditionally not been available to the average person. Most people don’t have a few million dollars at their disposal to purchase blue-chip art, like an original Andy Warhol.
Masterworks is changing that by allowing anyone to invest in fine art created by some of the world’s greatest artists. They take a crowdfunding approach, and they are the first company to offer this type of platform for art investors.
What is Masterworks?
Masterworks is a New York-based company that was founded in 2017 by Scott Lynn, who has been a contemporary art investor for more than 15 years. Masterworks purchases paintings based on data that indicates the potential to appreciate by 9-15% per year, and they try to purchase below market value. After Masterworks has purchased the piece, they file an offering circular with the SEC. After it has passed the SEC and FINRA review process, Masterworks sells shares to investors for $20 per share.
The intent is to own a painting for 3-7 years before selling to a collector, but that is a loose timeframe. Offers to purchase can be made at any time and all shareholders will be able to vote. If the majority vote to sell, the piece is sold and funds will be distributed to investors, after the fees and costs are deducted.
Masterworks is also planning to facilitate the trading of shares, but at this time that is not an option. As it stands now, your investment with Masterworks is not liquid and you’ll own your shares until the piece is sold. A platform that allows shares to be bought or sold would provide investors with more flexibility and liquidity. This type of platform is in the long-term plans for Masterworks, but there is no guarantee that it will happen.
Is Art a Good Investment?
A question you may be asking yourself: “Is art a good investment?”
Artprice’s Global Index tracks the performance of art as an investment. The Artprice100 index tracks the performance from top artists, so it’s a better comparison to the blue-chip pieces that Masterworks is purchasing. “The composition of the Artprice100® is adjusted by a scientific committee every January 1st to reflect the evolution of the Art Market. The index essentially identifies the 100 top-performing artists at auction over the previous five years who satisfy a key liquidity criterion (at least ten works of comparable quality sold each year). The weight of each artist is proportional to his/her annual auction turnover over the relevant period.” (source)
Since 2000, the Artprice100 has significantly outgained both the Artprice Global Index and the S&P 500.
(chart by Artprice.com)
This data indicates that investments in pieces created by top artists performance much better art from lesser-known artists. What may be more surprising is how much better the Artprice100 has performed compared to the S&P 500 over an 18 year period.
Of course, this data is based on the collective results of 100 top artists. The results of one specific painting may be better or worse.
Here are some of the major reasons why you might want to consider investing in art through Masterworks.
Not Limited to Accredited Investors
Historically, fine art is an investment that has only been an option for the ultra-wealthy. Masterworks has changed things by allowing even small investors to get involved. Unlike many other popular alternative investments, you don’t need to be an accredited investor to invest with Masterworks and own a share of art from a renowned artist.
Focus on Blue-Chip Art
When I first heard about Masterworks, I assumed it was a platform for investing in no-name artists. However, that’s not the case at all. The fact that Masterworks focuses only on blue-chip artists is a big deal because it gives you the best chance to earn a healthy return on your investment.
Access to an Investment that Would Otherwise Be Unreachable for Most Investors
Aside from Masterworks, currently there is really no other way for the average investor to invest in blue-chip art. Now, anyone can own a share in a piece from someone like Warhol, Monet, or Picasso.
Potential for Strong Returns
As we looked at earlier, pieces from leading artists have the potential to significantly increase in value over time.
Not only does it give you the potential to increase in value, but it also adds some diversification to your portfolio. The value of art isn’t directly tied to the stock market, and since many valuable pieces are owned by very wealthy individuals, the value should not be as susceptible to a decline in economic conditions.
Like any investment, there are some cons as well.
Lack of Liquidity
The typical holding period is 3-7 years, which means you won’t be seeing your money for quite some time. And as of now, the shares can’t be sold (that may be an option in the future), so this is a very illiquid investment.
A lot of alternative investments lack liquidity, so you just need to be sure that you’re only investing money that you won’t need in the near future.
Your investment with Masterworks will have a 1.5% annual fee, which covers things like insurance and storage. Masterworks will also keep 20% of any profits that are made when the piece is sold. This fee will definitely impact your returns, but it does ensure that Masterworks will do its best to buy pieces that will increase in value over time.
No Guarantee of Investment Gains
Although blue-chip art has performed well over time, there is no guarantee that your investment will produce a positive return, especially considering that you are investing in individual pieces instead of a broader index. However, that risk also comes with the potential for your investment to do very well.
Relatively New Platform
Masterworks hasn’t been around very long. It’s impressive that they’ve been able to change the way average people can invest in art, but like any new platform, it doesn’t have much of a track record yet.
Who Is It For?
- Investors looking for alternative investments – Alternative investments should make up a small percentage of your portfolio, while more traditional investments form the core of your portfolio. If you have the core part of your portfolio taken care of, and you’re looking to diversify with some alternative investments, you may want to consider Masterworks.
- Investors who are willing to wait 3-7 years to see results from their investment – In order for this investment opportunity to be a good fit for you, you’ll need to invest with money that you won’t need for several years, since you’ll have little control over when you get paid from your investment.
- Those who are interested in art – While it’s not an absolute requirement that you have an interest in art in order to invest with Masterworks, the idea is likely to me more appealing to those who already have an interest in art. In general, it’s a good idea to have some familiarity with the things that you invest in, so this could be a good opportunity for those who already have an interest in art.
Most of these details were mentioned earlier in the article, but to summarize, here are some of the key details about investing with Masterworks:
- You don’t need to be an accredited investor.
- You can buy shares in a painting for just $20 a piece, but the total minimum investment will vary based on the offering.
- The typical term for an investment is 3-7 years, but it can be longer or shorter.
- Masterworks charges a fee of 1.5% per year, plus they’ll keep 20% of profits when any of the paintings are sold.
- Masterworks invests in blue-chip art from well-known artists.
If you are interested in learning more about Masterworks or investing, please visit their website.