THE  PLEASURES  AND  PERILS  OF  INVESTING  IN  ART  –  8  FEBRUARY  2012  

               OVERVIEW  
The Pleasures of Collecting & Investing in Art! Brief History of the Art Market! Incorporating Art into a Wealth Portfolio ! Things to Keep In Mind When Investing in Art! Investment Strategies! Sector Characteristics !

               THE  PLEASURES  OF  COLLECTING  AND  INVESTING  IN  ART    
Living with aesthetically pleasing and intellectually challenging works of art! Expressing personal passion and creative energy through the creation of an art collection! Owning a part of history! Creating a cultural legacy! Joining a global community of like-minded individuals! Supporting artists and the art of oneʼs generation!

 THE  ART  MARKET  HAS  UNDERGONE  UNPRECENDETED  GROWTH  IN  RECENT  YEARS  
Total Global Art Sales 2002 - 2011 !
$80! $70.7! $70! $60! $50! $40! $30! $20! $10! $0! 2002! 2003! 2004! 2005! 2006! 2007! 2008! 2009! 2010! 2011! $23.4! $23.4! $33.0! $34.1! $57.2! $59.4! $57.5! $45.1! $65.3!

Source: The European Fine Art Foundation & Artvest Partners!

Billions!

 NOT  ALL  SECTORS  HAVE  GROWN  AT  THE  SAME  RATE  
AMR / ARTVEST Auction Price Indices!
1400! 1200! 1000! Index Value! 800! 600! 400! 200! 0! Contemporary Art! American Art (Pre-1950)! Impressionist & Modern Art! Old Master Paintings!

Jan-88!

Jan-89!

Jan-90!

Jan-91!

Jan-92!

Jan-93!

Jan-94!

Jan-95!

Jan-96!

Jan-97!

Jan-98!

Jan-99!

Jan-00!

Jan-01!

Jan-02!

Jan-03!

Jan-04!

Jan-05!

Jan-06!

Jan-07!

Jan-08!

Jan-09!

Dec-86!

Jan-10!

Jan-11!

 GROWTH  HAS  BEEN  PARTICULARLY  ROBUST  AT  THE  TOP  OF  THE  MARKET  
Volume of US $1 Million+ Artworks Sold at Sothebyʼs and Christieʼs!
1600! 1400! 1200! # of Lots Sold! 1000! 800! 600! 400! 200! 0! 2002! 2003! 2004! 2005! 2006! 2007! 2008! 2009! 2010! 2011! Christie's! Sotheby's!

 THE  ART  MARKET  HAS  BECOME  MORE  GLOBALIZED  
  A shared global appreciation of art as an asset class has emerged!   Since the market dislocation, Chinese spending on art has increased at a rapid pace ! Global Market Share (by value)! 2006 ! Market Size: $57.20 Billion! 2008 ! Market Size: $59.44 Billion! 2010 ! Market Size: $57.51 Billion!
22%! 34%! 15%! 16%! 6%! 16%! 5%! 6%! 9%! 6%! 23%!

46%!

34%! 27%! 35%!

China!

France!

USA!

UK!

Other!

Source: The European Fine Art Foundation!

 THE  ART  MARKET  IS  NOT  CORRELATED  TO  OTHER  ASSET  CLASSES  –  AMR  INDEX  
AMR Art 100's Annual Correlation To:!
1.00! Correlation Coefficient ! 0.75! 0.50! 0.25! 0.00! -0.25! -0.50! -0.75! Small Cap Equities! Global Equities! US T-Bonds! Commodities! US Home Prices! S&P 500! Bonds! REITs! Gold! -1.00!

*Based on data from past 25 years (31 December 1986 – 31 December 2011) !

