My article "Investing in Works of Art & Art Funds" published in Forum Views, BSE Brokers Forum magazine. Investing in works of art and art funds is at the nascent stage in India.

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VOLUME: 3 • ISSUE NO. 1BSE BROKERS' FORUM, MUMBAI, INDIAAPRIL 2014 (SPECIAL ISSUE)

2. Feature Article: Works of AFeature Article: Works of Art and Art Funds
102 Forum Views - April 2014
INVESTING IN WORKS OF
ART AND ART FUNDS
By CA Nitiin A Khandkar
Founder
Beyond Quant Equity Research Training
“Art has always been considered an investment of
passion that offers in addition to aesthetic utility,
potential of economic benefit too. However, art has
only recently been considered a potential alternative
investment as part of a portfolio of assets.”
103 Forum Views - April 2014
Unusual vis-à-vis Conventional
Asset Classes
Most investors are familiar with
"conventional" asset classes, such as
equities, precious metals and real estate.
However, more and more investors the
world over, are now looking beyond
these conventional asset classes.
In this article, we will take a look at some
of the "unusual" asset classes, viz., works
of art, philatelic items and numismatic
items, and also the new investment
product named "art funds".
What are Works of Art?
This term applies principally to tangible,
portable forms of visual art, such as:
• Fine art, such as paintings or sculptures
• Rare diamonds, or pieces of ancient
jewellery
Who invests in Work of Art?
It is usually the super-rich or the High Net
worth Individuals (HNWIs), who invest in
such assets, simply because the ticket
size of such investments is way too high
for ordinary investors. There are said to
be private collectors across the world,
whose secret, private galleries contains a
number of rare painting, sculptures, etc.
Size of the Art Market
According to The European Fine Art
Foundation (TEFAF), the total size of the
global art market is estimated at $60bn,
based on public auction data and an
estimate of art gallery and private art
dealer sales during 2011. The market has
grown six-fold over the last 20 years
(source: JP Morgan).
Philatelic Items
Philatelic items consist of postage
stamps and miniature sheets (also
known as souvenir sheets).
The world’s first postage stamp was
issued by Britain in 1840, and was called
the "Penny Black".
The painting was assessed in 1962-1963,
for insurance purposes, at a value of
$100mn, and is estimated to be currently
worth a billion dollars!
A few of the most expensive paintings
include:
• "The Card Players" by Paul
Cézanne, sold for $259mn in April,
2011
• "Le Rêve" by Pablo Picasso, sold for
$155mn in March, 2013
• "No. 5, 1948" by Jackson Pollock,
sold for $140mn in November, 2006
Such works of art would be out of reach
for almost everyone but the super-rich.
However,even paintings by Indian artists
like MF Hussain, among the modern, and
R a j a R a v i Ve r m a , a m o n g t h e
contemporary fetch fancy prices at
international auctions. Other leading
Indian painters include Nandlal Bose,
Anjolie Ela Menon, Satish Gujral, Mukul
Chandra Dey, etc.
Paintings of modern day Indian painters,
which are priced modestly when
compared to the contemporary
painters,can prove to be good
investments over a period of a few years.
Rare Diamonds
Rare diamonds include the historically
significant Kohinoor (105 carats) and
the Sancy Diamond (55 carats). The
Cullinan and the Hope diamond are
estimated to be worth $400mn and
$350mn respectively.
Benefits of Art Investing
• Low correlation withreturns on other
asset classes. These assets can
perform even during economic
recessions and when prices of other
assets are depressed.
• Art is a unique investment. There are
many non-monetary reasons for
buying. Till the time these items are
sold, they are an excellent hobby for
learning, and gaining knowledge
about different cultures and eras.
• Art provides collectors with much
needed social status and prestige.
• Philanthropic benefits by way of
financing young and up-and-coming
artists, or building a collection to
preserve cultural heritage.
• Steady appreciation over a period of
time. Potential for good returns.
• Easy purchase and sale through e-
commerce websites, or through
international and local dealers, in
respect of philatelic and numismatic
items.
Drawbacks of Investing in Works of
Art
• Obviously, investing in these unusual
asset classes is not for everyone.
• The market is restricted to a select
audience of art connoisseurs, art
galleries, etc. Prices may therefore
widely fluctuate depending on the
demand and supply. It may not be
easy to sell a work of art quickly, say
for raising funds in an emergency.
• S i m i l a r l y fo r p h i l a t e l i c a n d
numismatic items, market is still
somewhat small. Appreciation may
take time.
We now look at the highlights of the
various works of art.
