Blue-chip art has long been a “passion investment” favored by the ultra-wealthy, while the rest of us were largely unable to get in on the action. By fractionalizing investments in paintings by the likes of Monet, Basquiat and Kusama into affordable shares of $20 and up, the Masterworks platform has effectively democratized the asset class.
Although it’s this business model that has attracted much of the attention around this New York-based unicorn startup, it’s actually the use of advanced data analytics that has allowed Masterworks to offer impressive returns to its community of investors.
Having worked at some of the world’s leading investment banks for a decade, Nigel Glenday pivoted to the art investment space in 2015, when he joined Athena Art Finance as the Managing Director of Strategy. Four years later, he joined Masterworks as CFO.
You’ve been part of the Masterworks executive leadership team since the platform first launched. How has the company evolved most since those early days, nearly five years ago, and where do you see it headed?
Masterworks recently celebrated the fourth anniversary of our first painting launch. We’ve come a long way since. In the process, we have defined what it means to invest in art. At the outset, we were still learning about how much investor demand there would be for art as an investable asset class.
We had then, as we still have today, incredible conviction around art as investment – given its history, ability to appreciate in excess of inflation and low correlation to other assets. But investor demand was still totally unproven. As soon as we launched and sold out that first offering from Andy Warhol in mid-2019, followed quickly with our first Banksy offering, we knew we had found our market.
Fast forward to today, we have grown to over 400 individual painting investments totaling $1 billion, in the process become among the art market’s largest acquirers. We’re enabling the investment community broadly, whether your are a individual or a professional investor, to add high-value, high-appreciation-potential artwork to an investment portfolio as you would any other investable asset.
This is our core mission: to make art investible and for Masterworks to be synonymous with art investing. That means in the next five to ten years, the foundations we are building now will be powering art as investment across any portfolio type. Whether you are investing in artwork directly with us at Masterworks.com, or through a mutual fund with your investment advisor or through an investment fund in a pension plan, Masterworks will be the engine behind all of those.
What’s more, we have an incredible opportunity to share the art collection we are building with the world. We are already so proud to see some of our masterpiece paintings in major museum shows and we have much more in store on this front.
How do you see the Masterworks finance and data teams in particular maintaining a singular vision, even as they’ve grown rapidly in head count?
We look for the same combination in all the members of the finance and data analytics teams: core expertise, technical skill-sets and intellectual curiosity. You need to be the best at what you do, using 21st-century tools to operate – and just love to figure out how stuff works.
For our finance team, that’s how we’ve built systems to securitize and manage our 400 (and growing) artwork investment vehicles with investors from around the world. For our data analytics teams, it’s about developing a framework to understand art just the way an investor would any other investment – starting with simple questions about how the market has appreciated over time and what its risk characteristics are, to more advanced predictive analytics.
A major aspect of Masterworks’ draw is the way you use data to identify paintings that are most likely to appreciate in value. To do this, you’ve had to compile your own database of paintings that are resold. Please tell us about the conceptual origins of that database and how you contend with the biggest challenges associated with keeping it updated.
The good news is, the art market generates a lot of data and has been doing so for a very long time. This is among the factors that make art unique among other collectibles, be they cars, sport memorabilia, etc. The art market has existed for centuries, the majority of which transacts at public auction. So we can directly observe how much artwork sells for and when.
The first challenge is, nowhere is this data centralized or normalized in any useful way for investors. For virtually any other asset class, financial data is at your fingertips through Bloomberg, Thomson Reuters, Yahoo Finance, you name it. For art? You need to slog through countless different auction websites (just for what is online) and pore through libraries of auction catalogs. The few online databases that exist are narrowly designed for art market professionals, like appraisers, and not particularly useful for investors.
So it was clear to us from the outset for us to be able to substantiate an investment thesis around the art market, we needed data. That’s why we compiled it ourselves. This was a year-plus-long effort scouring through auction catalogs going back over three decades to compile a database of all auction sales.
