Why your family estate should hedge some of its assets in art

This digest is brought to you by Patrons MCAA. Patrons is a full-suite art advisory firm that helps private and corporate art collectors diversify their wealth through art collection, appraisal, packaging & transportation, storage, insurance, maintenance, and restoration.

Art is a bankable asset. Recent research by Deloitte and ArtTactic revealed that 85% of wealth managers believe art and collectibles are excellent investments and make them a part of their client’s offerings. This response from wealth managers is intriguing and encouraging, considering the same research fared when it was conducted in 2014 results. In 2014, only 53% of wealth managers were on board.

What changed?

For a very long time, investors sought after gold as a haven to hedge some of its assets under extreme market conditions and a hedge against stocks on average (Baur and Lucey, 2010). Over the years, wealth managers have realized that art can and should be treated the same as other assets, such as real estate and stocks. As part of a wealth management offering, art enjoys the same protection as other assets. This protection happens through estate planning, insurance, and hedging strategies and is enhanced through frequent portfolio appraisals to determine current market value and available tax breaks. A high net worth individual without an art portfolio is looked upon demeaningly, and wealth managers tend to bear the heat from their clients.

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Art has become an increasingly popular investment vehicle for wealth managers, investors, and high net worth individuals (HNWI) looking for potential alternative instruments to diversify and strengthen their portfolios. All of this indicates and fuels the demand for art. This, in effect, explains its rise.

Let’s consider one fact; art has consistently earned its status as an asset because of the price levels at which it is trading. In the grappling pandemic of 2020, Deloitte and ArtTactic valued the wealth associated with art and collectibles to be over $1.5bn and $191trn of their assets.

Art’s popularity as a value-preserving asset motivates more investors to shy away from traditional investments such as stocks and real estate to diversify their portfolios. Quarterly and yearly art allocations are now commonplace to wealth managers. While we can all agree that some individuals and institutions have personal reasons that fuel their interests in art collection – emotional attachments, cultural and intellectual value – it is almost impossible to rule out that wealth management tops this list of reasons.

Economists will tell us that, on average, a crisis occurs every 25 years or even less frequently. In juxtaposition, a recession occurs every eight years. This fact already leaves cues for wealth managers and investors to hedge risks accordingly for when the economy crashes or slows down. Close monitoring of the global art index renders the positive and hostile environments of the financial crisis and how art performs in such cases. These indexes show that art performs better before and after crisis years. Knowing this, wealth managers use this index to improve diversification and enhance returns through volatile periods. Additionally, art can be a hedging option, especially for decreasing the volatility of the portfolios during uncertain times.

If you can speak with your wealth manager on this, I’d remarkably advise that you do so. However, if you do not have one and would like some advice on how to get started with hedging some of your assets in art, speak to us. We can help you at Patrons: [email protected].

Until next month,
Keep diversifying your portfolio.