Paintings
We have all read about the "Mona Lisa"
painting, painted between 1503 and
1506 by Leonardo da Vinci, which has
been acclaimed as the "best known,
most visited, most written about, most
sung about, most parodied work of art in
the world".
Newly created wealth in emerging
markets like China, Russia and the Middle
East has led to the entry of new
participants in the art trade. In spite of
the tough economic environment,
collectors globally are paying record
Evolution of the Art Market
Art has always been considered an
investment of passion that offers in
addition to aesthetic utility, potential of
economic benefit too. However, art has
only recently been considered a potential
alternative investment as part of a
portfolio of assets. Studies show that art
can offer long-term return potential that
is uncorrelated with other asset classes.
sums for top works. However, the lack of
market transparency, illiquidity and high
object costs have generally kept
participation to a select class of wealthy
individuals.
In a recent survey of wealthy individuals,
almost 50% of respondents own fine art
and, on average, art makes up nearly 4%
of the average HNWI's total wealth
(source: JP Morgan).
Returns on Art
The Mei Moses World All Art Index, which
is based on resale values of paintings
sold multiple times at auction, shows
positive returns over the last 50 years,
slightly lagging the S&P 500. Art has
done particularly well on a relative basis
in recent years, outperforming U.S. and
international equities and U.S. fixed
income over the last 10-year and 15-year
time periods, as of 2011 (source: JP
Morgan).
Since the end of World War II, the value
of works of art has appreciated
enormously. This is predominantly due to
increasing rarity caused by an expanding
demand from museums and collectors,
and dwindling supplies (source:
www.thefineartfund.com).
Analysis suggests that art may add
diversification benefits to an investment
portfolio. Over the last 25 years, art, as
measured by the Mei Moses World Art
Index, had almost zero correlation with
U.S. equities, and was negatively
correlated with fixed income and REITs
(source: JP Morgan).
The Kohinoor
The Sancy Diamond
Old, rare postage stamps and stamps
with errors fetch fancy prices in the
market.
The most expensive postage stamp in
the world is the "The Treskilling
Yellow", issued in 1857, which is
estimated to be worth upwards of $5mn.
Other well-known, rare stamp is the
"Inverted Jenny" issued in May 1918,
by the United State Postal Service, which
had the picture of the airplane printed
upside down in error. This stamp is
estimated to be worth $3mn.
Newly created wealth in
emerging markets like
China, Russia and the
Middle East has led to the
entry of new participants
in the art trade. In spite
of the tough economic
environment, collectors
globally are paying record
sums for top works.
However, the lack of
market transparency,
illiquidity and high object
costs have generally kept
participation to a select
class of wealthy
individuals.
Again, while such diamonds are way too
expensive as investment for most,
investments in smaller, quality diamonds
or other precious stones can yield returns
over a period of time.

3. 104 Forum Views - April 2014
drastically in terms of their
investment strategies, such as
making co-investments with other art
market players, focusing on sales by
distressed sellers or making bulk
purchases from artists or their
estates to secure better pricing.Art
fund managers employ more than
one strategy simultaneously to
realize gains continuously.
• Portfolio Restrictions: Each art fund
adopts a set of restrictions that
governs the character of its art
portfolio. Examples include
limitations on how much of the fund’s
capital can go into works by a
particular artist, into a single work of
art or into specific periods of art
history.
However, the art market is characterized
by a lack of regulatory authority, deficient
price discovery mechanisms, non-
transparency and the subjective value
and illiquid nature of fine art.
Proponents of art investment funds
argue that it is these very characteristics
that generate the significant arbitrage
opportunities within the market that
seasoned art professionals can exploit
for the benefit of the fund’s investors.
How does the Art Market view Art
Funds?
The art market has generally viewed art
funds with distrust and opposition,
arising from a combination of individual,
high-profile failures among early art
funds and a lack of understanding about
art funds and the ways in which they
operate.
Art fund critics tend to brand art funds as
"flippers" or "market manipulators".
However, most art fund managers
employ long-term investment strategies
and work with galleries in protecting and
supporting the market for those artists’
works that they acquire. In many cases,
art fund managers hold their artworks for
periods far exceeding those of the
p r o m i n e n t c o l l e c t o r s w h o a r e
traditionally favoured by the market. Art
funds have even served to provide much-
needed funding to contemporary artists
seeking to produce their next large-scale
series of works.
Moreover, art funds pride themselves on
adopting comprehensive exhibition
programs for acquired artworks, which
Numismatic Items
Numismatic items are banknotes and
coins issued by various countries.
Obviously, old, historic, rare coins and
banknotes fetch a premium in the
market. Rare banknotes have a solid
investment history. The market, both
national and international, has shown
significant and steady growth in sales
backed by past and present catalogue
and auction sales.
