Art and the Financial Markets - Assignment Example

 Art and the Financial Markets Introduction The establishment of art museums for preserving cultural heritage, started at the end of the eighteenth century, and was initially patronised only by the upper classes and the educated members of society (Duncan:1). Auction houses, art galleries and the commercialization of artworks came much later, and by the late twentieth century, the business grew to international proportions, sometimes exceeding financial investment markets in its profitability. This paper proposes to study the art business: art galleries and their functions, their immediate and long-term goals, their marketing and management, the auction houses, art as an investment for private investors or banks; and a comparison of the art industry to other markets with respect to volatility, price inflation and other factors. Discussion Art Galleries and Art Museums: Their Day-to-day Tasks and Aims: Some researchers state that the core functions of art galleries are different from those of art museums. Galleries are related to the art market for the purpose of selling artworks, whereas museums are agents of culture, impart art education and conserves the works of Old Masters and the most representative works of contemporary artists (Zukin: 428). On the other hand, Duncan (p.1) asserts that in the United States the terms art gallery and museum of art is used interchangeably, and it is only in Great Britain that there is a distinction between the two terms. There are several daily tasks and aims of art galleries and museums: An important task is organizing museum-school participation: Museum educators develop and carry out several levels of art education programs for school children. These are interactive, informative and teach art appreciation and history, through multi-disciplinary programs. (Zeller: 51; Stone: 83). Art-works help in protection of the human environment: The natural and human environment as perceived by the creative artist is depicted in both historical and contemporary artworks (Riviere: 34). The environment keeps changing with time, as populations increase, the power of technology and built environment advance further. The earlier environments and spaces which are captured by artists thus serve to refresh viewers’ memories, and take them back in time. Art galleries also help in building community through art experiences: “Societal structures like family and community need all the help they can get”, states Arnold (p.47). To strengthen communities, to increase a feeling of unity and belonging among students, to build ideals of commitment and responsibility, engaging in creative and remunerative activities with artwork was found to have beneficial outcomes. Thus, the art gallery serves as a guide and training ground for young artists, who then create their own works for combined activities and art shows, bringing them all together to work for a common goal. Moreover, they take viewers back in time: Art galleries and museums with their historical artworks are replete with scenes, events, people, objects, and situations in the past, as chronicled by the artist as his lived experience. Thus they have the power of carrying viewers back in time, giving them a glimpse of bygone days. Organizing exhibitions, seminars, lectures, auctions and other art programs: Art galleries are usually busy all the year round with various cultural and academic activities, planned in advance and executed painstakingly to perfection. Buying and selling valuable artworks: This is a commercial function of the galleries, which helps to enhance finances for the purpose of sustaining the continued growth and development of the facility. Long Term Goals of an Art Gallery: Factors that can influence prioritization of goals are: “financial and human resources, nature of the surrounding community, space and facility considerations” (Moore: 36). Long term goals for art galleries are traditionally categorized into four different groups as: acquisition, preservation, education, and research; the tasks to be divided among the different departments. Besides the traditional goals, other categories are in departments such as “administration, finance, community outreach” (Moore: 36), and collaboration and integrated work plans among the groups may be essential in certain areas. By means of breaking up the long term goals into shorter ones, the day-to-day actions, measures and interventions that need to be undertaken should also be planned. Thus immediate action can be initiated for achieving the goals. Some long term goals suggested by Moore (p.38) are: Educational: to promote learning by visitors by means of exhibits, lectures, and publications; Social: to encourage positive social changes; Curatorial: to acquire and conserve collections, and research on the collections; Professional: networking with other museums, educational institutions, research centers, and historical socities; Environmental: building relationships by outreach to local communities and retail groups; Administrative: goals for the internal working of the art gallery, relating to staff and volunteers, enhancing the financial support available, promotion and advertising of the art gallery, and goals for efficient and effective use of museum property and facilities. An important goal is: profit enhancement through acquisition and sales of high quality artworks created by new artists, thus supporting them for mutual benefit. The Marketing and Management of an Art Gallery: Due to cuts in federal funding, management and enhancing of resources is the key factor for ensuring survival and progress for art galleries. It is vital that the challenges are met with strong policies, planning and execution. There exists a mutually dependent relationship among art galleries, artists and dealers. Aesthetic worth and