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Valuation_Final Assessment

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Valuation_Final Assessment

  1. 1. PORTFOLIO EXERCISE DEMONSTRATING THE PERFORMANCE OF CERTAIN WORKS AS INVESTMENT VEHICLES FOR THE YEARS 1996-2005 WITH COMPARISONS TO FINANCIAL MARKETS FOR THE SAME CALENDAR PERIOD SUBMITTED TO FULFIL REQUIREMENTS FOR SOTHEBY’S INSTITUTE OF ART – LONDON MAAB PROGRAMME 2005/06 ART MARKET VALUATION STUDENT 0068
  2. 2. SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 1 AUTHOR’S NOTE: UPON CONSULTATION WITH (AND SUBSEQUENT APPROVAL FROM) DR. IAIN ROBERTSON, DIRECTOR, MAAB PROGRAMME, I HAVE STRUCTURED THIS ASSIGNMENT AS A FICTIONAL EXCHANGE BETWEEN A NON- EXTANT ART ADVISORY FIRM AND AN EQUALLY FICTITIOUS HIGH NET-WORTH CLIENT. ALL DATA PRESENTED IS FACTUAL AND IS DULY CITED. ANY RESEMBLANCE TO ANY PERSON(S), LIVING OR DEAD, IS PURELY COINCIDENTAL.
  3. 3. 30-31 Bedford Square / Bloomsbury / London WC1B 3EE / United Kingdom T: 44+020.123.456.789 F: 44+020.123.456.790 1330 Connecticut Ave. NW / Washington DC 20036-1704 / USA T: 1+202.555.7890 F: 1+202.555.7891 12 May 2006 Dr. Harlan Ellison 10 Decoctor Way Greenwich, CT 06830 Dear Dr. Ellison, It was good to hear from you so soon after the holidays. I hope that you and yours are doing well and enjoying the best of the New Year. Per your request, deltaAXIS LLP is providing a detailed analysis of certain key works of art that were sold by our firm on your behalf within the last year. In your attempt to streamline your investments and prepare for your pending retirement from New York University, this report highlights some of our more prominent successes in your portfolio. We have chosen six works that fall roughly into a ten-year time span from date of acquisition to date of sale. While your sizable collection reflects an interest in a variety of genres/sectors, we have focused on Modern US Paintings (1945-75) and Rare Books/ Manuscripts to best illustrate to you the performance of your investments over time. Should you decide to reinvest any/all of the proceeds from these and other sales, we believe these to be among the best sectors to pursue in terms of risk and projected rate of return. The state of the art market has never been stronger, with auction houses reporting record sales for the calendar year 2005, and attendance to the major art fairs has never been higher. This bodes well for the perceptive investor who may be looking to art for an alternative to the more traditional securities instruments. Please feel free to contact me or any of my staff with any questions or concerns you may have regarding this report. Thank you for choosing deltaAXIS LLP for all of your art investment and advisory needs. Sincerely yours, Morris G. Newman Vice-President, Client Services North American Office ΔΔAAXXIISSLLLLPP ffiinnee aarrtt aaddvviissoorryy sseerrvviiccee Investments Collection Management Conservation Storage / Shipping Insurance
  4. 4. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 TABLE OF CONTENTS PERFORMANCE OF SELECTED WORKS FROM PORTFOLIO EXHIBIT A: MODERN US PAINTINGS (1945-75) OBJECT A1 – JOSEF ALBERS, HOMAGE TO THE SQUARE (GREEN TENSION) OBJECT A2 – ALEXANDER CALDER, UNTITLED (PAIR OF GOLD CUFFLINKS) OBJECT A3 – CY TWOMBLY, RAMIFICATION, 1971 EXHIBIT B: RARE BOOKS/MANUSCRIPTS OBJECT B1 – BESLER, BASILIUS. HORTUS EYSTETTENSIS, SIVE DILIGENS ET ACCURATA OMNIUM PLANTARUM, FLORUM, STIRPIUM, EX VARRIIS ORBIS TERRAE PARTIBUS[…] OBJECT B2 – HAMILTON, SIR WILLIAM. CAMPI PHLEGRAEI, OBSERVATIONS ON THE VOLCANOS OF THE TWO SICILIES AS THEY HAVE BEEN COMMUNICATED TO THE ROYAL SOCIETY OF LONDON. [WITH:] SUPPLEMENT[...] OBJECT B3 – AMERICAS [VISSCHER, NICOLAES II] OUTLOOK FOR THE FUTURE EXHIBIT C: CONCLUDING REMARKS APPENDICES I. SUPPORTING CHARTS & TABLES II. PRICE HISTORY OF WORKS III. MARKET DATA USED IN THIS REPORT IV. ARTIST DATA USED IN THIS REPORT BIBLIOGRAPHY
  5. 5. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 PERFORMANCE OF SELECTED WORKS FROM PORTFOLIO EXHIBIT A: MODERN US PAINTINGS (1945-75) We are truly pleased with the results of our sale, via Sotheby’s, of the works in your portfolio representing Modern US Paintings, 1945-75. The three works highlighted here best represent the sound investment decision made by our selective purchasing in the mid-1990s of pieces from this sector. While each of the artists presented demonstrates a wide range of investment characteristics over the past ten years, we believe them to be prudent in any discussion of the potential found in the art market. In this section of the report, we will discuss the actual performance of this sector as a whole in relation to other potential investment arenas for the years 1996-2005. In citing both internal and external factors unique to the art market, we hope to present a clearer picture of the mechanisms