Contemporary photographs can deliver good returns - and at a low correlation to the mainstream markets. So says Peter Zaugg, a specialist in the fine art investment field.

Editor's note: As part of an occasional series of articles looking at different aspects of investing in fine art and other forms of art, here is Peter Zaugg, president and chief executive of the Loubna Fine Art Society, with his thoughts on the market for photography. This publication does not necessarily endorse the specific fund investments as described.

Originally published in Art Fund Tracker, by Fine Art Wealth Management. With permission. 

A rather new and potentially lucrative niche for fund investment has emerged. The Fine Art Invest Fund is an art fund specialising in fine contemporary photographic artworks. Art funds in general have come more and more on to the radar of investors, who search for new and real assets. The Fine Art Invest Fund features several attractive characteristics, which make it stand out of the crowd. It is uniquely focused and the centrepiece of the fund is the active and transparent management.

The financial crisis has recently played a key role in preparing the field for photography funds. Art funds exhibit no correlation with the classic investment markets, and for this reason have come more into the attention of investors when considering how to allocate their assets. In October 2010 the Fine Art Invest Fund was launched as the first worldwide open-ended art investment fund. Already in the first 9 months a return of 8.27 per cent was achieved. The forecast for the first year is between 12 to 15 per cent.

New target groups art museums and exhibitions of the works of famous artists are very popular, as the ART 42 this year in Basel, Switzerland, demonstrated with a new record attendance of 65,000 visitors. This and the circumstance that worldwide ever more museums and galleries are being opened show that art is generally no longer a matter for the upper crust. The art market has developed dynamically in the last few years.

Worldwide, approximately $45 billion is invested annually in art, with 15 per cent of that being transacted through auctions. The auction house Christie’s publicised revenues of £3.3 billion for the 2010 financial year, which is its best performance in the 245-year history of the firm. The majority of analysts once again view the art market to be on a strong growth course.

With the explosive development worldwide of the number of very wealthy people, the so-called “high net worth individuals” and the ultra high net work individuals, the primary class of buyers for expensive art has grown. The steep development of executive salaries, particularly in the financial sector, and the interest of prominent people in music, cinema and sports has also led to the substantially increased demand for art in general. At the same time there has been an overall shift in the direction of contemporary art forms. In the last 10 years alone, auction turnover for contemporary art and contemporary photography has increased tenfold. Regarding contemporary photography specifically, there is still tremendous potential.

Art is resistant during a crisis

While the familiar indices S&P 500, SMI and the FTSE EPRA/NAREIT real estate index, clearly recorded negative performance over a 10 year period, only the Global Fine Art Index shined with an impressive rise of 60 per cent. The development during the height of the financial crisis from March 2008 to March 2009 was especially grave. During this period the US S&P 500 fell by 51 per cent, the DAX by 41 per cent and the Nikkei by over 44 per cent. The losses incurred in traditional investments, such as stocks and debenture bonds, which were brought about by the turbulences in the global financial markets, have led to greater efforts in seeking alternative investment opportunities. Though the characteristics of alternative investments are not all identical, the goal of investing in alternatives is to provide traditional portfolios with diversification through uncorrelated returns, or to provide more consistent returns, or a combination of the two.

Francis Hodgson, manager of photography at Sotheby’s, made the comment: “When you look at the prices in the last few years, the value of photographic works has held spectacularly well.”

Disregarding the period or the medium, the entire art photography market has demonstrated its strongest growth in the last ten years. During the period from 2000 through 2008 alone, the photography market tripled. Art investments can trump with above-average returns. Dr Rachel Campbell, of the University of Maastricht, has investigated the correlation of art prices with other investment types. She proved that art investments, by offering portfolio diversification, are an attractive type of investment. The Global Art Index has an exceedingly weak correlation of 0.047 with the MSCI Global Equity Indices. Art even correlates negatively with other asset classes in some cases.

Another advantage of the developments in art photography is that it is mostly spared from problems such as unsettled provenance or ownership relationships, and even more important, from counterfeiting or plagiarism. In addition, all modern photographs have traceable digital specifications. The niches of contemporary photography also offer the option of making attractive purchases with manageable capital. Above all, investing in young artists with short track records offers an attractive potential. Good examples for how value has increased over the last six years can be very impressively evidenced by the German photography artist, Claudia Rogge, whose works have appreciated by +163 per cent and the Chinese photographer, Chi Peng with +276 per cent.

The LOUBNA Fine Art Society has carefully analysed these findings about the art market in general and contemporary art photography in particular. In cooperation with a Swiss fund management firm, it launched the Fine Art Invest Fund in November 2010. This fund was established onshore in Malta, is subject to stringent EU law and is quoted in Swiss francs.

Value retention of the works of art is the core of managing the Fine Art Invest Fund. The investment strategy specifies that investments are to be made one-third each in the established classic photographers (i.e. Avedon, Penn), in photography artists who have had a discernible track record over many years (i.e. Rogge, Peng) and in promising new talent (i.e. Kanjo Také). Investments are made with a regional concentration of at least 30-40 per cent in rapidly growing Chinese and Indian art photography markets. The Fine Art Invest Fund is proactively managed to maximise returns, combining a buy and hold strategy as well as a trading strategy. To realise these strategies, the fund’s management firm cooperates with premium galleries.

With regard to its transparency, the Fine Art Invest Fund most decisively distinguishes itself from established art funds. All relevant data (e.g. offering memorandum. etc.) as well as all of the assets in the fund can be viewed on the website at any time (www.faif.ch). To avoid conflicts of interest, the art advisor, the LOUBNA Fine Art Society, is a distinct legal entity apart from the fund’s management firm.

The FAIF has not dedicated itself to any defined growth target, allowing for a prudent management of the portfolio itself. Furthermore, each quarter, investors can withdraw their invested capital from the fund. By investing in the Fine Art Invest Fund, investors can optimise their portfolio and profit from an attractive investment return.

Alan Greenspan once said: “Whoever seeks something stable should preferably purchase art.” Conclusion: The careful choice of art photographers and their key works by a reputable committee of experts in combination with optimal acquisition policies can garner uncorrelated and above-average returns.