Castlestone explores the new art of investing in paintings

The question for today: when are 200 one US dollar bills worth $43.8 million? Answer: when they were painted by Andy Warhol. Only the art world could have conjured up a reason for a silk painting portraying $200 (Dh734) of value, to be actually sold for $43.8 million.

Yet, that's what happened recently when art dealer Pauline Karpidas (who purchased the painting for $385,000 back in the mid 1980's), sold for a staggering $43.8 million.

Now, because I come from the philistine-end of the cultural compound, you can't beat-me-up for the use of the word "staggering" as the Sotheby's pre-auction forecast ranked the painting at $8-to-$12 million. They too will be staggered when they get their commission!

It makes you think, did Karpidas actually know what she was doing? Was it luck? Was it judgment? Plus, for my philistine brethren: does it matter if the arbitrage opportunity is so significant? After all, you don't have to hang it on the wall. Leave the picture of Johnny Wilkinson (or whatever artist you feel appropriate) where it is and put the Warhol neatly stashed under the staircase. It's the millions-of-dollar jump in value we want not a painting I think my daughter could have done.

But where's the opportunity for this type of niche-thinking? Maybe there isn't one. However, getting close to the under-the-staircase philosophy is the Castlestone Management Art Fund. Principal Director and founder Angus Murray is far from a philistine (where I am the benchmark); but is definitely a realist.

So real in fact that his main trumpeting call is for "real assets", things you can hug-and-hold, above financial assets. Commodities, gold and now art dominate the Castlestone fund suite.

Art and gold

There is both a sensible and ironic approach to Murray's view of the world of art and gold. Ironic that, an artist of the profile of Andy Warhol, is highly unlikely to have cared that his painting would become an investment. He might have been happy with the ego-aspect; but the highly esoteric world of pop-drink-drugs-fun, doesn't resemble the office of my stock-broker up the road.

Yet, Murray's fund turns this type of thinking into an asset class. For Murray: "Gold and art are both real assets. They're the both the same underlying actual asset. Art is an irreplaceable, unleveraged real asset; gold is an unleveraged real asset.

They both will rise because the value of money is going to fall. You can't pump this much money into the economies as we have done, not only recently but in the last 20 years, and not have the value of money depreciate".

In other words, the "sensible" component to the thinking is that top-class painting should keep pace with inflation, and that, in itself strengthens the diversification, different asset class angle.

The Castlestone Fund is therefore positioned by Murray as a means to attract a mix of philistine and not-so-rich investors from the diversification angle rather than the underlying asset sizzle. Evidence to this is the minimum entrance as low as $10,000 or £10,000 (depending on which currency you chose).

The fund is intended to run with an 8 year investment term although there are liquidity provisions. So, despite its philistinian angle, it is not a get-rich-quick fund.

Performance

Finally, the fund needs to perform, and all performance needs rewards as reflected in the quasi-hedge fund structure of 1% AUM plus a performance fee.

As a portfolio component it therefore has its risks and advantages.

On the downside, three considerations stand out, firstly, there will be fees, and you do need top art dealers to help select the paintings.

Managing would not be tracker-style cheap. Secondly, the fund works mainly with "high end" paintings.

Whilst we might chose our stock because of the size of the consumer market in, say India; the size of our consumer-base for high end paintings is miniscule. We know they exist, but I only get to read about them, and I never get to meet them. Finally, where is the performance benchmark?

We know that Sotheby's and Christies exceeded recent expectations on how much money their recent auctions would generate, but what will happen next time? Forecasting is highly artistic!

On the plus side, there are also three attractions: firstly, the inflation hedge as highlighted by Murray. Secondly, the ever important need for diversification.

From a portfolio planning perspective, the assets are not being bought and sold in the manner of a stock or a commodity market so the downside volatility is reduced.

Finally, of course, if the markets crash you can hang the picture on the wall. It has an element of intrinsic value. If another crash occurs, the picture of choice for us philistines is likely to be Edward Munch's "scream".

The writer is chairman of Mondial Financial Partners.