behind the figures. Included with this are analyses of investment risk in this and other markets, paying particular attention to the ability these works have shown in outperforming inflation1. Concluding this section is a brief summary of the actual highlighted works and their sales history for the same period. A more than cursory examination of the three artists shown in this sector is included to demonstrate the differences – both subtle and direct – that can occur within a single sector of the art market. This is no more evident than in Modern US Paintings. The next section of the report will give the same consideration and analysis of the other highlighted sector in your portfolio – Books and Manuscripts. To conclude, an attempt is made to divine the 1 All figures and data in this report are in USD ($); subsequently, data for inflation is taken directly from US Government sources. The only exception is the indexing of the commodity market for gold. For these figures, we have turned to the London market for data, as it represents the largest volume of trading in this sphere, thereby presenting a more accurate picture of its performance.
  6. 6. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 2 future for both of these sectors in the art market and their continued potential for investment. SECTOR ANALYSIS The sector of Modern US Paintings 1945-1975 is difficult to pin down as far as investment potential is concerned. On one hand, some of the greatest prices for art were achieved in recent years with art from this particular sector of the market, with 2005 being no exception. According to a leading art market researcher, three of the top ten artists at auction for 2005 were in this sector – Andy Warhol (2), Mark Rothko (5), and Willem de Kooning (7). (Artprice 2006: 16-18) These rankings and sometimes astronomical auction prices overshadow a fact often overlooked by those who simply buy art in the hope of its appreciating in value. This is perhaps the most volatile – in terms of investment – sectors in the art market today. When compared with other sectors of the market, time “has not tested the strength of its artists’ price indexes.” (Artprice 2006) Our own analysis of the sector in comparison to other financial markets bears this out. In addition, we have undertaken an analysis of the three artists from this sector represented in your portfolio – Josef Albers, Alexander Calder, and Cy Twombly. All have produced works that buck the trend in post-war American art and defy the assumption of volatility in that sector. We would first like to turn your attention to Modern US Paintings and its performance when viewed against other financial markets. By indexing market data from 1996-2005, we have established evidence to indicate that the pundits are right – at least in regards to the sector’s volatility. However, the sector easily outpaces two
  7. 7. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 3 disparate other markets in terms of value (App. I, Chart 2). In fact, the annualised rate of return (ARR) for the years 1996-2005 in Modern US Paintings outpaces both the S&P 500 and Gold Indexes by 29.87% and 77.23%, respectively (App. I, Chart 6). Assuming one could invest in this sector of the market as a whole2, the risk is great. This is in keeping with their rate of return. Our analysis shows the volatility of this sector to be among the highest we have seen with a standard deviation (the industry standard for measuring risk in any given investment by observing past performance) of 5.11%, well above the figure computed for the S&P 500 and Gold (App. I, Chart 5). INDIVIDUAL ARTISTS IN PORTFOLIO As stated before, the elements of your portfolio represented in this sector exceed all expectations in relation to the sector in all aspects of our analysis. We have examined each piece sold by our firm at auction on your behalf and produced a brief insight into the mechanisms behind this astounding performance. Our first in your portfolio to come up for auction was Homage to the Square (Green Tension), by Josef Albers. We first acquired this work for you at auction in 1997 for $33,014. In November, it fetched a respectable $200,000 at Sotheby’s Contemporary Art Morning Sale. Adjusting for inflation, this represents a net gain of almost $160,000, giving you a 497.86% return on your investment. This represents a Compound Annual Growth Rate (CAGR) of 22.22% over the 8-year period you owned the piece. 2 While it is not possible to invest in a fund that tracks the performance of any given sector of the art market (cf. SPDR – the fund that tracks the S&P 500 and invests accordingly), it is useful to establish the position of the sector in relation to other potential investments for purely illustrative purposes. Later discussion of individual artists’ performance is more indicative of performance over a given period of time.