The highest ever price for a banknote at
auction was a world record price of
$2.25mn for a US Red Seal Grand
Watermelon banknote, in December
2006. Apparently, there are only two
such banknotes available in the world
today, with the only other known Red
Seal Grand Watermelon being stored
in the museum at the Federal Reserve
Bank of San Francisco.
105 Forum Views - April 2014
funds are here to stay.(Source:
http://artasiapacific.com,
http://www.artfundassociation.com/)
India’s potential for Art Funds
Currently, there are very few funds in
India, which invest in art. The number of
HNWIs in India grew 22% year-on-year
to 153,000 at the end of 2012, according
to the Asia-Pacific Wealth Report 2013.
Given the growing population of HNWIs
in India, which has strong appetite for
non-conventional investment avenues,
we may have more art funds in India, in
future. However, last year Sebi ordered
closure of Osian’s Art Fund, which can
potentially affect investor sentiment for
art funds.
serve to showcase them for the benefit of
the viewing public, a trait that is not
always shared by private collectors.
What does the future hold for Art
Funds?
The art fund industry is still in a nascent
stage and is continuing its efforts to
convince both the alternative investment
community and the art market that it can
produce attractive returns for its
investors while supporting the market in
which it participates. As the industry
continues to grow, it is important for art
fund managers to engage with the
broader art market in order to correct
any misperceptions in the market and
establish in no uncertain terms that art
• Size: Art funds have generally been
small in size, sayUSD10mn-100mn
range. The size of an art fund is
typically related to the particular
period(s) of art that the fund will
invest in.
• Duration: Art funds are generally
structured to have a fixed operating
term, with predefined time frames for
making art acquisitions (usually 3-4
years from the launch of the fund)
and for selling off the funds’ art
portfolio (usually 5-7 years from the
launch of the fund).
• Investment Focus: The first art funds
were fully diversified, covering works
of art across most of the primary art
markets, so as to minimize the impact
of adverse changes in one particular
market. However, the industry has
seen the development of funds that
focus on a single segment of the
market, such as American art or
Chinese contemporary art.
• Investment Strategies: While all art
funds follow a traditional "buy and
hold" strategy, art funds can differ
Access Economics rates banknotes as the
number one investment in Australia over
the past 10 years.The Australian
Financial Review quoted banknotes as
the "top earners", representing an
excellent way to diversify one’s
portfolio.The value of the One Pound
Riddle/Heathershaw Renniks 26
(R26) in un-circulated condition has
appreciated from $250 in 1989, to
$1,150 in 1998, and further to $11,500 in
2012 (source: www.johnpettit.com).
Back home, the Shivarai, a coin issued
by King Shivaji, is an ideal example of a
priceless, rare coin.
Investing in Art Funds
A growing interest in the art market has
led to the creation of new investment
products that invest in art and give a new
breed of investors exposure to the art
market.
What are Art Funds?
Art funds are investment funds dedicated
to the generation of returns through the
acquisition and disposition of works of
art. They are managed by a professional
art investment management firm, which
receives a fee and a portion of returns
delivered by the fund. Art funds are
offered privately to sophisticated and
financially capable investors and are not
open to investment by the general public.
The underlying characteristics of art
investment funds are diverse and vary
from fund to fund, in particular with
regard to the following:
Nitiin A. Khandkar is a senior Chartered
Accountant and the Founder of "Beyond Quant
Equity Research Training," an equity research
training firm based in Thané (Mumbai).
In his current role as Equity Research Trainer, Nitiin
offers:
1. A comprehensive Training Program in Equity
Research, aimed at fresh graduates (CAs / CFAs
/ MBAs). He also offers a Distance Learning
version of the training program to outstation /
overseas trainees. Nitiin has also trained and
mentored a few experienced analysts, with a
view to improve their skill sets.
2. An Advanced Training Program in Stock Market
Investments, aimed at non-finance
professionals who would like to learn the art of
bottom-up stock picking and avoid the pitfalls of
equity investing.
Prior to founding Beyond Quant Equity Research
Training, he had a multi-faceted career as head of
sell-side institutional research desks, and as a buy-
side analyst and PM in US equities. Nitiin has also
marketed Indian IPOs to foreign institutional
investors and private equity investors. Nitiin was
assigned the Best IPO Analyst Award for 2009 by
Zee Business. In the past, he has arranged one-on-
one institutional investor road shows for a few
listed companies. He has worked in India and
abroad.
In addition to training, Nitiin remains passionate
about equity investing, and currently manages
equity portfolios of his family. Nitiin also advises
start-ups/corporates on corporate strategy and
raising funds from VCs/PEs.