Tangible Assets: Why Now's the Time to Buy

Time to Load Up on Hard Assets

And That Means 'Real' Tangibles, Too

Usually when Wall Street talks about hard assets, they're talking about precious metals or commodities, things you can touch or feel or consume.

But hard assets can mean other things - things that bring pleasure like art, vintage cars or rare stamps. Let’s call them ‘real’ assets' or ‘stable assets.’

So what's happening to real assets in this volatile environment? Demand is booming. But compelling values still exist.

“Rare diamond and gemstone prices have been steadily rising and auction houses have been selling investment grade gemstones at record sales” reports Reuters.

Vintage car sales have increased 38% year over year with a corresponding price rise.

The market for Old Masters and blue chip art is witnessing robust demand with heated bidding for prized works. According to art market analyst Nicholas Forrester,

Old Masters paintings are the quiet achievers of the art world- conscientiously going about their business and becoming more valuable at a slow but steady pace.

What’s driving this trend?

More and more, investors are leaving currently risky investments such as financial and real estate and moving towards tangibles - hard assets with staying power, that aren't impacted by government, regulatory or financial market whims.

Like other asset classes, tangible real assets like fine art provide portfolio diversification and work in periods of inflation, currency devaluation and economic or financial distress. While the value of a stock can go to zero and you’ll have nothing to show for it but a worthless piece of paper, you’ll always be able to enjoy the beauty of a rare work of art. Its value is literally priceless. It's wealth preservation abilities are strong.

Like other markets, art is driven by supply and demand. Unlike other markets though, the supply of rare art is finite. The Old Masters are dead and gone. They’re not coming back. Their work exists only in limited numbers. It’s this rarity that makes these real assets valuable.

But Why Now?

Why are Real Assets, Blue Chip Collectibles Something We Should Consider Now?

Due to upheaval in the financial markets and economies, fortunes have been lost. Hedge funds have closed; leaders of industry and high profile investors have lost millions if not billions of dollars. Not for profits like museums are in trouble. Investors are throwing out every asset in search of cash. Museums are searching for ways to monetize their assets so they can pay their bills to keep the doors open. But what assets do they have besides the art?

Well that’s just the point. Many have collections of rare art that have been locked away, secreted and prized that they have promised never to sell. Only now they have to sell them.

Several prominent museums have announced that they are closing their doors. They’ve simply run out of money. Their endowments are down, attendance is off and their Boards of Directors can’t or won’t pitch in. Entire collections will be auctioned off.

Brandeis Rose Art Museum announced that they will close their doors and sell its 6,000 work collection including many masterworks. The Los Angeles Museum has auctioned off several of its prize works to raise cash and shore up its finances. At last count, nearly 40 US museums have announced major cutbacks or closings since January 1.

These assets will be offered to the public through auctions, dealers and collectors. For many works, this will be the first time they'll be offered to the public. Highly priced works will be on the market, but also important works for less. For a reasonable amount of money, you can still buy a significant piece of art. An Old Masters prints auction at Christies in London recently sold many works in the $10,000-$20,000 range.

This unique, once in a generation opportunity puts buyers in the drivers seat. Many important works, and not the ones only for the super rich, are available for collectors with less than a fortune to spend.

But this asset class has more than intrinsic value to offer.

Alternative assets are important for portfolio diversification. According to academic studies, the correlation between hard assets and other assets like Treasury bonds, international stocks and large cap growth stocks is zero. This is especially true for blue chip art, which is uncorrelated to any other asset class.

If your portfolio is sizeable enough to include alternative assets as 5-10% of the overall portfolio, further diversification within this asset class will increase total portfolio returns while reducing risk.

Long-term studies of returns for real assets are compelling.

The most often cited example is the British Railway Pension Trust. In 1974, the BRPT invested $70M or 2% of its portfolio in over 2,500 works of art. These objects included paintings, sculpture, drawings, silver, furniture and decorative art. Sotheby’s sold the work in several lots in the 1980’s resulting in a compound annual rate of return of 11.3%. The returns are consistent with long term studies, which conclude that art has outperformed bonds and bills during the five and ten-year periods but equities outperformed art marginally over the past 25 years.

Art As a Store of Value

Art, precious gemstones and gold have always stood the test of time. Real assets maintain their purchasing power, cannot increase in supply and cannot be duplicated. Rare art is not a commodity. Morgan Stanley cannot issue a buy recommendation on a piece of art or yell, “Sell” when the moment moves them.

Rare assets, like historically significant art assets, possess stability due to their limited supply. This stability is what allows these assets to act as a hedge against economic and political cross currents, currency devaluation and inflation.

In times of economic or political distress, investors, in a flight to quality, have embraced stable assets. We are witnessing this now. Art represents the rare, timeless asset.

What are your options for investing in rare tangibles? How can you get on board?

Use a professional. Art partnerships allow you access to a diversified portfolio managed by art professionals with insider access. This is not a DIY market or one where you load up your shopping cart on the internet. Take you time and research. This asset class allows you to do this. With patience and knowledge, you can assemble a world-class portfolio.

Comments

[Lara Crigger:]

Excellent article! I also wanted to point out that Debra just wrote an article for us on fine art investing (www.hardassetsinvestor...) that touches on some of these points in more detail.

Debra, what's your opinion on the new Collection of Modern Art mutual fund offered by Castlestone Management?

Apr 21 05:26 PM