  8. 8. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 4 These results are entirely in keeping with our research into Josef Albers’ works and their performance in the marketplace. Recent exhibitions at several major galleries and museums have brought his works to the forefront of the art world’s consciousness and his work has been performing especially well in the last two years (App. I, Chart 3). The ARR on his work is also worthy of attention. Over the last ten years, his works have netted a return of 132.37%. Compared again with other markets, this is phenomenal growth in an artist from the post-war period (App. I, Chart 6). The next artist in your portfolio presents similar results. While more widely known for his large mobiles that grace practically every major museum of modern art in the world, Alexander Calder also made jewellery in the latter part of his career. The purchase of Untitled (Pair of Gold Cufflinks) in the summer of 1996 is a testament to both your taste and eye for the future. No one piece in your portfolio saw such a dramatic return on your investment, with a net return of 960.53% from an initial investment of $2,863 USD (adjusted for inflation). This represents a CAGR of 28.58% over the ten-year period in was in your portfolio, well ahead of artwork examined in this report. Comparing with an overall CAGR of 12.5% for his entire market performance over the same period, this bodes well for his lesser-known œuvre. Of the three artists in this sector within your portfolio, Calder proves to be the most historically promising. With a total rate of return of 120.04% over the ten-year period 1996-2005, and a standard deviation of only 1.71% (App. I, Charts 6 & 5, respectively), his works represent the greatest rate of return with the lowest risk. This can be understood if one looks at the prominence of the artist in the public
  9. 9. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 5 consciousness among both connoisseurs and those who are not so familiar with his work. His name embodies a “mythic status” among American artists (Benhamou- Huet 2001: 53), thereby enhancing his status within the marketplace. His omnipresence in most major museums has already been commented upon; it is perhaps the scale of these works that so firmly fixes his name in the canon of American art. A somewhat different picture emerges upon examination of the final post- war artist in your portfolio, Cy Twombly. Somewhat of an enigma during his long- spanning career, Twombly’s works are often met with more questions than solutions. Your recently divested piece, Ramification, is no exception. In his signature ‘stream of consciousness’ style, Twombly created a work of unusual depth and understatement. The art market seems to agree; it was snapped up at auction for a healthy $260,000 USD. This represents an inflation-adjusted return of 450.86% and a healthy CAGR of 16.25% for the period of holding. Upon closer analysis, Twombly’s performance in the art market is as contentious as the reaction his work often elicits. As a whole, for the years 1996-2005, Twombly’s risk one of the highest figures for any of the examined sectors, markets, or artists with a standard deviation of 4.06%. While this may, at first glance, seem high, it still represents a slightly lower risk than the S&P 500 (App. I, Chart 5). It is only in the last two years, that his overall index has overtaken the S&P 500 (App. I, Chart 3). This risk is not without reward. Our analysis shows both the highest Total Rate of Return and CAGR of any examined market, sector, or artist in this report – 142.79% and 14.23%, respectively (App. I, Charts 6 and 4).
  10. 10. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 6 SECTOR/ARTIST PERFORMANCE VS. INFLATION In all respects, the artists from the US Modern Paintings all outperform inflation for the period 1996-2005. Evidence from our examination shows these artists to be unrepresentative of their sector. For purposes of comparison, our analysts created a model to demonstrate this fact. Given a $1000 USD initial investment over the ten- year period 1996-2005, all of our artists produce a final figure well in excess of inflation and its related investment vehicles, such as bonds (App. I, Chart 8). These investments still represent a safe way for a guaranteed rate of return over time, but in no way do they match the results of fine art as demonstrated in our calculations. As is often said, the higher the risk, the higher the return. Reasons for this outperforming of inflation are hard to divine. It is possible that the current growth of the global economy has led to an overall increase across all asset classes. As investors may still be wary of investing in the equity markets after the dotcom bubble burst in the early part of the century, alternative asset classes may present a new way for the returns sought after by the investing public. As this demand increases and more players enter the market, the natural inclination is for prices to rise. The strength of the current portfolio under analysis shows that it beats inflation for all the years under examination, except 2000, the year of the aforementioned bust (App. I, Chart 9).
  11. 11. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 7 OBJECT A1 – JOSEF ALBERS, HOMAGE TO THE SQUARE (GREEN TENSION) DATE OF ORIGINAL PURCHASE 11 December 1997 PURCHASE PRICE $33,014 DATE OF SALE 10 November 2005 SALE PRICE $200,000 ADJUSTED PURCHASE PRICE3 $40,172 PERCENTAGE GAIN/LOSS 497.86% COMPOUND ANNUAL GROWTH RATE (SEE NOTES FOR APPENDIX III) 22.22% 3 Adjusted Purchase Price reflects the original purchase price, adjusted for inflation, calculated using the Federal Reserve Bank of Minneapolis Consumer Price Index Calculator.
