Blue Chip Art Investing

Introduction

For generations, art has been recognized not just as a form of expression, but also as a potentially lucrative investment. One segment of the art market in particular, blue chip art (or “blue-chip art”), has garnered attention from alternative investments (alts) investors.

This article explores blue-chip art, its attractiveness as an investment, associated risks, ways to invest, and other factors and strategies to consider when investing.

What is Blue Chip Art?

Blue chip art can be defined as artwork created by esteemed, recognizable artists who have achieved international recognition for their craft. These artists often have a substantial and proven track record in the art industry, with their works frequently showcased in reputable galleries, esteemed art institutions, museums, and noteworthy private collections. These can include notable modern and contemporary artists such as Picasso, Warhol, Basquiat, Koons, and others who often dominate the blue chip art market. Blue-chip artists can also include classic masterworks from earlier periods by revered artists like Monet, de Vinci, and Rembrandt.

The term “blue chip” itself is borrowed from the financial world where it’s used to describe large, more stable, profitable companies. In the art realm, blue chip art shares these similar qualities of being the most valuable and recognizable compared to other artwork such as so called “red chip art” by emerging artists that haven’t become as established yet. Blue chip art can sell for 6 to 9 figures, compared to much lower amounts for red-chip and other art. For example, Leonardo da Vinci’s Salvator Mundi sold for an astounding $450.3 Million in 2017.  

It’s worth noting that the so called “blue chip” status of an artwork is not determined by any set criteria or benchmarks. Rather, it’s a widely accepted perception among art professionals and market players, often built upon the artist’s enduring influence, their contribution to the field of art, and the consistent demand for their works in the market.

These rare works of art tend to be highly sought after, not just for their inherent aesthetic appeal or the status they confer upon their owners, but also for their investment potential. This is similar to other collectibles markets like coins, stamps, or sports memorabilia where there are some extreme outliers of a select number of ultra-rare pieces that sell for exceptionally high prices.

Blue chip art investing has long been associated with the elite due to the high capital requirements, but the landscape is changing. Thanks to emerging investing platforms like Masterworks, everyday investors can now participate in the art market by buying fractional ownership stakes in art, akin to owning shares in a company. These platforms purchase blue-chip and other art from auctions or private sales and then they securitize (register) it with the US Securities and Exchange Commission (SEC) to sell shares to investors.

The Attraction of Blue Chip Art Investing

The allure of blue chip art is multifaceted, attracting various types of alternative investors for different reasons. Some are art enthusiasts, driven by an appreciation for outstanding works of art and the desire to possess pieces created by internationally renowned artists. That is why art is sometimes referred to as a passion asset. The emotional satisfaction and status derived from owning such coveted works are paramount for these individuals. Not everyone can say, “hey, come to my house and see my $450 million painting”.

However, beyond the prestige and passion, blue chip art also attracts investors who believe the value of the artwork will appreciate over time. Additionally, this asset class can help expand portfolio diversification beyond stocks and bonds. The value of blue chip art tends to have low correlation with these traditional financial markets. This can make art an effective hedge, potentially offering some stability during times of economic uncertainty.

Additionally, despite market fluctuations, over the last 20 years blue chip art rose considerably in value. Of course, no one can predict whether this will continue in the future because past performance doesn’t guarantee future results.

Artprice created the Artprice100 Index of what they view as the 100 most representative artists of blue chip art. Visit their website to learn more about their index’s methodology and assumptions. Using pricing data from many auctions, they compiled the below comparison of their Artprice100 index compared to the S&P 500 index. According to their data, the blue chip art index outperformed the stock index (yielding over a 360% return).

It appears at least visually though that blue chip art experienced more volatility than stock. There also appear to be larger drawdowns, which is a financial term describing the drops in values from peaks to troughs before recovering (as illustrated in green below). But from a return-on-investment standpoint, the results speak for themselves.

Artprice also compiled another much broader Artprice Global Index that incorporates non-blue-chip art into the data to represent the overall art market. This index provided a negligible return over this same 23-year period. Additionally, art prices overall in this index were highly volatile: doubling and then losing roughly half their value three times over again (ending back at the original price level).

If in 2000 someone had invested $100 in art that mirrored this index, then he/she would have taken a lovely roller coaster ride, but still ended up with roughly $100 at the end of 2023. During the period, some investors may have sold and profited, while others may have bought at higher levels then subsequently lost money selling for lower prices.

Explore Alts has no way to independently verify the data, but a key takeaway from these two above charts is that the Artprice100 Index of blue chip art experienced higher returns and less volatility compared to broader Artprice Global Index.

Risks Involved in Blue Chip Art Investing

Like any investment, there are risks and possible losses. Art investing is considered high risk like stocks and most alternative asset classes. Below are some of the key risks (not a comprehensive list of all possible scenarios).

Market Fluctuation Risks

The first risk is fluctuating market values, which are influenced by evolving aesthetic preferences and socio-economic conditions. The popularity of an artist or a particular art style may rise or fall, affecting the artwork’s value. There can also be generational tastes and preferences that change over time that could impact long-terms investors.