But then there is the second problem: How do we create a price index when no two artworks are alike? In fact, each artwork is unique in its own way or “characteristic” assets. This differs from something like stocks, where one share of Apple common stock is no different than any other, so creating a stock index is a straightforward exercise. But what about art?
It turns out there are a few well-researched approaches to building a price index around assets similar to artwork, notably for residential real estate. Homes are also characteristic assets – they exist in a certain place, have a certain size, a certain age, etc. Much the same way an artwork is painted by a certain artist, has a certain size, was painted on a specific date. So the way to account for these characteristic differences is to observe how the same object, be it a home or an artwork, sells multiple times.
This is called a “repeat sales” approach to building a price index, and it addresses precisely this issue. If we see an artwork sell for X at a certain date and then sell again Y at a later date, we can calculate its price appreciation and, even more, if we do this over tens of thousands of repeat sales we can create a price index that tells us something about how the art market appreciates as a whole.
As it turns out, for contemporary art in particular, it does remarkably well. We observed that, over the past 25 years, contemporary art has appreciated 12.1% annually on average or 1.9X% the S&P 500 and with negligible correlation to the S&P 500. This was an incredibly important foundation to our investment thesis around art as an investable asset.
To see the most ROI possible from blue-chip art, Masterworks’ own messaging has emphasized the need for extended holding periods of up to ten years. On the other hand, in order to demonstrate that the platform is already driving value to its user base, you’ve sold some pieces much more rapidly, in some cases after less than a year. What kind of financial modeling do you use to decide when to sell what assets, given the balance of these two objectives?
We’ve purposefully designed our artwork investments to be long-term, capital appreciation vehicles and are ideally suited for investors with a long-term investment horizon. At the same time, we’ve also structured them with the flexibility for Masterworks to sell artwork when we find opportunities to deliver attractive returns to our investors. So, there is a balance of course.
We are continually monitoring transaction activity in all the artists markets we own. We spend a lot of time estimating supply and demand in each market – not easy! Importantly, we overlay all this quantitative data with the incredible market intelligence our acquisitions and private sales specialists are gathering every day, as they are transacting on new artwork with thousands of other art market professionals and individual collectors.
We don’t need to guess about the art market, because we are in it. So while we love and will continue to hold our portfolio for the long term, we do get presented with terrific opportunities to sell and where those can generate a great return for our investors, we want to be able to move on them.
To what extent is the individual’s subjective love of art important when your team assesses the investment performance potential of a given piece?
Zero. Our goal is to deliver attractive returns to our investors that are consistent with the high-value contemporary art market. In that, we are hyper focused on understanding what, why and how artwork appreciates over time. This is, first, a data exercise, then enriched by on-the-ground market intelligence from our incredible acquisitions and private sales teams.
To do anything else would be a disservice to investors and, certainly, our team’s personal taste preferences are irrelevant.
By making art more investible, is Masterworks taking love of art out of the picture, effectively turning the asset class into a commodity like any other?
This question presents a false choice. What makes art powerful, culturally significant or engaging is not mutually exclusive from its ability to appreciate in value – these are invariably interlinked.
The data bears this out. Research from Deloitte has shown that the majority of art collectors view their collections, at least in part, from an investment perspective, and this is only natural. If one is spending upwards of $1 million on anything, it is an asset. So answering questions about store of value, ability to appreciate, ability to sell become fundamental. Art is no different – it is a passion asset with the ability to appreciate in value as a result of a whole host of factors: some relating to the cultural significance (or how “important” an artwork might be) and others related to macro-economic factors like wealth generation among the global ultra-high-net-worth community.
Masterworks doesn’t change any of this. What we simply do is deliver the art market to the investor community, who are by definition motivated by an investor objective and who share in our investment conviction, in a format and framework that they can understand and take action on. And, in the process, we just so happen to be building a generational art collection that we are thrilled to be able to share with the art loving public.