  12. 12. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 8 OBJECT A2 – ALEXANDER CALDER, UNTITLED (PAIR OF GOLD CUFFLINKS) DATE OF ORIGINAL PURCHASE 07 June 1996 PURCHASE PRICE $2,300 DATE OF SALE 10 November 2005 SALE PRICE $27,500 ADJUSTED PURCHASE PRICE $2,863 PERCENTAGE GAIN/LOSS 960.53% COMPOUND ANNUAL GROWTH RATE (SEE NOTES FOR APPENDIX III) 28.58%
  13. 13. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 9 OBJECT A3 – CY TWOMBLY, RAMIFICATION, 1971 DATE OF ORIGINAL PURCHASE 16 November 1995 PURCHASE PRICE $45,000 DATE OF SALE 10 November 2005 SALE PRICE $260,000 ADJUSTED PURCHASE PRICE $57,667 PERCENTAGE GAIN/LOSS 450.86% COMPOUND ANNUAL GROWTH RATE (SEE NOTES FOR APPENDIX III) 16.25%
  14. 14. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 10 PERFORMANCE OF SELECTED WORKS FROM PORTFOLIO EXHIBIT B: RARE BOOKS/MANUSCRIPTS It is in the analysis of this sector within your portfolio that caused the most excitement amongst our team of analysts. While we could not perform as rigorous an assessment on these works, we believe that our results will still show that Books/Manuscripts represents a strong choice for fine art investing, albeit for different reasons. Data on this often overlooked sector of the art market is hard to come by, with most of the focus placed upon modern first editions and works of more obvious historical importance. The unique nature of each of the pieces represented in your portfolio also created its own set of difficulties, as both of the books are singular in their condition and presentation without being solitary in their origin. Multiple editions exist for each with varied conditions and provenance affecting their overall value. The work by Sir William Hamilton best demonstrates this premise. Your copy, which according to our records, is an inheritance from your great-uncle, the Rev. John Tewkesbury, does not have an established provenance that could potentially elevate its value. The same work sold for just over $133,000 USD at an auction in 2001 (Sotheby’s 2001: 89-90, with gatefold). As a result, Hamilton’s work was the lowest performer on the auction block in this sector. The other two works greatly exceeded their presale estimates by an astonishing percentage, with the Visscher map selling for $260,000 USD, 278.4% over its presale maximum estimate of $68,704 USD. The Besler volume, with its now iconic botanical images performed almost as well. Selling for $249,052 USD, 61.1%
  15. 15. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 11 over its presale maximum estimate of $151,584 USD, Hortus Eystettensis...was the star of the auction. While not achieving the highest sale price, our attendance at the auction and its preview allowed us to witness firsthand the excitement that this work brought to the marketplace. SECTOR PERFORMANCE VS. OTHER MARKETS AND INFLATION It is in the analysis of this sector compared to other markets that the most surprising data emerges. Over the period 1996-2005, Books/Manuscripts shows the lowest risk compared to all other markets, sectors, and artists, 0.37%. The only artist that comes remotely close to matching this low of a risk is Alexander Calder. This low risk would lead the casual observer to conclude that returns were in kind, low but consistent. This could not be further from the truth. Both CAGR and total rate of return for the sector outperform the other markets included in our analyses, Gold and the S&P 500 (App. I, Charts 4 and 6). Its correlation to the S&P 500 presents a value of 0.18, the highest value for any examined sector or artist in this report. This positive correlation indicates a closer relation to the results found in the more traditional equity market (See Apps. III & IV). Our assessment of Books/Manuscripts as a sector when compared to inflation proved to be just as telling (App. I, Charts 7 & 8). Results of our analysis show a constant return greater than produced by those equities that either index to inflation.
