Performance and correlation of art as an alternative asset class during the current financial crisis
Deloitte research report
In this short research paper, Deloitte in collaboration with Dr. Rachel. A. J. Campbell from Maastricht University take a look at art as an alternative asset, and look specifically at how the performance and the very low correlation between art and equity presented in previous academic papers is affected by the current financial crisis.
The average annual performance for each art market sector is higher than the one reported in previous studies; however this is mainly driven by the extraordinary results of the art market in 2007. Since October 2008, we observed that all art market sectors have been negatively impacted by the financial crisis in different ways. The more speculative sectors such as modern art and contemporary art sectors have lost up to -30% from their peaks and showing no signs of bottoming out at the end of March 2009 while the old masters painting market lost only 6%. The current performance contraction of the art markets although less severe than the one experienced by equity markets and art markets in mid-1990s also impact the correlation between the art and equity markets.
For the last two years, the correlation increased substantially to more than 50% for contemporary, modern and impressionist art sectors while remaining close to 0% for the Old Masters sector. Should this trend be confirmed and not only be the result of the current financial crisis, the opportunities that art could play in portfolio diversification would reduce in particular for certain art market sectors. Using the rules of Elton, Gruber, and Padberg1 to derive the condition for a “security” to enter an optimal portfolio and assuming a high correlation between art and equity markets; it would imply that the minimum return after transaction costs art has to deliver to be considered as a good candidate to be included in an investment portfolio would have to increase substantially.