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Why Russian Modern Art
by Yuri Tsapayev
Page 1  Page 2  Page 3
Alexander Bikhter, Landscape with Horseman. 1995, oil on canvas, 60 x 80 cm
Lost Civilization, painting by Bulat Akhmetov
Bulat Akhmetov, Lost Civilization, 1997, oil on canvas, 80*100 cm
Contemporary art is not for everyone. But fanning the excitement that it generates and
expanding the market is not difficult these days. As contemporary art prices leap from peak to peak,
reflecting the sector's position as status symbol du jour for hedge fund managers, newly minted
Russian billionaires and other masters of the financial universe, others are eager to spend tens of
thousands for a chance to rub shoulders with the wildly rich and to get in on a booming market.

Introduction

Art as an investment avenue has been considered an interesting and profitable alternative,
but it is also extremely risky. With uncertain stock market returns and interest rates at their lowest in
decades, nervous investors are now considering alternative investment avenues. Some of them are
hoping to find solace in alternative investments such as fine art, wine and even stamps. These
alternative investments' performance is alluring. Indices tracking the performance of high-class art
have held up well in the recent economic slowdown, while art-auction houses report record prices.
Art as an object of investment has been debated for long. However, in the age of 20% returns on
stock markets and a long bull market, the concept of art as an investment option was passed over.
But the corporate scandals, stock market losses and low interest rates have helped it to re-emerge.
Some art consultants says, art has been an attractive investment for centuries and is becoming
increasingly recognized as it has outperformed more conservative investments over the last few
decades. It is an alternative investment earning capital gains rather than a dividend. Art can never be
considered as financial asset. Critics contend that investing in art disregards the traditional yardsticks
of financial analysis, since they do not generate income streams that can be discounted. It is a bet on
the price appreciation of something whose value defies financial logic. According to some
researchers, "Artworks do not generate any income, except to the extent that income can be
obtained from lending them to galleries, and they incur negative income in the form of storage and
associated costs. Some artworks have appreciated enormously in value over time; it is difficult to
make a case for artworks overall earning a positive net rate of return in real terms over the long run."
But advocates of art investing argue with growing volume of supporting analysis. From 1875 to
2000 art has outperformed fixed income, but underperformed equities. And in the past two and half
years of stock market losses, art has outperformed equities.

About  Contemporary Art

Art market is illiquid, opaque and unregulated. Transaction costs are too high, sometimes up
to 25% and may in fact wipe out the profits. Further, the money invested in art is at the mercy of
erratic public taste and short-lived trends. Above all, art's unpredictable value makes it as easy to
lose as to profit. However, Wolfgang Wilke, Vice-President, Dresdner Bank's Economics
Department, who has been researching on this topic for the last 20 years, feels, art investment is high
risk only if the selected investment period is too short. In the short-term, market volatility is relatively
high compared with other asset classes. But over the long-term experience suggests 10 years and
more investment in art provides annual average returns, which top all-Coiners. The prerequisite is
investment in top-quality art. He also believes that with knowledge, practice and discernment, the
risk is alleviated. The high end of the market is not at the mercy of public taste. The contemporary
art market has its blue-chip investments and these quality investments will bring reliable return. Of
course, the entry point is higher. Fine Art Fund also plans to solve the problem of lack of dividend
income in this type of investment by renting out its art. This can be a boon to wealthy private
investors, wanting to take advantage of slow but steadily growing art market. The advantage of
investing in good contemporary art is it survives economic downturn. In art markets cumulative
selling pressure arises only during economic depression and that is primarily confined to the lower
segment of the art market. In some report investing in Art, the long-term trend in inflation adjusted
art prices follows the general economic trend, i.e., art prices rise above average compared to the
prices of other goods. However, lower priced categories react quickly to worsening economic
environment. An economic slowdown causes drop in demand and an increase in supply (plummeting
assets and income trigger offloading), leading to forced selling. This, however, does not apply at all
or only rarely to artworks in the top price category." Consequently, top-quality art tends to be more
stable than most financial investments in difficult times.

