When you think about diversifying your investment portfolio, alternative asset classes that reduce risk and maximize returns often come to mind. Fine art, known for its high appreciation potential and low correlation with traditional investments, is a promising option. However, the high-end art market has traditionally been accessible only to wealthy investors with significant disposable income, making it elusive for the average person.
This is where Masterworks, an art investing platform, comes in. By using a fractional ownership model, Masterworks allows retail investors to enter the exclusive world of fine art seamlessly. But how effective is this approach for portfolio diversification? Let’s explore this in our Masterworks review.
Fine Art as an Investment: A Deeper Insight
In 2022, the U.S. art market reached a record $30.2 billion in sales, with an 8% year-on-year growth, even amidst global challenges like supply chain disruptions, rising inflation, and geopolitical tensions. Unlike traditional assets, the value of fine art is largely immune to macroeconomic factors. The value of a painting is determined by its aesthetics, historical significance, and the artist’s reputation rather than economic conditions. For example, in May 2022, an Andy Warhol silkscreen portrait of Marilyn Monroe sold for $195 million.
Investing in fine art has shown impressive returns, with the contemporary and post-war art market achieving a compound annual growth rate (CAGR) of 12.6% from 1995 to 2022. This surpasses the returns of the S&P 500 (9%) and corporate bonds (4.9%).
The Masterworks Advantage: Simplifying Diversification
For most people, investing in fine art has been out of reach due to the high costs and perceived risks. Traditionally, high-net-worth individuals allocate up to 50% of their portfolios to alternative assets, compared to just 5% for average investors. However, Masterworks changes this narrative by making fine art investments accessible to everyone.
Masterworks employs a proprietary database and machine learning to identify artworks with high appreciation potential. By focusing on established artists and emerging markets, they reduce the risk of losses. Additionally, the platform securitizes each piece with the Securities and Exchange Commission (SEC), ensuring authenticity and allowing users to purchase shares in the artwork for as little as $20.
This approach not only makes art investments affordable but also offers flexibility. Investors can diversify their portfolios by owning shares in multiple artworks, thus mitigating the risk associated with any single artist.
Masterworks Art Investment Returns
Masterworks has delivered an average of 45% annualized returns across 16 successful exits. In 2022 alone, the platform paid out $25 million to investors. Even the lowest-performing piece, a Warhol painting, achieved a 4.1% annualized return after less than a year.
The returns from art investments depend on various factors, including market demand, supply trends, and the holding period. Masterworks typically retains artworks for up to ten years, but they monitor the market to identify optimal selling opportunities. For instance, a Simone Leigh piece sold for a 325.5% annualized return after just 36 days.
How to Invest in Art with Masterworks
Investing in art through Masterworks is straightforward. After requesting an invitation on their website and completing a phone consultation, you can start buying shares in the artworks Masterworks acquires. Each share costs $20, with a minimum investment requirement typically around $15,000, although this may be adjusted during your initial consultation.
Once you purchase shares, you can either hold them until Masterworks sells the piece or sell your shares on the platform’s secondary market.
How the Masterworks Platform Operates
The process is simple:
- Research: Masterworks identifies artists with high investment potential.
- Acquisition: They purchase the right artworks, considering price and potential returns.
- Securitization: They file an offering with the SEC, allowing investors to buy shares.
- Holding Period: Artworks are held for 3 to 10 years to maximize returns.
- Exit: Investors can sell their shares early on the secondary market or wait until the artwork is sold for a profit.
Masterworks Fees and Costs
Masterworks charges a 1.5% annual management fee based on the total value of your account, deducted through a reduction in shares rather than a cash payment. Additionally, they take 20% of the profits from the sale of an artwork, which covers various costs like storage, appraisals, insurance, and SEC fees.
Is Masterworks Worth It?
If you’re interested in art investment but lack the capital typically required, Masterworks offers a viable entry point. It’s also a good option for those looking to diversify their portfolios with alternative assets.
The Final Verdict: Is Masterworks Legit for Investing?
For those seeking an alternative asset class to protect their portfolios from financial stress, fine art is an excellent option. Masterworks provides a legitimate and accessible way to invest in high-value artworks, with consistent returns making it a worthy addition to a diversified portfolio. However, as with any investment, fine art comes with risks, and it’s advisable to have a strong foundation of traditional investments before exploring this market.