  16. 16. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 12 OBJECT B1: BESLER, BASILIUS. HORTUS EYSTETTENSIS, SIVE DILIGENS ET ACCURATA OMNIUM PLANTARUM, FLORUM, STIRPIUM, EX VARIIS ORBIS TERRAE PARTIBUS, SINGULARI STUDIO COLLECTARUM, QUAE IN CELEBERRIMIS VIRIDARIIS ARCEM EPISCOPALEM IBIDEM CINGENTIBUS, HOC TEMPORE CONSPICIUNTUR, DELINEATIO ET AD VIVUM REPRAESENTATIO. [NUREMBERG]: 1613 DATE OF ORIGINAL PURCHASE N/A PURCHASE PRICE N/A DATE OF SALE 17 November 2005 SALE PRICE $249,052 PRE-SALE ESTIMATE (MINIMUM) $120,232 PRE-SALE ESTIMATE (MAXIMUM) $154,584 PERCENTAGE BY WHICH FINAL HAMMER PRICE BEAT ESTIMATES 107.1% / 61.1%
  17. 17. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 13 OBJECT B2: HAMILTON, SIR WILLIAM. CAMPI PHLEGRAEI. OBSERVATIONS ON THE VOLCANOS OF THE TWO SICILIES AS THEY HAVE BEEN COMMUNICATED TO THE ROYAL SOCIETY OF LONDON. [WITH:] SUPPLEMENT TO THE CAMPI PHLEGRAEI BEING AN ACCOUNT OF THE GREAT ERUPTION OF MOUNT VESUVIUS IN THE MONTH OF AUGUST 1779. NAPLES: [FOR PETER FABRIS], 1776-1779 DATE OF ORIGINAL PURCHASE N/A PURCHASE PRICE N/A DATE OF SALE 17 November 2005 SALE PRICE $51,528 PRE-SALE ESTIMATE (MINIMUM) $42,940 PRE-SALE ESTIMATE (MAXIMUM) $51,528 PERCENTAGE BY WHICH FINAL HAMMER PRICE BEAT ESTIMATES 20.0% / -
  18. 18. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 14 OBJECT B3: AMERICAS [VISSCHER, NICOLAES II] DATE OF ORIGINAL PURCHASE N/A PURCHASE PRICE N/A DATE OF SALE 17 November 2005 SALE PRICE $260,000 PRE-SALE ESTIMATE (MINIMUM) $60,116 PRE-SALE ESTIMATE (MAXIMUM) $68,704 PERCENTAGE BY WHICH FINAL HAMMER PRICE BEAT ESTIMATES 332.5% / 278.4%
  19. 19. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 15 OUTLOOK FOR THE FUTURE EXHIBIT C: CONCLUDING REMARKS All investments present a risky proposition to the investor. Nowhere is this more evidenced than when one decides to invest in fine art. Recent years have seen an unprecedented boom in the sales of fine art, with a turnover of $4 billion USD in 2005, outpacing the record set the year before of $3.6 billion USD (Artprice 2006). The factors contributing to this growth are not as easy to pin down as are comparative figures in other markets. Whereas stocks and other equity investments are a homogenous product, each capable of being analysed on its respective merits, fine art defies this type of examination4. Other anomalies found in this attempt to examine art as a bona fide investment category include transaction costs, lack of positive dividend generation, and lack of long-term equilibrium pricing (Sagot- Duvauroux 2003: 57 and Ashenfellter & Graddy 2004: 19). There is a guarded sense of interest in seeking to exploit the art market as a potential source of wealth creation for investors. Phillip Hoffman’s Fine Art Fund is a singular example in today’s marketplace of investment opportunities. Currently in the process of setting up a second fund to match the performance of his first successful attempt, Mr. Hoffman remains the sole player in a market that is slowly gaining momentum. In a recent lecture to business students at a leading London postgraduate institution, he indicated that of the 18 funds similar to his, only he (and 4 This is not to say that it has not been attempted. In a recent essay, noted German sociologist Olav Velthuis attempts to construct a paradigm for determining the values of contemporary art in both Amsterdam and New York by combining elements of economic and sociological modeling techniques. While not conclusive, it does manage to underscore the difficulty in understanding what, if any, definitive mechanisms can be ascribed to the process. (cf. Velthuis 2003)
  20. 20. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 16 possibly 2-3 others) had managed to survive and prosper. This would seem to indicate a concept in its nascence, with the accompanying birthing pains. In a related move, London-based Barclay’s Bank PLC included a section on the potential for art as an investment in their Barclay’s Capital Gilt Report 2005. Alongside other lucrative investment categories, fine art was given a thorough analysis that reached the conclusion that it represented a good investment potential with some caveats attached. Firstly, fine art, unlike equity investments, requires a substantially longer ‘holding period’ in order to maximise returns and lessen risk. This long period was also emphasised as a means to hedge against inflation, based