Investing in Contemporary Art

Ioannis Evangelos C. Haramis, an investment advisor from www.GreekShares.com
<http://www.GreekShares.com>, which advices on art investment, says, "Cycles in the art market
are not necessarily linked to those of other asset classes and there is low correlation between art
prices and the equity markets, just as there is little correlation between different categories within the
art market. This might make art a good choice for investors that want to diversify their portfolios.
Consequently, art has the ability to reduce the risk of a portfolio when combined with the other
assets and Art combines passion and investment. But under purely financial aspects as well, art is a
genuine contender as part of any sophisticated asset planning, hence looks like the right candidate
for inclusion in portfolio. Wolfgang Wilke says, "Investment in works of art helps reduce portfolio
risk as trends on the art market generally have a slightly negative correlation with the financial
markets. 
Nevertheless, art as an investment cannot be overlooked for one unique reason: An ever-
increasing demand coupled with an absolutely limited supply. Add to that ability to survive economic
downturn, one would start contemplating about investing in it. Although putting money into art may
not be as straightforward as investing in bonds or equities, the art market is attracting increasing
interest. As a result, we are now seeing a lot more new and old investors that are looking to put their
money at art. Art is an asset class of its own. It is neither a real asset nor a financial asset. Art
combines passion and investment. But under purely financial aspects as well, art is a genuine
contender as part of any sophisticated asset planning. The difficulty of investing in the art market
arises from the art market's inherent inefficiencies. The main trouble with investing in art is that it is
almost impossible to identify an intrinsic value. It is about aesthetic judgments.
Valuation is based more on human emotion than on any predictable model. Rival bidders
who like the same piece can quickly push the sale price beyond all estimations. Accepted price
levels for works of art are established by the interplay between auctioneers and dealers. There is no
objective" value for works of art. Prices follow overall prosperity (income growth) and evaluation
according to aspects of taste. Those items, which become the focus of a change in taste later
generate the highest yields. Anti-cyclical investment is thus the hallmark of the successful investor. In
the end, as the beauty lies in the eyes of the beholder, so is the value. The key for art investing
success, like stocks, is predicting which works of art will increase in value. Investors who are not
hesitant of high risk can make the biggest gains at the lower end of the market by investing in lesser
known and new artists.
The problem with this is that there are so many artists in the world and finding the one that
will become the next Rembrandt or Picasso can be next to impossible. It is unlike predicting the
companies that would be future stars. Art market can be divided into five categories: Old Masters
(1300-1860), Impressionists (1860 - 1910), Modern (1940 -1970), Contemporary (1970 - 1985)
and Very Contemporary (1985 onwards). It is the last category that is more risky. Old Master art
tends to hold its value because it embodies the deepest aesthetic and cultural qualities, and acquires
tangible investment value as a source of these qualities. In the case of contemporary art, so much of
it is based on a fashion and artists tend to rise and fall very quickly. At the same time, top art is
unlikely to fetch huge gains. It is much less likely to increase in value than middle or lower-priced
works. For art value, artist, of course, is the most significant factor, but only a starting point. To be
able to attract a top price, a painting must also be thoroughly typical of the artist i.e., the style which
people have come to think of as characteristic of the appreciated enormously in value over time, it is
difficult to make a case for artworks' overall earning a positive net rate of return in real terms over
the long run.

            Basic components of value of Contemporary Art

The unique investment as it is, art market has some unique risks. Successful investment in art
requires not only extensive knowing how about the artistic quality and authenticity but also the
peculiar nuances of the art market. As each work of art is different and the markets are everything
but transparent, evaluating quality and price requires knowledge of the market inside out. There are
potentially large differences in expertise between buyers and sellers. And the art markets are often
cloaked by veil of secrecy. Investment horizons typically run for years or even decades, and the
market is generally illiquid, which significantly limits an investors' ability to convert a holding to cash.
Transaction costs (auction fees, appraisal fees, insurance, handling costs etc.) are by far larger than
in other markets. Though there has been increase in availability of and access to data from art-
research firms, websites dedicated to prices of art, indices of the art market and art auctions, it is far
from adequate.
The main trouble with investing in art is that it is almost impossible to identify an intrinsic
value. When evaluating individual purchases, there are few risks that may not arise when investing in
securities. For example, there is no official registration office or certification authority that can
authenticate the ownership of individual artworks. Other transaction risks include absence of clear
title, forgery, mislabeling, and auction fraud. These risks have made art market a place for insiders.
On a physical level, art typically requires a specially controlled environment where temperature,
humidity and light are continuously monitored. The method is similar to stock market manipulations
by the major stockbrokers. However, in the art world, there is not even pretense of accounting and
the market is entirely unregulated. The art world is far less regulated than securities and real estate,
so there is often no resource in the event of misrepresentation. The investor is very much on his own
to perform appropriate due diligence. Art market itself is not volatile. Investors, seeking financial
gain only, create volatility in the market.
Art is a good investment, but only in the long run. Its gain has been slow, but steady. It is a
good investment only because people of taste recognize their historical significance and their rarity.
These are values that no other investment options offer. If greedy investors, for whom these values
do not matter, start playing in the marketplace, the short-term economic value may become
disproportionately emphasized over their long-term aesthetic and historical values. Art is certainly a
growing asset class, to use financial language. The search for alternatives to the classic forms of
investment will ensure that art as an asset class will enjoy an unimagined upswing. The number of art
advisory firms promising to help new art market entrants is growing. Many financial institutions are
building up large databases covering various segments of the art market. A few firms are even
turning to art experts to build art portfolios for their wealthy clients. But it is never going to be just
about the numbers.
Art speaks a language-subjective and unique. Most people, who have made money over the
years, haven't bought art as an investment. Nearly everyone, from art experts to gallery owners to
financial advisers, emphasize that investment should never be the sole-or even the primary-reason to
buy art. Collecting art can be one of the most enjoyable ways to spend money. An engaging work
can provide its owner with a lifetime of visual pleasure-and then fetch cash. But investment in art
should not be solely financially motivated. Buy what you love, because even though it might go
through a transitory devaluation, the intrinsic value of the work will always be there. The art market
has been in existence for a long time because of its returns - capital gain, pleasure and social status.
Considering that art touches a personal chord, it can never be a staple part of institutional investment
portfolio. There will always be a place for artworks in the investment portfolios of wealthy private
individuals who gain enjoyment from investing in art that goes beyond its attraction from a pure
investment standpoint, but not in institutional investment portfolios. And in final analysis, art markets
are a lagging indicator of economic growth and are fallout of general wealth creation. Further, art has
a role in society that goes well be among other things, many owners view the artworks as a symbol
of their social status. That function has existed for thousands of years, and will most likely continue
to exist in the future, regardless of the merits of art as an investment, and it is this image associated
with it as a connoisseur that creates an ever increasing wannabes willing to pay through their nose to
differentiate themselves beyond its investment value.
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