post gazette, August 22, 2005
'Art funds' starved for investors
By Marcus Baram, The Wall Street Journal

Art prices are dazzling collectors these days, but the market for investment funds that buy and sell art is looking gloomier than El Greco's "View of Toledo."

During the past two years, art-auction sales revenue at Christie's International PLC and Sotheby's Holdings Inc. has increased 80 percent. The recent jump in prices prompted the launching of several art-investment funds, which pool investors' money to purchase artworks and sell them, hopefully for a profit. Last fall, art-fund entrepreneurs predicted that there would be as many as 30 such funds by the end of 2005.

The trouble is, not enough people are interested in pulling their money out of hedge funds, mutual funds and stocks to invest in more-impressionistic endeavors.

The latest fallout: ABN Amro Holding NV, the Dutch financial conglomerate, has abandoned its ballyhooed plan to create an umbrella fund that would invest money in a range of art-investment funds, people familiar with the matter said. Last September, ABN organized an art-investment advisory group and hired Seymour Management, a London-based art firm, to determine which funds around the globe were worth including in its "fund of funds."

Seymour found several, but only one that was actually buying and selling stuff.

"There were too many funds that were having trouble lining up any investors," says Spencer Ewen, managing director of Seymour Management. "You can't do a fund of funds if there's only one fund."

So ABN Amro has decided to scale back to concentrate on advising private clients in their art purchases. The fate of the advisory group is under review.

The experience of Peter Hastings Falk, who runs Hastings Art Management in Madison, Conn., shows how tricky the mission can be. He set up the American Art Fund in 2001 and planned to raise $100 million to acquire undervalued U.S. works. He met with bankers from companies like Citigroup Inc. and with wealthy collectors but was unable to raise enough money to get going.

It was a Catch-22, Mr. Falk says: He couldn't attract investors without backing from a financial institution, but banks wanted to see some interested investors first. That's "where we've been for the last few years," says Mr. Falk. He scaled back his fund-raising goals to $20 million and, having exhausted his own contacts in search of money, plans to start making "cold calls."

The Collectors Art Fund, based in Gstaad, Switzerland, was launched at the beginning of the year to raise $200 million to invest in contemporary and modern pieces. It has scaled back its goal to $50 million. "The art-investment idea is a very good one, but having to communicate that to investors is very difficult," says Frank Schuller, its chairman. "It's a bit like diving into the black hole, and you don't know whether you'll come out the other side."

London's Fine Art Fund says its an exception to the trend. Director Philip Hoffman, a former Christie's executive, wouldn't disclose how much the fund has raised, but he says it has been meeting its goal of reselling art for a 10 percent to 15 percent return since it started buying in July 2004.

For investors, "there's a learning curve, just like (real-estate investment trusts) were 20 years ago," says Mr. Hoffman. "The first property fund had zero subscriptions, the fourth one was 200 percent oversubscribed." Mr. Hoffman's fund is no longer accepting money, but he intends to start another fund by the end of the year and is considering a third devoted to Chinese art.

Mr. Hoffman wouldn't discuss which artworks his fund has bought and sold, but he said it is spending more than $1 million every two weeks and made 46 percent on one contemporary piece within 16 weeks of buying it and 86 percent on another within 25 weeks.

The business model for funds in this niche is the British Rail Pension Fund. For 25 years starting in 1974, the pension plan invested in more than 2,400 works of art including Old Masters, Impressionist works, books and manuscripts, medieval art and sculpture, and Chinese ceramics.

The plan's art fund enjoyed returns in excess of 11 percent, due largely to its sale of a few masterpieces (though its return on art investments failed to beat the stock market during that period). It bought Canaletto's "Two Views of Venice" in 1975 for $330,000 and sold the two paintings in 1997 for $7 million. After British newspapers discovered that the fund was gambling pensioners' money on artworks, it stopped dabbling in art in 1999.

Transparency is one reason big institutions shy away from art funds. While stocks and commodities are sold publicly, the only available information about art prices comes from auction sales, and that represents only a third of the market; the rest is private undisclosed deals.

"Honestly, we aren't investing in any of these funds" says Mary Hoeveler, the head of Citigroup Private Bank's Art Advisory Service.

Another problem is high sales commissions of as much as 30 percent at most auctions and galleries -- enough to keep Swiss bank UBS AG from recommending art funds to private banking clients, says Karl Schweizer, managing director of UBS's art-banking department.

"I have seen many art funds coming up in the market and being closed after a while, not having been so successful," he says.

Some funds are keeping their hopes up. Bruce D. Taub, a former Merrill Lynch executive, started Fernwood Art Investments LLC, an art-investment firm based in Boston, in 2003. His goal is to create a $150 million fund. It has yet to buy any artwork and is still in talks to establish partnerships with major financial institutions. He plans to start making purchases by the end of the year.

"Investing in art is not for everybody," says Mr. Taub. "It's not like picking stocks, but we've got a strategy to mitigate the risk and challenges inherent in the art market."

http://www.post-gazette.com/pg/05234/558036.stm

 

 

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(Art-Eastasia list)

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