Masterworks: Fractional Art Investments That Hold Strong in a Recession

The global economy has been in a state of turmoil for several months, making it harder to find high-yield investments in the stock market. 

In this climate, blue-chip art has emerged as an increasingly attractive alternative asset class, largely because the market dynamics that make other assets volatile don’t apply to art. With fractional art investments now possible via Masterworks, art has become more accessible to everyday investors.

Economic Slowdowns and the Hunt for Alternatives

In recent weeks, New Zealand’s economy became the latest to sound alarms when it was announced that the GDP had declined by 0.1% and 0.7% in the first two quarters of 2023, respectively. The news came shortly after the Reserve Bank of New Zealand hiked interest rates to a 14-year high.

Unfortunately, New Zealand isn’t an exception. While it was one of the first countries to start raising interest rates, the situation has been equally concerning in most parts of the world. The US Federal Reserve, too, has been hiking interest rates to curb inflation, although the Fed did announce a pause on this activity.

Given the scenario, a global recession seems more or less inevitable. According to a survey by the National Association for Business Economics (NABE), a majority (58%) of economists believe the US will face a recession in 2023. It’ll likely start in the third quarter of the year.

That means ordinary citizens should prepare for a period of economic decline that comes with higher costs of living, layoffs, and pay cuts. Additionally, expect depreciation in any investments you have made in traditional assets like stocks and bonds. As businesses struggle to remain profitable and everyday investors need to liquidate their assets, stock prices can plummet.

Today, it makes sense to start diversifying your investment portfolio with assets that are less vulnerable to economic crises. If you’re looking for alternative assets that can weather the storm, fine art makes an excellent choice.

However, fine art, as an asset class, has been traditionally reserved for the wealthy. Investing in multi-million dollar art is a feat only those with troves of liquid cash can aspire to achieve. With Masterworks, the exclusivity of fine art investing has been diminished.

Before we delve into the nitty-gritty of how Masterworks simplifies art investing, let’s first understand what makes fine art a good investment option during a recession.

The Current State of the Art Market

The global art market generated sales worth $67.8 billion in 2022. That’s a significant jump over pre-pandemic levels and the second-highest value in the last 15 years. Additionally, worldwide sales volumes in the art market rose by 1.3%. 

While the recent pandemic triggered a period of slow sales and reduced turnovers, art galleries, museums, auctioneers, and art fair organizers found new ways to stay afloat. From online exhibitions and art fairs to live-streamed auctions – the industry embraced digitalization, which helped mitigate some of the pandemic’s impact.

It’s common knowledge that during periods of economic decline, investors gravitate toward alternative assets, such as precious metals and real estate. What makes the art market particularly appealing is that contemporary art investments have been steadily offering high annual returns for more than two decades. It stands at 14%, to be precise, which is higher than the 9.5% annual return of S&P 500 investments.

Data compiled by Masterworks also show that post-war and contemporary art has appreciated at a compound annual growth rate (CAGR) of 12.6% between 1995 and 2022. In comparison, corporate bonds and real estate have grown at a CAGR of 4.9% and 4.5%, respectively, during the same period.

Furthermore, the art market has historically exhibited a low correlation to other sectors during any economic crisis.

It is, however, worth noting that the art market wasn’t entirely immune to the Great Recession. The overall market had fallen by nearly 33% by 2009. Many small art galleries in London, New York, and Berlin shut their doors.

But even in that year, Yves Saint Laurent’s collection raked in more than $470 million at Christie’s Paris. Later that year, Andy Warhol’s 200 One Dollar Bills sold for $43.8 million at Sotheby’s New York. The price was more than thrice its upper estimate.

The numbers tell an interesting story – masterpieces by famous, in-demand artists can command high prices, even during a recession. Investing in such artworks can help fortify your investment portfolio during a recession.

How Masterworks Makes Art Investing Accessible

Founded in 2017, Masterworks purchases blue-chip art, i.e., works of established and well-known artists like Banksy, Warhol, Picasso, and KAWS. They file an offering circular with the SEC for each painting to allow the public to invest. Thereafter, investors can purchase shares of the painting on the Masterworks platform. 

Prices start as low as $20 per share, and that’s what helps make art investing affordable for the common public. You no longer have to be a high-net-worth individual with millions of dollars in the bank to invest in fine art.

As of this writing, Masterworks has purchased 278 artworks and boasts more than 729,000 members. The platform usually holds a painting for three to ten years before selling it and distributing the returns among shareholders. Members also have the option to trade their shares on Masterworks’s secondary market.

Besides making art investing accessible and affordable, Masterworks also simplifies the process. Investors don’t have to worry about identifying the right markets and choosing artists whose work is likely to appreciate in the future. Nor do they have to go through the hassle of auctioning their collection at the right price, as Masterworks takes care of all those intricacies.

Mastering the Art of Investing in Fine Art

While Masterworks dissolves much of the exclusivity and mystery associated with art investing, you should carefully consider whether it’s the right choice for you. Given that your money could be locked in for a few years, this is not a good option for people looking to see quick ROI.

Additionally, keep in mind that today’s in-demand artists and masterpieces may not be as valuable a few years later when buyers’ tastes evolve. There’s a chance your investments won’t yield any profits after all that waiting.

Therefore, it’s crucial to invest in a combination of asset classes, both traditional and alternative. Build a concrete base of traditional investments that help you achieve your immediate financial goals before experimenting with any alternative assets.