Authenticity Risks

Another key concern with any collectible like art is the issue of authenticity and forgery. It’s essential to conduct thorough due diligence, including verifying the provenance and authenticity of the artwork. Provenance is the documented history of an artwork’s ownership.

Some ways to address authenticity concerns include using professional appraisers, buying only through reputable dealers and auctions, and/or buying through investment platforms that conduct extensive due diligence on behalf of investors.

Risk of Damage and Theft

Another risk is the potential damage or loss of the artwork. Whether it’s due to theft, accidents, not storing it properly, or natural disasters, such issues can lead to irreversible financial and emotional losses. What happens when your fancy friend spills red wine on your Picasso? Whoops. Factors like temperature, humidity, dust, and UV light exposure also need to be considered. Any restoration or repairs, no matter how minor, could affect an artwork’s market value. Likewise, when buying restored blue-chip art, this should be factored into investment decisions and price.

Insuring artwork is essential because despite best efforts, art is always susceptible to damage and theft. Investments should be made to physically protect the artwork. Alternatively, buying through an investment platform where investors don’t have physical access to the artwork, can also help address these concerns because these companies know how to properly store, protect, and insure art.

Additional Considerations for Blue Chip Art Investing

In addition to risks, here are some additional factors that investors should consider before investing.

High Investment Fees & Other Costs

Art investing is typically characterized by high transaction costs and ongoing fees. The investment returns, therefore, need to be high enough to offset these costs. Auction fees can be upwards of 30% (citation). Also, ongoing insurance, maintenance, and storage costs add up, eating into returns.

Investment platforms also have high fees that can resemble the fee structure of hedge funds. The fee structures vary by platform. These fees are drawn from the initial investment (investors don’t make separate payments). There are typically annual ongoing management fees (e.g., generally ~2%), some form of performance incentive (e.g., generally ~15-20% of investment profits), and potentially other fees such excess profit fees above a set target, etc. This can vary considerably from one platform to another, so investors should review a platform’s terms and conditions carefully.

Non-Income Producing Asset Class

Blue chip art, like commodities or non-dividend paying stocks, doesn’t generate current income (dividends or interest). The gain (or loss) of an art investment is realized only when the artwork is sold. Some investors may view this as an advantage though if they want to avoid having taxable income prior to their exit. Investors should consult with their tax professional to learn more.

Illiquidity

Blue chip art is not a liquid investment. Sure, a pawn shop may “take it off your hands”, but selling fine art takes time. To address this limitation, the Masterworks investment platform has a secondary marketplace though which investors can sell their shares to other investors (of investments initially made on the platform). However, it is a small, inefficient market (one without many buyers and sellers), so Masterworks warns investors to not expect to necessarily find a buyer for their shares. It is possible though to sell shares for more than the initial investment price.

On a side note, this makes for an interesting investment opportunity for patient buyers with long-term investment horizons who may find opportunities to buy from sellers desperate for an exit who sell at a discount. However, a risk of buying discounted shares is that those shares really should be discounted because of a decline in value of the underlying artwork. There are no guarantees and investors could lose money on any art investment (even if buying discounted shares).

Lack of Regulations

It’s also worth noting that the art market lacks the regulation seen in traditional financial markets. Investment platforms that sell to US investors are regulated by the SEC (even if the platform is based outside the US), but art auctions, art dealers, and art galleries aren’t SEC regulated. This lack of oversight can lead to price manipulation and a lack of transparency, which may affect investment returns (or losses). This doesn’t imply that investment platforms are necessarily safer, because they buy art from non-regulated art dealers, auctions, etc.

Limited Pricing Data Compared to Stocks and Bonds

Compared to the stock market where there is an abundance of pricing data available second-by- second, there is much more limited data for art. The same is true for other types of collectibles and antiques.

Artwork is very bespoke meaning that each piece is unique. One Warhol painting could sell for much more than a different Warhol painting. Since art isn’t a standardized commodity, it can lead to differences in opinion in value. Like in real estate, you could get 10 different appraisal amounts from 10 appraisers.

Additionally, there are a limited number of art auctions and weeks may pass between major auctions. There are also a lot of private transactions, so that pricing data isn’t publicly available. This results in much less pricing data transparency. This can also make historical art price data (like what was presented above) appear artificially less volatile because of a potential data smoothing effect. Essentially, it could falsely appear that art doesn’t react as quickly to changing market forces.

For example, if there is a significant financial news headline today, it would almost certainly impact stock prices today. It may be a month until another major blue chip art auction, and that news headline may be “old news” by that time and not impact prices at the auction. Had the auction been on the same day as the news event, then perhaps there could have been an impact on auction prices. However, as mentioned earlier, one of the benefits to blue chip art investing is the limited correlation to stock prices. Therefore, it’s possible that a good/bad news headline might only impact stock prices without affecting art values or vice versa.

Investment Strategies for Blue Chip Art

Investing in blue chip art involves more than simply purchasing a piece from a well-known artist and patting yourself on the back. To maximize the potential return on investment and navigate the complexity and risks, a carefully devised strategy is essential.