upon their research. (Kochugovindan 2005) The exact length of this time period remains a matter for conjecture and debate. The analysts at Barclay’s indicate a minimum of 10 years for a portfolio to outperform other markets and inflation in an appreciable way. Some critics even assign a minimum of 35 years for one to see appreciable results. (Adam 2005: 54) Another international financial services giant, ABN-AMRO, has looked at the potential to be found in fine art funds as an investment vehicle and reached many of the same conclusions, albeit with a slightly more cautious tone. They emphasise the inherent problems of liquidity – art cannot be ‘spot traded’ in the same way that equities can along with issues surrounding historical performance and potential conflicts of interest. They conclude by stating that “From an investment perspective the highly volatile nature of the Art market leads us to maintain a positive however somewhat lower allocation into the Art market than the results would suggest given the returns over the previous 40 years. A second line of caution lies in the more long-term nature of the Art
  21. 21. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 17 market. High volatility stems from the whimsical nature of the Art market...” (ABN-AMRO 2005: 13, emphasis mine) It is only a matter of time before other players in the field look to diversify their clients’ portfolios with the addition of fine art funds, with no attention paid to whimsy, perceived or otherwise. That being said, it becomes apparent that a more thorough methodology is needed to assess the state of the market and its pricing. Currently, all indexes used by professionals to gauge the performance of fine art are limited by the source and scope of their data. While some, such as the Mei-Moses Index, utilise analysis of repeat sales of works, others such as Art Market Research and Art Net use hedonic pricing models to determine the values of their indexes. By no means do these indexes include all of the art sold in a given period by a particular artist. The only publicly available price data is that of auction sales (Guerzoni 2005: 54). Prices of works sold privately through art dealers, galleries, or agents are not available for analysis as those sales figures are now, and likely to remain, private transactions. These indices also come under scrutiny for their seeming fixation on only including paintings, which only account for 30% of overall art sales in any given period (Ibid). Comparing this finding to other markets and their respective indices suggests that this practice is akin to only looking at pharmaceutical companies and software giants when gauging the performance of the NASDAQ, FTSE, or S&P 500. The overall consensus seems to indicate an inclusion of fine art in any well- diversified portfolio. Accompanying the more traditional investment sectors of equities, bonds, and commodities, the high-risk nature of the market for fine art can
  22. 22. Personal and Confidential – Dr. Harlan Ellison Valuation Report SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 18 help to increase overall portfolio returns, while providing certain intangible returns these steadfast contenders cannot. Psychological aspects of aesthetic appreciation and the contribution to society via the loan value of such works are just two of these intangibles given credence by experts in the field (Grampp 1989: 153 and Worthington & Higgs 2004: 264). A result of “complex interactions that can usually not be explained by economic theory (such as) the name of an artist...reactions of dealers, critics, museum directors, art historians, collectors, and investors” (Ginsbugh 2003: 40), the art market remains an exciting, and potentially hazardous, place for investment. Rewarding the investor who has the practical understanding and the knowledge to navigate its largely uncharted terrain successfully with returns that meet or exceed those in other markets can provide a hedge against the ever-present threat of inflation. The explosive increase in turnover in recent years has made the art market more lucrative than ever, with no readily apparent signs of slowing down. Once again, the sale of a Picasso masterpiece has attracted the world’s attention. With a hammer price in excess of $90 million USD coming off a pre-sale estimate of $40-50 million USD, it well exceeded everyone’s expectations. This can do nothing but improve the position of the art market in the eyes of investors. In the diversification of a portfolio, fine art investment looks to be a sensible and rewarding choice, one that will only get better with time and further developments to make it increasingly attractive to a wider range of investors. Far from being the “unnatural couple [with] marital infighting” (Benamou-Huet 2001: 121), it could prove to be a marriage made in heaven, for collectors, investors, and artists alike.