market value of the works becoming inter-changeable, there is a dramatic change in the interpretion of the function of art galleries The acceleration in sales of artworks as seen in the last decade, had beneficial impacts on art galleries “whose dealings grew in number, scope, and marketing technique” (Zukin: 429). With the active and competitive role of art dealers for supplying museums, the art market became global, leading to a thorough search for all sources of Old Master paintings which were the market’s most desirable as well as volatile product. Further, an artist’s market value could be raised by dealers’ negotiation with an art gallery to include the artist’s work in its collection (p.430). In order to generate more funds for its maintenance, art galleries are required to advertise their facility in order to attract an increasing flow of visitors and buyers. It is also essential that art galleries should foster the spirit of continued loyalty among its patron members, by sustained high level performance and service. In a research study, it was found that members of any organization had a feeling of self-identity linked with the organization, which increased their loyalty and continued patronage of the same facility. “Retaining existing customers is six times less expensive than luring new customers, and profits can be boosted by 25% to 85% by reducing customer defections by as little as 5%” (Bhattacharya et al: 46). The publication of museum catalogs is an important market tool, by which collectors, galleries and scholars can study examples of artworks for inclusion in their collections, or for research (Koenigsberg: 23). By making the merits of a collection available to the public sales can thus be boosted. To be a successful art investor, it was necessary to be able to judge quality correctly before making the investment. Rising prices of artworks make them too expensive for most art galleries and museums to acquire, hence to invest for the purpose of resale at a higher price, encouraging new artists’ works may ensure a steady incoming supply of art pieces. Art Auctions: The art market is generally accessible to all pockets and is potentially useful for investments when the main stock markets are in a low phase. Buying art auction paintings is a favoured method of investment, since the resale value is high depending on the investment climate at that particular time, and on the cost price. Chances of making high profits are increased when purchasing price is more than EUR100,000. Since 1996, paintings in the higher cost brackets have gained more than 12 % in value each year, thus making them valuable investments. But less expensive paintings which cost less than EUR 1,000 meet with losses, since their value shrinks by 6.4 % each year. These are generally not of the Old Masters, but are of relatively less known, and contemporary artists. This indicates that the artist’s reputation determines the value of the painting, and is of prime importance for their profitable re-sale through auctions or galleries. Hence, “investing in a painting by a little known, or even unknown artist is far more risky than investing in a work by an artist whose place in the history of art is already secure” (Art Auction Data Bank: 2007). Increases in art prices in the market thus help only those investors whose art budget is a minimum of 100,000 dollars. Art as an Investment: Art prices exceeded the stock market and there was continuous inflation in world art markets over the past decade (Zukin: 425). There was observed to be a steady growth in the sales as well as the reputation of the art produced. During that time, paintings of eminent artists had increased by nearly 120 percent in value, and were considered to be a better investment than taking risks at the stock market. The booming art market of the past decade was a cultural and financial phenomenon. Art as a form of investment took shape during this period. Art advisory services were offered by private banking units who expanded their support services. Including art in investors’ portfolios was expected to have potential benefits such as price appreciation and diversification. However, some pitfalls such as increased transaction costs and illiquidity were possible. The rates of returns by investing in art depends on particular details of the artwork such as the size, the medium used, the age of execution, authenticity of the work, and auction month and house. Further, the artist, time period of investment, price range and genre of the painting also impact the rates of return. These data are found to impact the highly sensitive rates of return (Agnello & Pierce: 359). Art experts observe that after a long duration of outstanding performance, now the market may in fact be declining. Kostigen (MarketWatch: Nov. 20, 2007) states that at a recent Sotheby’s auction in New York, a Van Gogh landscape which was expected to sell for an amount between $28 million to $35 million, remained unsold. Similarly, a Paul Gauguin work: “Te Poipoi (The Morning)” at the same auction sold for only $39.24 million which was well below its expected selling price at an amount between $40 million to $60 million. However, Pablo Picasso’s sculpture of his muse Dora Maar sold at the high end of its expected price range, thus indicating that sometimes buyers are still continuing to pay huge amounts for good value. Caution is the key word used in the art market these days. With the decreasing art prices, the slowing markets are creating opportunities for buying at the right prices. Investors appear to be diversifying their range of art collections. Instead of acquiring one expensive work by a well-known name, they are buying several artworks of lesser known names; or alternatively investing in lithographs and serigraphs of established artists (Kostigen, MarketWatch: Nov. 20, 2007). The