However much science may try to analyze its mysteries, fine art is always a fickle investment proposal. Fashions change, and unlikely stars rise to prominence. Luc Renneboog, a professor of corporate finance at Tilburg University in the Netherlands, has been investigating these changes, specifically the long-term returns of art as an investment, and has found that things in the art world are not always what they seem.
In his office, for example, hang several paintings that recall the hand of the Dutch expressionist Karel Appel. But alas, “the paintings were made by my 3-year-old,” Mr. Renneboog said.
The results of his latest study will also come as a surprise to many in the art market. In terms of inflation-adjusted value, art traded from 1951 to 2007 appreciated just a little more than 4 percent annually, much less than the Standard & Poor’s 500 average of 8.90 percent over the same period. The figure is also significantly less than figures from previous studies that pegged art’s annual returns at 8 percent or even 13 percent.
“Our results thus suggest that art is not as good an investment as is often assumed or hoped for,” Mr. Renneboog writes. Potential investors “should buy art primarily for nonfinancial reasons,” because hoping to somehow strike it rich “is wishful thinking.”
His latest paper, “Buying beauty: On prices and returns in the art markets,” was written with Christophe Spaenjers, a doctoral student. It uses a previously unavailable database of more than 1.1 million auction transactions for oil paintings, prints and works on paper by more than 10,000 artists. It is the largest such database yet assembled in this burgeoning research field, with previous studies topping out at about 100,000 transactions.
Mr. Renneboog attributes the robustness of his study to the breadth of this data set. “We investigate the art market in general,” he said, “and not merely the resales by leading artists at major auction houses.”
Using a technique known as hedonic regression, which involves breaking down a studied subject into telltale variables, Mr. Renneboog mined the database for traits that showed a correlation with long-term prices.
Mr. Renneboog’s analysis showed, for example, that self-portraits and urban scenes appreciate more than works depicting nudes, animals or natural landscapes and that having been shown at the prestigious Documenta exhibition in Germany has a significant effect on the value of minimalist and contemporary art.
Likewise, currency fluctuations over the decades have meant that art traded in U.S. dollars has done better than art traded in British pounds, which appreciated just 2.77 percent annually. The highest prices were fetched at Sotheby’s and Christie’s, usually in the spring and late autumn.
So could a crafty art investor use these results as a kind of checklist to acquire undervalued art? Some who work in the trenches of the art world remain unconvinced.
“I don’t want to rubbish the research they’ve done, but I take it with a pinch of salt,” said Philip Hoffman, founder of the Fine Art Fund Group in London.
Mr. Hoffman’s fund is an “arbitrage, opportunistic” fund that, like stock arbitrage funds, tries to take advantage of pricing anomalies to make money. Whether the market as a whole moves up or down, he said, is irrelevant to most traders in fine art, who judge their success transaction by transaction.
“I’m working in practicalities,” he said. “We’re not an art-market tracker fund. We’re not really that fussed about whether the art market per se has moved up 3 percent up or down.”
Richard L. Feigen, an art dealer in New York, said the vagaries of the art market did not lend themselves to this kind of econometric analysis.
“Most of the relevant sales are private, not public, and thus unrecorded,” he wrote in an e-mail message. Art “is unlike any other financial market. The market is opaque, not transparent. It is totally unregulated.”
Mr. Renneboog lets the data speak for themselves. “I just show the difference in numbers to show how they can affect returns,” he said. He hopes to expand the results soon by incorporating a database at Yale University that contains auction prices dating back to the 17th century.
And like collectors themselves, Mr. Renneboog is not fixated on commercial reward for his findings. “I’m an academic,” he said. “I learned quite a bit from it, and that’s the ultimate thing.”
(Originally published in the International Herald Tribune in October 2009)