  23. 23. SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 APPENDICES I. SUPPORTING CHARTS & TABLES CHART 1 – THE MARKET FOR BOOKS/MANUSCRIPTS VS. THE GOLD MARKET, S&P 500, AND US CPI, 1996-2005 CHART 2 – THE MARKET FOR MODERN US PAINTING 1945-75 VS. THE GOLD MARKET, S&P 500, AND US CPI, 1996-2005 CHART 3 – ART MARKET PERFORMANCE OF SECTORS/ARTISTS IN PORTFOLIO VS. S&P 500, 1996-2005 CHART 4 – COMPOUND ANNUAL GROWTH RATE COMPARISON - INCLUDED SECTORS /ARTISTS VS. OTHER MARKETS (1996-2005) CHART 5 – RISK ANALYSIS AND COMPARISON (STANDARD DEVIATION) / ALL INCLUDED SECTORS/ARTISTS AND OTHER MARKETS (1996-2005) CHART 6 – COMPARISON OF TOTAL RATE OF RETURN FOR ALL INCLUDED SECTORS/ARTISTS AND OTHER MARKETS (1996-2005) CHART 7 – YEARLY RETURNS FOR INCLUDED ARTISTS / SECTORS VS. US YEARLY RATE OF INFLATION CHART 8 – HYPOTHETICAL $1000 INVESTMENT FOR THE YEARS 1996-2005 / US INFLATION RATE (μ) VS. ALL INCLUDED ARTISTS/SECTORS AND S&P 500 INDEX CHART 9 - COMPARISON OF ELLISON PORTFOLIO VS. THE US CPI AND THE S&P 500 FOR THE YEARS 1996-2005 TABLE 1 – HISTORICAL US RATE OF INFLATION (JAN 96 – DEC 05) TABLE 2 – HISTORICAL US CONSUMER PRICE INDEX (CPI) (JAN 96 – DEC 05) II. (A) PRICE HISTORY OF WORKS (US MODERN PAINTING 1945-75) (B) PRICE HISTORY OF WORKS (BOOKS/MANUSCRIPTS) III. MARKET DATA USED IN THIS REPORT IV. ARTIST DATA USED IN THIS REPORT
  24. 24. SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 Source: Art Net™/The Price Database, Accessed 08 April 2006 APPENDIX II(B) – Price History of Works (Books/Manuscripts) Basilius Besler Title HORTUS EYSTETTENSIS, SIVE DILIGENS ET ACCURATA OMNIUM PLANTARUM, FLORUM, STIRPIUM, EX VARIIS ORBIS TERRAE PARTIBUS, SINGULARI STUDIO COLLECTARUM, QUAE IN CELEBERRIMIS VIRIDARIIS ARCEM EPISCOPALEM IBIDEM CINGENTIBUS, HOC TEMPORE CONSPICIUNTUR, DELINEATIO ET AD VIVUM REPRAESENTATIO. [NUREMBERG] Year 1613 Sale Of Sotheby's London: Thursday, Nov 17, 2005 [Lot 60] Valuable Printed Books: Natural History, Travel, Atlases, Continental books & Manuscripts Estimate £70,000 - £90,000 Sold For £170,400 / $292,679 PREMIUM (£145,000 / $249,052 HAMMER) Sir Alexander Hamilton Title CAMPI PHLEGRAEI. OBSERVATIONS ON THE VOLCANOS OF THE TWO SICILIES AS THEY HAVE BEEN COMMUNICATED TO THE ROYAL SOCIETY OF LONDON. [WITH:] SUPPLEMENT TO THE CAMPI PHLEGRAEI BEING AN ACCOUNT OF THE GREAT ERUPTION OF MOUNT VESUVIUS IN THE MONTH OF AUGUST 1779. NAPLES: [FOR PETER FABRIS] Year 1776-1779 Sale Of Sotheby's London: Thursday, Nov 17, 2005 [Lot 106] Valuable Printed Books: Natural History, Travel, Atlases, Continental books & Manuscripts Estimate £25,000 - £30,000 Sold For £36,000 / $61,834 PREMIUM (£30,000 / $51,528 HAMMER) Nicholaes Visscher II Title Americas Year c. 1710 Sale Of Sotheby's London: Thursday, Nov 17, 2005 [Lot 210] Valuable Printed Books: Natural History, Travel, Atlases, Continental books & Manuscripts Estimate £35,000 - £40,000 Sold For $296,000 PREMIUM ($260,000 HAMMER)
  25. 25. SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 Source: Art Net™/The Price Database, Accessed 08 April 2006 APPENDIX II(A) – Price History of Works (US Modern Painting 1945-75) Josef Albers Title Green tension Year 1951 Medium Oil on Masonite Size 24 x 24 in. / 61 x 61 cm. Misc. Signed, Inscribed Sale Of Sotheby's New York: Thursday, Nov 10, 2005 [Lot 145] Contemporary Art / Morning Estimate $100,000 - $150,000 Sold For $228,000 PREMIUM ($200,000 HAMMER) Title Homage to the Square: Green tension Year 1951 Medium Oil on Masonite Size 24 x 24 in. / 61 x 61 cm Misc. Signed, Inscribed Sale Of Sotheby's London: Thursday, December 11, 1997 [Lot 152] Contemporary Art - Part II Estimate £20,000 - £25,000 BP ($33,540 - $41,925) Sold For £23,000 ($37,966) PREMIUM (£20,000/$33,014 HAMMER) Alexander Calder Title Untitled (Pair of gold cufflinks) Year 1945 - Medium gold Size 1.3 x 0.7 in. / 3.2 x 1.9 cm. Sale Of Sotheby's New York: Thursday, Nov 10, 2005 [Lot 102] Contemporary