 THE  ART  MARKET  IS  NOT  CORRELATED  TO  OTHER  ASSET  CLASSES  –  MEI  MOSES  INDEX  
Mei Moses All Art Index's Annual Correlation To:!
1.00! Correlation Coefficient ! 0.75! 0.50! 0.25! 0.00! -0.25! -0.50! -0.75! Small Cap Equities! Global Equities! US T-Bonds! Commodities! US Home Prices! S&P 500! Bonds! REITs! Gold! -1.00!

*Based on data from past 25 years (31 December 1986 – 31 December 2011) !

 25-­‐YEAR  RISK  /  RETURN  (DECEMBER  1986  –  DECEMBER  2011)  
16%! 14%! 12%!
Pop Art

Return: 25 -Year CAGR!

Post-War Art

Contemporary Art

10%!
Modern Art

Russian Art

8%! 6%! 4%! 2%! -1%! 0%!

Latin American Art 19th Century Art Old Masters

American Art Impressionist Art

5%!

10%!

15%!

20%!

25%!

30%!

35%!

40%!

45%!

50%!

Volatility: Geometric Standard Deviation!
*Based on Art Market Researchʼs index data from past 25 years (31 December 1986 – 31 December 2011) !

 25-­‐YEAR  RISK  /  RETURN  (DECEMBER  1986  –  DECEMBER  2011)  
16%! 14%! 12%!
Pop Art

Return: 25 -Year CAGR!

10%! 8%! 6%! 4%! 2%! -1%! 0%!

S&P 500 US T-Bonds Bonds Gold

Post-War Art REITs Small Cap Equities Modern Art

Contemporary Art

Russian Art

Latin American Art Global Equities 19th Century Art Old Masters

American Art Impressionist Art

Home Prices

Commodities

5%!

10%!

15%!

20%!

25%!

30%!

35%!

40%!

45%!

50%!

Volatility: Geometric Standard Deviation!
*Based on Art Market Researchʼs index data from past 25 years (31 December 1986 – 31 December 2011) !

 10-­‐YEAR  RISK  /  RETURN  (DECEMBER  2001  –  DECEMBER  2011)  
25%!
Pop Art

20%!

Gold Russian Art Post-War Art

Return: 10-Year CAGR!

15%!

Modern Art 19th Century Art Old Masters Bonds Latin American Art S&P 500

Contemporary Art

10%!

REITs

American Art

Impressionist Art

Small Cap Equities

5%!

Global Equities Commodities

Home Prices

0%! 0%!

10%!

20%!

30%!

40%!

50%!

60%!

Volatility: Geometric Standard Deviation!
*Based on Art Market Researchʼs index data from past 10 years (31 December 2001 – 31 December 2011) !

 ART  INVESTMENT  PORTFOLIOS  
14%! 12%! 10%! 8%! 6%! 4%! 2%! 0%! 0%!

Aggressive
Pop & Contemporary

Return: 25-Year CAGR!

Moderate
Modern & Post-War

Conservative
Old Master & 19th C.

5%!

10%!

15%!

20%!

25%!

30%!

35%!

40%!

Volatility: Geometric Standard Deviation!
*Based on Art Market Researchʼs index data from past 25 years (31 December 1986 – 31 December 2011) !

 WHEN  ART  HAS  OUTPERFORED    
Average Change in Prices in Years* When: !
30%!

25%!

20%!

Impressionist & Modern Art! Post-War & Contemporary Art! American Art (Pre-1950)! Old Master Paintings! S&P 500 (SPX)!

15%!

10%!

5%!

0%! US Consumer Confidence Dropped! US Inflation Was Above 3%! S&P 500 Volatility (VIX) Increased! US GDP Growth Exceeded 4%!

*Based on the past 25 yearsʼ data from the AMR / ARTVEST Auction Indexes (31 December 1986 – 31 December 2011) !

 ART  IS  AMOUNG  THE  MOST  EFFECTIVE  INFLATION  HEDGES  
Average Index Growth In Years When US CPI Inflation Was Above 3% (1987-2011)!
20%! 15%! 10%! 5%! 0%!

