Portfolio Theory. A fundamental essence in management of the risk-reward relationship for any investment is supportive of the fact that adding a further investment into a portfolio of assets should essentially reduce one’s overall portfolio risk. The concept was put forward by Henry Markowitz and suggests that the reduction in overall risk is magnified if the returns from the assets in that portfolio are uncorrelated. Think of a basket of bonds, stocks and bank deposits. Adding real estate in the portfolio leads to lower overall portfolio risk. Adding commodities such as grains, metals would further reduce the portfolio risk as returns from the different assets in the portfolio become more uncorrelated. Captured differently, a portfolio containing stocks as the only assets would be riskier than one containing stocks, bonds and say commodities.
Art is one such asset that can be part of any investor’s portfolio. Its uniqueness as an investable asset class is driven by the low correlation between its value (price) and any of the normal economic drivers of an asset’s value as well as with other asset classes such as stocks. According to Hiscox Online Art Trade Report 2017, global online trade in art (both antiques and contemporary) grew 15% from 2015 to hit US$3.75bn in 2016. Online trade now represents 8.4% of the total global art market, implying an overall value of US$44.6bn. The TEFAF 2017 Global Art Report estimates that global sales in art grew 1.7% to hit US$45.0bn in 2016 and paints a picture of a ‘stable and resilient’ market that experienced positive growth.
Demand for African art as an investment has gradually been on the rise although it still represents a small fraction of total global art trade. According to Sotheby’s, a leading global art auction house, African art accounts for a paltry 0.01% of the international art market. However, this is expected to rise, if recent interest and efforts are anything to go by. Sotheby’s had its first auction of modern and contemporary African art in May of 2017 in London, fetching a total of US$2.8mn; an achievement of 78% sell through rate by value. Such interest has been replicated by other big players such as Louis Vuitton (who opened three complementary African art shows this year), Bonhams and Swann Galleries which both hold regular sales of African art.
East African art remains largely untapped and has only recently started attracting attention. Any investment implies the existence of a willing seller and buyer, an investable asset as well as a market place. Information regarding the asset also plays a key role in the investment decision; and information asymmetry between different players often creates arbitrage opportunities. East African art as an investable asset has been in existence since time immemorial, driven by a huge talent pool, but has always suffered from lack of an appropriate market place as well as a platform for information exchange.
The Circle Art Auction is East African’s only contemporary art auction. Since its launch in 2013, it has effectively created a market-place and information-sharing platform for various art pieces. The most recent auction held in February of 2017 netted Ksh. 19mn (US$ 186,000); with 85% of the lots sold. This has played a key role in improving price transparency as well as creating a platform for both local and foreign investors to own a piece of the attractive pie.
The case for inclusion of art in one’s investment portfolio is supported by a number of factors. The low performance of East Africa’s stock and bond markets has seen most investors witness wealth erosion and has driven interest in alternative investments such as real estate and private equity. The illiquid nature and unaffordability of real estate and private equity, coupled with a lack of knowledge and understanding by investors however, locks out most potential investors. The global commodities market has seen decreased demand for commodities as an investment class.
Art emerges as a potentially attractive investment to achieve better returns. Art, often regarded as an emotional investment, has translated to low correlation between its returns and those of conventional asset classes, often appreciating in value at higher rates than other asset classes. This has made it a favorite for speculative investors, with most people either buying for personal reasons or buying and selling after time depending on their investment horizons and liquidity preferences. This is further driven by its low return volatility and consequently lower risk, unlike other classes such as stocks.
The huge talent pool in East Africa also means a wide variety of ‘art asset-types’ for investors to choose from, with a wide-ranging set of price points. The increasing penetration of various sales channels such as mini-exhibitions held at various galleries as well as online platforms is also driving an active secondary market for art; improving the chances of investors realizing their returns from secondary sales. The lack of information, uniformity in quality, limited liquidity and little government regulation however remain key challenges to achieving Henry Markowitz’s portfolio diversification benefits of adding art into one’s investment portfolio.
Written by: Shadrack Nyobii, Botho Ltd