First, a financial advisor can work with you to see if this is even a type of investment you should consider, and if so, what would be an appropriate allocation. Then, unless the financial advisor was also an art expert, it would be advisable to work with an independent art consultant.

These art professionals can bring a wealth of industry knowledge, connections, and experience to the table, which can be crucial in making informed investment decisions. They can help identify promising opportunities, negotiate deals, and advise on when to hold or sell an artwork. This is especially important when not investing through a platform. One of the benefits of investing through a platform is that they utilize art experts to provide information to investors and to conduct due diligence on their behalf.

In addition to receiving expert guidance, the cornerstone of art investing is meticulous research. Rather than solely relying entirely on art experts’ analysis, it is prudent to familiarize yourself with an artist’s influence on the art industry, global reputation, and sales record. Delving into the nuances of their artistry, the periods of their greatest creative output, and the reception of their work within the art community can give a clearer picture of their market standing.

Additionally, an understanding of market trends is vital. The blue chip art market, like any other, is influenced by changing tastes, societal shifts, and economic conditions. Keeping a pulse on these trends can help identify investment opportunities and inform decisions about when to buy or sell. In essence, investing in blue chip art requires a fine balance of art appreciation, market understanding, and astute judgment.

The aesthetic appeal of an artwork, albeit highly subjective, also influences its market value. The popularity of the art style, the uniqueness of the piece, and its visual appeal to potential buyers can drive demand (or lack thereof) and, subsequently, its price.

Like all investing, another fundamental strategy is diversification. While the allure of blue chip art lies in its perceived value and prestige, it remains wise to distribute whatever an investor allocates to art investments across a range of artists, periods, mediums, and styles. This approach can help balance the portfolio and protect against fluctuations in market trends or shifts in artistic preferences. Some platforms assist with diversification. For example, Yieldstreet occasionally bundles together multiple pieces of art into an investable bundled lot that contains blue chip art combined with art from emerging artists as well (for accredited investors only). They currently have one art fund that has a $15,000 minimum investment. There are other platforms like Masterworks that are open to all investors and don’t have a minimum investment.

When investing through platforms, another form of diversification could also be investing in opportunities with different holding periods. Each investment deal is different, but many range from around 3-10 years before the art is sold. One could effectively create a ladder of art investments that “mature” at different times (kind of like a CD or bond ladder, but with much more risk because the future value of art is unknown). This can provide liquidity at more frequent intervals and can help spread out timing-related risks of market ups and downs.

Ways to Invest in Blue Chip Art

The traditional methods of blue chip art investing include buying directly from owners or through reputable art dealers or art auctions like Sotheby’s or Christie’s. If buying through an auction, it’s critical to establish ahead of time the highest bid limit and then remain disciplined to not change it during all the excitement and competitiveness of an auction. The most successful investors (of art or any other asset class) are those who rely on prudent judgment and objective reasoning rather than emotion.

However, this direct form of investment may require considerable capital, given the high market value of blue chip art. Therefore, emerging alts investing platforms have begun to offer fractional art ownership, by securitizing the art and selling shares. Investors share in the potential appreciation (or loss) of the artwork’s value when it is sold. View our list of investing platforms here and filter on “Art”. This process democratizes access to blue chip art by reducing the financial barrier to entry, making the blue chip art market more accessible to a wider audience. As mentioned earlier, some platforms like Masterworks even have a secondary marketplace for investors to buy and sell their shares prior to the artwork being sold.

Of the investment platforms that offer art investments, Masterworks has the largest selection of blue chip art investments and the most comprehensive research on this niche since that is the sole purpose of the platform. Masterworks is also open to all investors and doesn’t have a minimum investment.

Below are some key pros and cons of both investing approaches. Note, a financial advisor should be consulted regardless of approach.

Direct Ownership

• Pros
  • Direct control (can decide when to sell and can directly negotiate the purchase price).
  • Can take physical possession to enjoy the artwork.
  • Avoids the additional fees of investing through a platform.
• Cons
  • Can require significant capital (~ 6 to 9 figures).
  • More effort to assemble a team to conduct due diligence.
  • Annual expenses that are directly paid rather than being deducted from initial investment (insurance, storage, etc.).
  • Physical possession risks (theft, damage, etc.).

Fractional Ownership Via an Investment Platform

• Pros
  • Requires much less capital.
  • Platforms use a team of art experts and conduct due diligence on behalf of investors.
  • Professional, secure storage.
• Cons
  • Higher fees than direct ownership.
  • Can’t take physical possession to enjoy the artwork.
  • No control over when the art is sold.

Conclusion

Navigating the blue chip art market can be complex and risky, but also potentially very rewarding. It’s important to approach art investing with due diligence, seek the guidance of experts (financial advisors and art consultants), and educate yourself about art market dynamics. If you are interested in learning more about different types of alternative investments then head over to our Alts Guide. To learn more about alternative investment platforms, then view our filterable list here.