The lucrative sales of highly coveted art, like this painting by Picasso that sold for a record $179,365,000, inflate the valuation of the rest of the art market, researcher say. Photo by John Angelillo/UPI | License Photo
LUXEMBOURG, June 15 (UPI) -- New research suggests returns on investment in fine art have been significantly exaggerated. Economists' advice to collectors: buy art if you enjoy it, but not with the expectation of profit.
No longer simply framed and hung in homes or museums, art is now bundled into financial instruments and used to diversify investment portfolios. Financial analysts have measured the annual rate of return for art funds at 10 percent over the last 40 years.
But new analysis by researchers at the University of Luxembourg's School of Finance suggest the rate of return is significantly lower. Their findings were detailed in a paper published in the journal Review of Financial Studies.
Economists looked at auction sale data collected by the Blouin Art Sales Index to more accurately measure both the potential returns and risks involved in art fund investments. Their work suggests art as an asset provided a return rate of 6.3 percent between 1960 and 2013. Researchers also found the risks assumed in hopes of profit were underestimated.
Researchers blame the overvaluation on selection bias in the art market. The most valuable and quickly appreciating pieces of art go to sale most frequently and are sold for the highest prices. These inflated prices are then used to overvalue the remaining art that doesn't sell.
By incorporating data on how likely a painting is to sell and how quickly prices rise over time, researchers were able to more accurately value the art market. Their analysis suggests a portfolio with an art fund is no more likely to outperform the market than a portfolio without one.
The new analysis applies specifically to art funds, but risks are high for individual investors, too.
"If you own a painting, you bear the physical risks and costs, including insurance, damage, and theft or forgery, among others," researcher Roman Kräussl, a professor of finance at Luxembourg, said in a news release.
"In short, buy paintings if you like looking at them," Kräussl concluded. "You can hope that your children will sell one or more of them later for a gain -- but paintings are primarily aesthetic investments, not financial ones."