symbolic meanings for prices of artworks are unique. In the art market, when there is uncertainty about the aesthetic or cultural value of artworks, the cultural value of a piece is taken to be indicated by its price. “A range of cognitive and cultural meanings are expressed through prices” (Velthuis: 208). Hence, from the dealer, artist and gallery’s profitability point of view, it is essential that prices should not decline. Comparison of the Volatility, Price Inflation of Art Market/ Industry to Other Markets Research was conducted by the author, by constructing an art return index based on the transaction price of paintings brought at least twice over a very long period of 271 years. This allowed a comparison of painting price movements to stock-market fluctuations, and also “an evaluation of the risk and return characteristics of art investment” (Goetzmann: 1370). The author found a strong relationship between aggregate financial wealth and the demand for art, over the long term. This related to the high correlation between the art index and index of stock exchange shares over the same period. It was clear that with increase in the wealth of art collectors, there was a concurrent demand for art. The high prices obtained at auctions for paintings such as Van Gogh’s Sunflowers occurred during an unusually profitable decade for global stock investments. Other than wealth, another important factor in the demand for art is taste. The increaing prevalence of an uniformity of taste among art collectors from various parts of the world may also have contributed to the increase in painting prices; and “the difficulties that art galleries encounter in their attempts to purchase the works they consider important” (Goetzmann: 1375). The relationship between auctioneer pre-sale price estimates and the long-term performance of artworks was studied. This was found to complement behavioral economics which focuses on analyst earnings estimates and stock prices. “The price estimates for expensive paintings have a consistent upward bias over a long period of thirty years”, state Mei & Moses (p.2430). Paintings which are highly estimated in terms of returns, generally have adverse and abnormal returns. Upward bias appears to be quite persistent over time, since estimation error having a positive serial correlation. These results confirm the view that “auction house price estimates are affected by agency problems, and some investors are credulous” (Mei & Moses: 2431). Thus asset pricing can be understood from a new perspective. It is considered possible that the time variation of estimation errors can give rise to predictable patterns, that explains the predictability as well as high volatility. The results also help in understanding the low performance of valuable or fashionable assets which are hyped by their sellers in order to lure unsuspecting buyers. In fact, the well-documented low performance in initial public offering (IPO) stocks and the underperformance of the masterpiece are observed to be very similar. From the risk-return profile that was documented by the authors, investors would be aided in deciding whether to include art in their long-term investment portfolio. Conclusion This paper has highlighted the internal workings of the art business, with special focus on the work of art galleries, their daily tasks, aims, and long term goals. Further, the marketing and management of art galleries, auctions as part of art business, art as an investment, and the comparison of the art market with other markets with respect to volatility and price inflation. Thus, it is concluded that the art market is parallel to that of stocks and shares, and they do not mutually impact each other. However, dips in the stock market may result in decline in the art market, which is mainly due to the buyer’s funds situation being affected adversely. Art is being increasingly considered as a good investment which will fetch profitable returns, but the initial investment in purchasing expensive works will have to be met. Today banks are supporting the purchase of highly priced paintings by giving supportive training on how to identify the correct worth of artworks, so that art investors’ knowledge may be optimized. Works Cited Agnello, Richard J. & Pierce, Renee K. Financial returns, price determinants, and genre effects in American art investment. Journal of Cultural Economics, 20.4 (1996): 359-383. Arnold, Alice. Building community through arts experience. Art Education. (1994): 47-51. Art Auction Data Bank. Art auction information. Available at: http://artdatabank.com/ Bhattacharya, C.B., Rao, Hayagreeva & Glynn, Mary Ann. Understanding the bond of identification: an investigation of its correlates among art museum members. Journal of Marketing. 59.4 (1995): 46-57. Duncan, Carol. Civilizing rituals: inside public art museums. New York: Routledge, 1995. Goetzmann, William N. Accounting for taste: Art and the financial markets over three centuries. The American Economic Review. 1993: 1370-1376. Koenigsberg, Lisa. Art as a commodity? Aspects of a current issue. Archives of American Art Journal. (1989): 23-35. Kostigen, Thomas. Chiseling away at gains: The high-flying fine-art market may finally have stalled. MarketWatch: November 20, 2007. Santa Monica, California. Available at: http://www.marketwatch.com/news/story/high-flying-fine-art-market-may-have/story.aspx?guid=%7B4A18BF74-E9AE-4C70-8CE6-40B7CB6CE42A%7D Mei, Jianping & Moses, Michael. Vested interest and biased price estimates: evidence from an auction market. The Journal of Finance, LX.5 (2005): 2409-2436. Moore, Kevin. Museum management. New York: Routledge, 1994. Riviere, Georges H. Role of museums of art and of human and social sciences. Museum International, UNESCO, Paris, No.212. 53.4 (2001): 33-42. Stone, Denise L. 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