Art Investment in "Chinadia" and Things they don't tell you about India's Art Investment Funds

The market volatility has made China and India equities fall from grace. By the end of July, Shanghai Composite and BSE Sensex index have plumme ....

Venus Fan 01.08.2008
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The market volatility has made China and India equities fall from grace. By the end of July, Shanghai Composite and BSE Sensex index have plummet 47.25% and 29.24% respectively year to date. Their stellar performances in the year of 2007 have become a fading legacy. While investor's fervor toward equities may cool down in these emerging markets, over-enthusiasm toward China and India's contemporary arts just looms large on the horizon. Buoyed by the China's contemporary arts, Christie's posted record-breaking sales of USD$31.7 billion from this year's spring sale in Hong Kong. The sales increased 58% from the same period last year when investors still went gaga for China and India's equity markets.

Wh

ere global financial markets remain jittery after the credit crisis, art prices have climbed uninterruptedly in Asia, especially for China and India's contemporary arts. When Chinese artist Yue Minjun sold his painting "Gweong Gweong", inspired by the bloody Tiananmen Square crackdown in 1989, he received USD$5,000. That was in 1994. Fourteen years later, the painting of toothy men dropping like missiles from war planes over Tiananmen, fetched USD$6.9 million at an auction in May. Two and half a years ago, it was sold by less than USD$650,000. A roughly 10 times return on investment went for the previous collector.

Once a bourgeois pastime has now transformed to an alternative investment. Art investment has become such a vogue that customized art indexes are produced to track the auction prices for the hottest artists in China and India. These art indexes have surged over the years. For example, China's Arton contemporary 18 index multipled 13-fold from 2003 to 2007.

India's art investment funds grew significance
Much like its Chinese counterpart, India's contemporary art market has grown exponentially. As artwork is recognized as an asset class, most art investment fund came to inception within the past three years (with an exception for the Capco, the first art investment fund in India, which launched in 2003.) India is a pioneer to launch art investment funds in Asia. These art investment funds have gained popularity among investors with billions of asset under management and the smallest fund size at USD$5 billion. The Securities and Exchange Board of India is the regulatory body. The investment universe is confined to India's contemporary artwork at the certified auction houses such as the Sotheby's, Christie's and etc.

According to India's Economic Times, India's contemporary art market has an annual growth of 35% since 2005. The ET Art Index that tracks the auction prices available from India's biggest auction house, Connoisseurs of Arts, for India's 51 most popular artists rose accumulatively 131% for the past three years.

Things they don't tell you about India's art Investment funds: higher minimum investment, multiple fees and fund information is not widely available
The return on investment may appear to be tantalizing for India's art investment funds but the underlying risk are often overlooked. Compared to the mutual funds that register for sales in Taiwan, India's art investment funds have an obscure practice in information disclosure. A fund's net asset value is not frequently updated and its portfolio data is not widely accessible for fund comparison and research. Three aspects particularly deviate from the common practice in Taiwan's mutual funds industry.

Higher than normal minimum investment: USD$ 10,000 - USD$1,000,000
Most India's art investment funds are close-end funds with fund size ranging from USD$5 billion to USD$ 25 billion. The number of investors are no more than a hundred with a minimum investment range from USD$10,000 to USD$1,000,000. Compared to an average minimum investment of $USD 100 for the mutual funds available in Taiwan, India's art investment funds and their higher than usual minimum investment make them significantly less accessible to the general retail investors.

Multiple fees eat away your return
India's art investment funds have a complex fee structure. The sum of annual and management fee already have a higher than usual range from 5% to 9 %; add up the front load and tax, these fees can eat away your returns. Take the largest India's art investment fund by asset, Osian's Art Fund, for example. The fund has an average annual return of 42% since its inception in July, 2006. However, an investor has to pay 9% for the annual and management fee, 33.5% for capital gains tax while the fund company retains 30% from its annual return on investment. All these fees essentially eat away at an investor's return. The realized return only accounts for about a third of what the nominal annual return.

Fund information is difficult to obtain
Investors do not have an easy access to general fund information for India's art investment funds. There is no fund information available through the most used source such as financial newspapers. In addition, there is no centralized platform for information disclosure. With an exception for the Osian's Art fund which discloses its NAV monthly on the company's website, other fund companies do not disclose such information to public. Most fund report only becomes available every six month. The infrequent information disclosure posts a challenge for the investors to examine the portfolio management. Neither does the information from these fund reports render good references as they hardly capture the cyclical nature of auction price for India's contemporary art.

Artworks do not fare better than equities
It is claimed that India's art investment funds are adequate defensive play during India's equity turbulence. It calls for scrutiny. When we look at the price of ET Art index for the past decade, it shows a rather different picture than what's claimed. The artwork, just like other asset classes, has price correction. Notably, its correction can be quite severe too. According to the ET Art Index, it fell 875.91 points, or 30.86% year to date as of June 6th. Although it did outperform India equity funds with Morningstar category average posted a loss of 31.59%. It still underperformed the equity market with BSE Sensex Index fell less than ET Art Index by 7.62% for the same period. By July, BSE Sensex Index went up for 4.01% while ET Art index fell by 3.5%. Artwork as an asset class does not fare better than equities. And from the price chart of the ET Art Index, the investors can see that artwork as an asset class is not insulated from price correction and therefore is still subject to potential loss as well.

Price correction level in Artwork
Although the index exhibits an upward trend, the red columns show the level of price correction is magnified over the years. The maximum level of price correction for the ET Art Index is 15.38% in 2005, 23.6% in 2006, and 35.05% in 2008 respectively. ET Art index plummeted from its peak in March to its lowest point in June by1059.25 points. Within three months, the index fell by 35.05%. The magnitude can attest to the implicated risk for art investment. Like all investment, there is no guarantee for persistent positive return. If anything, artwork as an asset is likely to have its own asset bubble when the price is frenetically bid up.

I. ET Art Index for the past decade

Data Source: Economic Times ET Art Index & Morningstar

India Equity Funds registered for sales in Taiwan

Data Date: All data are updated till August 1st except for ET Art Index as of July 17th and Parvest India I Acc Fund as of July 31st

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