Art / Morning Estimate $8,000 - $12,000 Sold For $33,000 PREMIUM ($27,500 HAMMER) Title Cufflinks Medium Sculpture gold Size 1.3 x 0.7 in. / 3.2 x 1.9 cm. Sale Of Sotheby's Arcade: Friday, June 7, 1996 [Lot 249] Modern & Contemporary Paintings Estimate $1,000 - $2,000 Sold For $2,587 PREMIUM ($2,300 HAMMER) Cy Twombly Title Ramification Year 1971 Medium oil, pencil, collage and oilstick on paper Size 33.3 x 27.2 in. / 84.5 x 69.2 cm. Misc. Signed Sale Of Sotheby's New York: Thursday, Nov 10, 2005 [Lot 200] Contemporary Art / Morning Estimate $250,000 - $350,000 Sold For $296,000 PREMIUM ($260,000 HAMMER) Title Ramification Year 1971 Medium Oil on Paper w/pencil & oilstick on paper collage Size 33.3 x 27.2 in. / 84.5 x 69.2 cm. Misc. Signed Sale Of Sotheby's New York: Thursday, Nov 16, 1995[Lot 193] Contemporary Art Part II Estimate $45,000 - $65,000 Sold For $51,750 PREMIUM ($45,000 HAMMER)
  26. 26. SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 BIBLIOGRAPHY BOOKS/JOURNALS/PERIODICALS ABN-AMRO. (2005) ABN-AMRO Bank N.V. Art Funds Initiative: 2005 Global Road Show. ADAM, GEORGINA. (2005) ‘You can make money on art, but only after 35 years.’ The Art Newspaper, n157, April 2005, p. 54 ARTPRICE. (2006) Art Market Trends 2005. Paris: Artprice ARTPRICE.COM (2006) ‘A peak in the art market in 2005?’ [Internet] http://web.artprice.com/AMI/AMI.aspx?id=MDg0Mzg0MjcxNTQ3OTk=&1=en. Viewed 15 March 2005. ASHENFELTER, ORLY & GRADDY, KATHRYN. (2004) Art Auctions. [Distributed Reading for Valuation Strand/Sotheby’s Institute of Art-London, MAAB Course 2005-06] BARCLAY’S BANK PLC. (2005) Barclay’s Capital Gilt Report 2005. London: Barclay’s Bank PLC BENHAMOU-HUET, JUDITH. (2001) The Worth of Art: Pricing the Priceless. New York: Assouline GINSBURGH, VICTOR A. (2003) ‘Art Markets.’ In TOWSE, RUTH. (ed.) (2003) A Handbook of Cultural Economics. Cheltenham, United Kingdom: Edward Elgar Publishing, Ltd., pp. 40-56 GRAMPP, WILLIAM D. (1989) Pricing the Priceless: Art, Artists, and Economics. New York: Basic Books GUERZONI, GUIDO. (2005) ‘Analyzing the price of art: what the indices do not tell you.’ The Art Newspaper, n157, April 2005, p. 54 HEILBRUN, J. & GRAY, C.M. (1999) The Economics of Art and Culture. New York: Cambridge University Press HOPE, ALEXANDER. (2005) ‘The nature of supply and demand in the Old Master picture market.’ In ROBERTSON, IAIN. ed. (2005) Understanding International Art Markets and Management. London: Routledge, pp. 195-213 KOCHUGOVINDAN, SREEKALA. (2005) ‘Stocks, Bonds...or Art?’ In BARCLAY’S BANK PLC. (2005) Barclay’s Capital Gilt Report 2005. London: Barclay’s Bank PLC, pp. 61-71
  27. 27. SIAL MAAB Programme 2005/06 Art Market Valuation Final Assessment Student 0068 ROBERTSON, IAIN. ed. (2005) Understanding International Art Markets and Management. London: Routledge SAGOT-DUVAUROUX, DOMINIQUE. (2003) ‘Art prices.’ In TOWSE, RUTH. (ed.) (2003) A Handbook of Cultural Economics. Cheltenham, United Kingdom: Edward Elgar Publishing, Ltd., pp. 57-63 SOTHEBY’S. (2005) Contemporary Day Sale, New York: 10 November 2005, 10:15 AM SOTHEBY’S. (2005b) Valuable Printed Books: Natural History, Travel, Atlases, Continental Books & Manuscripts, London: 17 November 2005 SOTHEBY’S. (2001) The Magnificent Scientific Library of Joseph A. Freilich, January 10, 2001 SOTHEBY’S. (1997) Contemporary Art - Part II, London: Thursday, December 11, 1997 SOTHEBY’S. (1995) Contemporary Art Part II, New York: Thursday, November 16, 1995 TOWSE, RUTH. (ed.) (2003) A Handbook of Cultural Economics. Cheltenham, United Kingdom: Edward Elgar Publishing, Ltd. VELTHUIS, OLAV. (2003) ‘Symbolic meanings of prices: Constructing the value of contemporary art in Amsterdam and New York galleries.’ Theory and Society. April 2003, v32 n2, pp. 181-215 WORTHINGTON, ANDREW C. & HIGGS, HELEN. (2004) ‘Art as an investment: risk, return, and portfolio diversification in major painting markets.’ Accounting & Finance. July 2004, v44 i2, pp. 257-271 ONLINE DATABASES ART MARKET RESEARCH – http://www.artmarketreport.com ART PRICE DATABASE (ARTNET) – http://artnet.com ART SALES INDEX – http://artauctionresults.com US BUREAU OF LABOR STATISTICS – http://data.bls.gov FEDERAL RESERVE BANK OF MINNEAPOLIS: CONSUMER PRICE INDEX CALCULATOR – http://minneapolisfed.org/research/data/us/calc/ SOTHEBY’S ONLINE CATALOGUES – http://search.sothebys.com

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