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Getting specialist asset management down to a fine art

20/12/2017 Greta Pender, senior trust manager, Saffery Champness Registered Fiduciaries,

Art is appreciated by many, yet owned by relatively few. However for trustees the acquisition, holding and administering of art, antiquities and collectibles as assets in structures has become an area of growth. The role of the trustee can now include arranging exhibitions and securing financing for highly valuable pieces. 

High net worth individuals (HNWIs) are increasingly interested in acquiring art and collectibles both for profit and for social and cultural reasons. 

Global art market sales were estimated at US$45 billion for 2016; an increase of $1billion on the previous year with the European market accounting for almost half of these sales, and the Middle East showing strong growth.  

While it is difficult to put a value on the total art held by private individuals, it is estimated to be up to an eye-watering $3 trillion, putting the art market on a financial par with hedge funds and private equity. 

In 2016 the combined price of the top 20 artworks sold at auction, which featured works by Monet, Picasso and Rothko, was $835 million. However, there has been a movement away from auction sales towards private, brokered deals and this increase in private transactions has a bearing on trustees. This increase in private transactions, compared to auction activity, may be a reaction to increased economic austerity and the shifting moral position over assumed "hidden wealth" of those involved at the top end of the market.

Some individuals look at the art market from a purely investment-based standpoint. In times of geopolitical instability the art market does not experience the same volatility as other asset classes. In the current economic climate, investors may be looking to buy assets that protect capital and retain their value in the long term.

Investment in art can also be used as a hedge against inflation and fluctuations in currency; it can add to the potential benefits of diversification with art as part of a wider portfolio housing a range of assets. 

Following the financial crisis there has been a return to investing in “real assets”.  Art is seen as tangible and more easily understood than some of the more complex pre-crisis products and schemes of which investors may now be more wary. 

An art collection can also be used to generate income if it is of sufficient size and/or cultural interest. Exhibitions, or the loan of rare works, can be arranged with museums on commercial terms. 

In the same way charges and mortgages can be secured by other assets, art can also be used to provide security for financing. There are specialist lenders in this field who have a detailed understanding of art being used as security. This can be useful if there is a wish to retain a particular piece but also a need for liquidity.

For those not wishing to invest directly in tangible assets, or not seeking to build up an art collection, exposure to the art market can still be achieved via art funds and structured products. Due to the illiquid nature of the underlying art assets, it is important to ensure that any fund being considered for investment is highly transparent and that the fund manager has clear policies on valuation methodology, liquidity and performance calculations. 

However interest in art is not necessarily related just to profit and in many cases there can be cultural and emotional motivations for individuals looking to acquire it.

With the globalisation of culture, an individual may wish to acquire items from their heritage or have a desire to “go back to their roots” and therefore share art on a wider scale through museum exhibitions rather than pieces being housed in private galleries in their homes.

This desire to promote and advance cultural objectives via museum exhibitions may also motivate clients to consider donations in support of the long-term future of galleries and similar institutions.

Alternatively, some individuals who give less priority to wealth preservation and growth, might be keen to invest in emerging artists to support their development and fund further works (perhaps seeking to emulate Charles Saatchi acting as patron to Damien Hirst and Tracey Emin in the late 1990s.) 

Investment in art can be a real passion so trustees seeking to work with clients with these types of assets need to be able to understand and relate to that enthusiasm; they would be wise to keep themselves informed of the latest trends and activities in the art market, as well as developing a knowledge of any niche area in which the client has an interest. 

Trustees may find they are more frequently asked to acquire, hold and administer art, antiquities and collectibles through trust, company and foundation structures. 

Structures may be used for asset protection; for example for clients looking to ring-fence their assets against political instability or for estate planning purposes to preserve an art collection for the enjoyment of future generations of the family. 

Housing the pieces within a trust or foundation structure can provide ease of administration with the structure taking on the responsibility for activities such as arranging exhibition agreements with museums and galleries or entering into financing arrangements. The Trustee can also appoint any required third parties, such as curators or specialist advisers, and make arrangements with regard to shipping, storage and insurance, relieving the ultimate beneficial owner of these actions. 

The trust instrument or company constitutional documents can be drafted to include specific details in regard to any cultural or social objectives for any collection held via the structure. 

If there is a desire to create a brand for the collection, elements of this can be undertaken through the structure via the acquisition of internet domain names for the collection website or holding trademarks for the collection name and any logos associated with it. 

However there are certain risks associated with art, collectibles and antiquities which trustees and directors should be conscious of. 

A qualified specialist should be used to make a thorough assessment in order to validate who was responsible for creating a particular work – known as attribution. There is certainly ambiguity in the language used in the art market of which trustees need to be mindful. Issues can arise where phrases such as “in the school of” or “after” are used as it may seem as though a piece has been created by a certain artist. 

Authentication should also be able to confirm that the piece is not a fake or forgery; this includes an expert undertaking a stylistic assessment as well as a technical review of the materials and physical characteristics of the work. 

A review of the provenance and previous ownership also links with ensuring authenticity; art can change hands numerous times and it is often not until an artwork appears for public sale that questions on ownership arise. 

Guernsey resident Sir Christopher Cook recently revealed that his great-great grandfather Sir Francis Cook acquired da Vinci’s “Salvator Mundi” in 1900 but it was mistaken for a fake and was sold at auction in 1958 for just £45. This year it was sold again at Christie’s in New York for £342 million., making it the most valuable piece of art in the world.

As it is a trustee’s duty to ensure they have received full title to any assets settled into, or acquired by, a trust, it is essential that ownership of the art is established together with expert advice on the provenance of the piece. 

While there are no central registries evidencing ownership, there are databases detailing lost and stolen art which can be checked. The onus is on the trustee to seek expert advice on any piece being acquired within a trust structure. 

As with all asset classes there are cases of alleged fraud and, at present, there has been publicity around the case of Timothy Sammons, a British art dealer, who is facing claims that he was engaged in a “Ponzi scheme” to acquire art from collectors and further accusations of not reimbursing his clients in full for the sale of artworks. 

That said, there is a trend towards greater transparency in art markets with calls for regulation from the industry itself to provide more protection for purchasers, balancing this with respect for legitimate privacy. For example, the Chairman of the Art Loss Register (the world’s largest register of stolen art) has called for after-sale ownership details to be put into some sort of Escrow for a decade or so which would be made available to buyers if a dispute arises.

It is important that trustees seek to understand these changing trends so they can support and assist their clients in this area. For any trustee acquiring or dealing in art, antiquities and collectibles, the key risks need to be considered and thought duly given to how these can be mitigated. 

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