 ELEMENTS  THAT  GIVE  ART  VALUE  

Condition! Size! Medium! Subject Matter! Movement! Artistʼs Reputation ! Provenance! Historical importance! Scholarly Research! Authenticity! Rarity! Quality!

Frequency of Sale ! Familiarity! Promotional Efforts! Location of Sale! Collector Behavior! Market Trend ! Global Wealth & Liquidity!

 CONNOISSEURSHIP  COUNTS  

Not  all  art  is  investment  grade   Collectors  must  carefully  evaluate  the  quality,   condiZon,  provenance,  rarity,  and  historical   significance  of  every  work   Collectors  cannot  make  sound  investment   decisions  based  solely  on  market  trends   SophisZcated  research  &  advice  from  established   and  respected  art  professionals  with  a  financial   focus  can  miZgate  risk,  and  yield  higher  returns  

 A  PRINCE  IS  NOT  ALWAYS  A  PRINCE  
Same Artist Same Purchase & Sale Date*, Different Result!
Richard Prince! Untitled (Fashion), 1984! Purchase Price:! Sale Price:! Compound Annual Growth Rate:! Net Annual Return ! (After Auction Fees):! $399,500 ! $362,500 ! -1.75%! -5.07%! Richard Prince! Untitled (Cowboy), 2003! $298,700 ! $602,500 ! 13.61%! 9.82%!

*Both  purchased  on  11/11/2004  and  both  sold  on  5/11/2010  at  Chris:e’s  

 ART  LIQUIDITY  

Artist!
Tier 1! Tier 2! Tier 3 !

First Rate!

High !

Moderate!

Low!

Artwork! Second Rate!

Moderate!

Low!

Very Low!

Third Rate !

Low!

Very Low!

Illiquid!

 ART  SUBMARKETS  CORRELATION  ANALYSIS  
Art Market Sectorsʼ Annual Correlation To One Another!
Pop Art! Pop Art! Russian! Contemporary! Post-War! American! Impressionist! Modern! Latin American! Old Masters! 19th Century! 1.00! 0.76! 0.82! 0.80! 0.67! 0.61! 0.75! 0.26! 0.62! 0.77! 1.00! 0.81! 0.78! 0.43! 0.82! 0.72! 0.29! 0.62! 0.77! 1.00! 0.86! 0.53! 0.80! 0.74! 0.36! 0.67! 0.86! 1.00! 0.49! 0.88! 0.91! 0.42! 0.78! 0.91! 1.00! 0.47! 0.34! -0.21! 0.42! 0.59! 1.00! 0.78! 0.26! 0.81! 0.86! 1.00! 0.57! 0.78! 0.83! 1.00! 0.22! 0.31! 1.00! 0.77! 1.00! Russian! Contemporary! Post-War! American! Impressionist! Modern! Latin American! Old Masters! 19th Century!

*Based on Art Market Researchʼs index data from past 25 years (31 December 1986 – 31 December 2011) !

 DETERMINING  AN  ART  INVESTMENT  STRATEGY  
A well-planned art investment strategy must take into consideration a variety of factors, including:! !Asset allocation strategy! !Liquidity parameters! !Risk tolerance! !Art wealth transfer strategies (intergenerational)! !Exit strategies!

STRUCTURING  A  PROFITABLE  ART  INVESTMENT  

Outperformance on a Risk Adjusted Basis !

Proprietary Analytics & Market Insight!
  Demographics!   Confidence Metrics!   Auction Breakdowns !   Exhibition Statistics!   Macroeconomic Data!

Portfolio Diversification!
  Sector !   Region!   Genre !   Movement!   Medium !   Price Point!

Exploitation of Market Inefficiencies !
  Geographic Arbitrage!   Bulk Buying Discounts !   Distressed Acquisitions !   Acquiring or Guaranteeing Undervalued Property!

Multiple! Exit Strategies!
  Private Deals!   Dealers & Galleries !   Auction Houses !  !Partnerships !   Deal Participation!

