Luxury Art and Timepieces: The Growing Niche of Alternative Investments

When it comes to traditional portfolio construction, financial professionals often focus on mainstay investments such as conventional equities and securities. For those that venture into unconventional waters, there is an entire sector of alternative investments that pose to offer investors a differentiated source of return. While we’ve spoken at length about conventional alternative investments such as hedge funds or private market funds traditionally accessed via private fund limited partnerships, or liquid alts such as ETFs and mutual funds, we wanted to broaden the scope of our discussion to the wider alternative investment ecosystem and highlight a niche portion of the alternative investment ecosystem: Luxury Art and Timepieces.

While small relative to the entirety of the alternative investment ecosystem, both the luxury art and timepiece markets have carved out an unsurprisingly robust niche, providing collectors and investors alike with compelling low-correlated return profiles. Why unsurprisingly? Well, these two markets are generally comprised of items that can be characterized as Veblen Goods, that is goods for which demand increases in tandem with price increases due to the limited supply, exclusivity, and ultimately appeal as a status symbol.1 Luxury Watch brands such as Rolex, Patek Phillipe, Audemar Piguet and Renowned Artwork from artists such as Mark Rothko, Lichtenstein, Pollock, among countless others have long been accumulated by the ultra-wealthy, and these items continue to fetch exorbitant prices at auction and on exchange, regardless of market conditions.

Long before the time of Bored Apes, Invisible Friends, and other pieces of NFT artwork developed by computer, infamous artists developed unique pieces the old fashion way, with a paintbrush and a canvas. While these masterpieces, similar to their NFT artwork counterparts, may not generate any real utility on the surface, they evoke emotion, are tangible and are widely sought after by the rich and famous. For tangible art, scarcity and renown consensus are driving factors to long-term price appreciation. The more consensus builds about a renowned artist, the more their work will be in demand by collectors, institutions, and investors alike and in turn, will be reflected in the perceived value of the piece of art. To understand the magnitude of price appreciation for various contemporary art pieces, the top 10 art pieces sold at auction (post-war era) and via private sale range from $110-$300M, raking in a combined total of ~$1.7B from artists like Jasper Johns, best known for his flag paintings to Willem de Kooning best known for his abstract art.2

Art is a valuable asset with an illustrious, time-honored past. For over two centuries now, marketplaces and auction houses like Sotheby's have made it possible to buy art as investments or simply for its world-renowned beauty. According to data compiled by Masterworks, from 1995 to 2022, the price appreciation of Contemporary Art has grown at a CAGR of 12.6% per annum, trumping that of the S&P 500 Index by nearly 3.6%, and other mainstay assets by more than 2x.3

Additionally, throughout history, contemporary art has generally exhibited low correlation characteristics with other major asset classes, providing potential insulation for owners during broad market drawdowns. The last calendar year, 2022, demonstrated the robustness of the art market amidst haphazard market conditions. While traditional investments suffered from events such as the war in Ukraine and rampant inflation, the art market had an exceptionally strong year, setting a record-breaking turnover of $65.1 billion.4 The ability of art to perform throughout market drawdowns, and display low correlations to other asset classes is a direct result of three prominent forces: a swelling of wealth among high-end buyers, scarcity of renowned art pieces, and the marketability of this asset class around the globe.

Now, switching gears over to the luxury timepiece market, many will be familiar with notable brands such as Rolex, Patek Phillipe, and Audemar Piguet. Long famed for their impressive craftsmanship and hand assembly, these luxury timepieces are produced in extremely limited quantities worn by the elite, and are rather difficult to purchase in primary markets, requiring significant lead times to acquire. While these watches do not fetch the same dollar amount as their contemporary art counterparts, there is an entire ecosystem developed around investing in luxury watches. Due to the rarity of these watch brands in circulation, secondary market activity has caused tremendous price appreciation for these brands. As evidenced during the pandemic and associated with the crypto boom, cash-strapped millennials and gen-z consumers put their hats into the arena, collecting & accelerating the interest in timepieces as an investment.

According to Bloomberg, the aforementioned luxury timepiece brands appreciated by an average of 20% a year since August of 2018, significantly outperforming the S&P 500 as an investment asset. While over a longer-term horizon, the luxury watch market has underperformed the S&P 500, with a CAGR of 7% vs 12% respectfully, the recent surge in secondary market platforms may provide insight into the further expansion of the luxury watch ecosystem. Given the continued tightness of supply in the primary market, it is reported that forecasts of secondary market sales can top $85B by 2033, a CAGR of 13.5%.5

As evidenced by the Institutional Investor article that came out more than a decade ago, hedge fund managers interest in rare art is not novel. In fact, at the time of this published article, nine of the top 200 art collectors in the world were hedge fund managers.6 The allure of the investment opportunity has caused many private fund managers to invest in the next iteration of technology platforms, facilitating ease and growth of transacting for both luxury art and timepieces. With respect to investing and transacting, platforms such as Masterworks, Artsy, and Chrono24 have all been the product of heightened software investor backing.7 These platforms each approach the luxury art and timepiece ecosystems differently, with the goal of continuing to accelerate the compounding growth of these expanding niches.

Relative to conventional alternative investments, which offer varying liquidity profiles, it is important to understand how Luxury Art and Watches compare. When compared to luxury artwork, which tends to lean towards illiquid portion of the liquidity spectrum, luxury timepieces tend to offer greater liquidity to investors given the prevalence of secondary market platforms which allow for a faster speed of turnover for luxury timepieces. However, it is important to note the general illiquidity of art has prompted ingenuity within the asset class. Marketplaces have developed, in which art is securitized and investors can buy shares in the underlying art. These marketplaces offer different liquidity terms, some requiring investors to hold shares of the underlying investment until a liquidity event is associated with the final sale of the piece, and others allowing for shares to be sold in an exchange-like fashion.

Investing in this portion of the alternative investment ecosystem, though historically rewarding, does come with inherent key risks and limitations such as liquidity constraints, market volatility, and cost barriers. Luxury art and timepieces are often limited to a niche market, which can limit the amount of liquidity available for investors looking to sell their assets. Luxury art and timepieces typically come with high price tags, making exclusivity a major consideration for most investors. This means that the potential pool of buyers is limited to individuals with significant disposable income, and, as such, demand can be unpredictable. Finally, the market for luxury art and watches can be unstable, with prices fluctuating based on many factors, including current fashion trends and economic stability. This can make it difficult to predict how much profit an investor will make in a given investment.

Sources:

1. Investopedia, Jan 2023. "What is a Veblen Good?"
2. Contemporary Art Issue, Dec 2021. "Introduction: Contemporary Art"
3. Masterworks, 2023. "Why Art?"
4. Artalistic, Jan 2023. "Art Market 2022: Recapping a Record-breaking Year!"
5. Bloomberg, March 2023. "Rolex Patek Investments Beat S&P Gains"
6. Institutional Investor, July 2011. "Hedge Fund Managers Among World's Top Art Collectors"
7. Crunchbase (Masterworks, Artsy, and Chrono24)