 ART  INVESTMENT  CHALLENGES  
The art market cannot be treated in the same analytic framework as a robust and continuously traded market due to:! !Uniqueness of property! !Illiquid market! !Limited public sales! !Opaque private market! !High transaction fees! !Limitations on financial research! Additional challenges include:! !Complex emotions! !Lack of income stream provided by art! !Considerable tax and legal implications! !Risk of physical damage, loss, or theft!

 EUROPEAN  MASTERS  13th  -­‐  19th  CENTURY  
Key Attributes:!   Extreme supply-demand challenges !   Value is heavily dependant on quality & condition !   19th Century paintings have been sluggish, may be undervalued !   Investment strength lies in its superiority as a hedge asset!   Most stable & least correlated sector of the art market!   Market is heavily reliant on estate property !   Increasing scarcity of supply could yield above-trend returns !   Strong foundation of loyal collectors who will continue to buy ! in market downturns!   Emerging wealth countries have not yet had an impact !

 IMPRESSIONIST  &  MODERN  ART  
Key Attributes:!   Largest global following of any art sector !   Has attracted considerable interest from emerging economies!   Collectors are generally more conservative than those of PWC!   Demand for accessible subject matter & famous names !   Often collectors begin with Impressionist & drift into Modern !   Prices recovered relatively quickly after recent market downturn!   Participation from emerging economies is likely to increase !   Over past 25-years, Modern has outperformed Impressionist & ! has been less volatile !

 POST  WAR  &  CONTEMPORARY  ART  
Key Attributes:!   High price volatility !   Will be significantly affected by intergenerational wealth transfer!   Shortage of available iconic Post-War works !   Popular among newer wealth & relatively younger collectors!   Often attracts individuals who initially collect in other sectors!   Minimal attribution, authenticity & provenance-related concerns!   Weak performance is likely for high volume, low value works!   Definition of the established Contemporary market is broadening !

 EMERGING  MARKETS  
BRAZIL!   Brazilians have become aggressive bidders for Latin American art!   They particularly focus on Brazilian art from the 1940s and 1950s! RUSSIA!   Russians collectors are not concentrating solely on Russian art!   Masterworks command high prices, lesser pieces struggle at auction ! INDIA!   Sales of India art have declined!   Indians have become interested in global Contemporary art! MIDDLE EAST!   A group of Middle Eastern buyers have become some of the most ! active collectors of Contemporary & Modern art ! CHINA!   Chinese art has become the art marketʼs largest sector!   After 4 years of rapid growth, Chinaʼs art market began to slow in! 2011, although year-on-year, prices rose!

 INDICES  USED  FOR  THIS  PRESENTATION  
Label!
Post-War & Contemporary Art! Impressionist & Modern Art! Old Master & 19th Century Art! All Other Art Indices ! Large Cap Equities ! Bonds ! Treasury Securities! Small Cap Equities! Global Equities! REITs! Commodities ! Gold! Home Prices! Federal Funds Rate! US 10-Year Treasury Bond! US Inflation Data!

Index!
AMR / Artvest PWC Auction Price Index (adjusted for lag)! AMR / Artvest IMP/MOD Auction Price Index (adjusted for lag)! AMR / Artvest OMP Auction Price Index (adjusted for lag)! Art Market Research Sector Indices! S&P 500 (GSPC)! VBMFX (Vanguard Total Bond Market Index)! VUSTX (Vanguard Long-Term Treasury)! NAESX (Vanguard Small Cap Index)! VTRIX (Vanguard International Value)! VGSIX (Vanguard REIT Index)! PCRIX (PIMCO Commodity Real Ret Strat Instl)! COMEX! CSXR (S&P/Case-Shiller Home Price Index - Composite 10)! Source: Federal Reserve Bank of New York! Source: US Department of the Treasury (returns calculated by Artvest Partners)! Source: US Bureau of Labor Statistics!

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