As a partner with Masterworks for the past few years, I’ve been following their growth in recent years. It’s been a while since I’ve published a deep dive on the company. So this post provides an update on their Masterworks performance, growth, track record, and explains how art could help improve your portfolio.
Masterworks is an art investing platform. It was founded in 2017 and began launching offerings through the SEC in 2019.
I first spoke to their CEO Scott Lynn in 2020 and caught up again in 2022 with the Masterworks team to get many updates for this performance review. Now let’s jump right in.
Masterworks Historical Performance Review:
Here’s a look at Masterworks historical performance annualized from their first three sales, on an individual basis, and the appraised value of their entire art portfolio.
Overall annualized track record from 2019 to Dec 31st, 2021: +15.8%
Individual Sales
- Banksy’s “Mona Lisa”: +32% net IRR (2019-2020)
- George Condo’s “Staring into Space”: +31.7% net IRR (2020-2022)
- Albert Oehlen’s “Doppelbild”: +33.8% net IRR (2020-2022)
Outside of their exits, the overall collection of work has appreciated nicely as well. If they were to sell everything today, the entire Masterworks collection is estimated to fetch over $500 million.
Masterworks Assets Under Management And User Growth
Masterworks was featured in Bloomberg in Q3 of 2020 for being a new leader in the democratization movement. At that time, they managed roughly $36 million in assets under management and had roughly 80,010 users on the platform.
Recently, Masterworks had an unprecedented spike in user growth and is accelerating at a rapid pace. Today, Masterworks manages over $500 million and has over 400,000 users.
Historically, investors had to buy paintings for a couple million each to get exposure to this asset class. With Masterworks, however, investors can buy shares across multiple paintings to diversify their portfolios. Experts at Masterworks handpick the works themselves, which saves you a lot of time and hassle trying to find interesting deals.
Investors can realize gains in one of two ways. You can either sell the shares yourself on their secondary market or wait until Masterworks sells the painting. You’re free to do either but most wait for the latter.
Masterworks plans on buying over $1 billion worth of art by 2023. This would make them the largest buyers of art in the world.
Today, a new painting launches on their platform nearly every six days. With more financial institutions like Deloitte and Citi recognizing art as a major asset class and the rising demand for alternative assets, Masterworks expects their investor base to continue growing.
What’s Driving Masterworks’ Success?
Masterworks’ performance and growth rate is being driven by a few key factors.
- An experienced Acquisitions team
- Superior Data Analytics
- Acceptance of Art as An Alternative Asset Class
Scott Lynn, the founder and CEO of Masterworks, built his team to help clients unlock the power of art investing. Years before filing their first offering, Masterworks built the largest private database of art auction sales records in the world. They also offer their data and help construct art asset reports with institutions like Citi and Deloitte.
Their in-house team analyzed over 5 million data points to track the appreciation rates of artists and their work. Using this proprietary database, they can identify which paintings and artists are accelerating in value the fastest. This is how they determine which art is considered investment grade.
Through October of 2021, Masterworks has been offered over $10 billion dollars worth of art. But they’ve only purchased 3% of the artwork that met their criteria. In addition, they buy most works at a discount to fair market value. In other words, they aim to purchase the highest quality works at excellent rates.
They also strive to acquire paintings with historical appreciation rates between 10-30%. And as you saw earlier, the sales to date have handed investors the upper end of that threshold.
Their own expertise aside, there’s been a growing demand for alternative assets and the acceptance of art as an asset class in the financial community.
According to Deloitte, only 53% of wealth managers believed art should be included as part of a wealth management service in 2014. This consensus has overwhelmingly grown in strength since then.
In 2021, this statistic jumped to 85% of wealth managers. Deloitte even claimed in their recent report that “art is an essential part of any wealth management offering.”
Art As An Asset Class And Its Place in Portfolios
A thoughtful allocation to art can help manage risk in a portfolio and may ultimately generate attractive returns over time. Here are some of the key benefits of art as an asset class:
- Potential for significant appreciation
- Protection from inflation
- Diversification
One of the best advantages of art as an investment is its potential to appreciate. If you look at contemporary art — art created after World War II — you’ll notice it has appreciated 14.1% per year for the last 25 years on average. That beats the S&P 500, which returned only 9.9% annually over that same time period. What’s more, it’s also outpaced gold and real estate by over 2x in that time. But there’s more to art than just attractive growth.
Art may also help manage risk in a portfolio and can generate attractive returns over time. Since it’s a physical asset, you’ll find it’s most similar to gold and real estate.
Plus, art can also provide protection from inflation. According to Masterworks data, when inflation is above 3%, contemporary art prices appreciate by 23.2%. This growth rate far exceeds that of traditional hedges like gold and real estate.
In their words, “art’s most attractive investment quality over the long-run has been its’ diversification potential.”
Given the unique properties of art and how it drives value, it benefits from being an uncorrelated asset class. According to Citi, art has a near zero correlation factor to developed equities — the lowest correlation of any major asset class.
For instance, during the first seven months of the pandemic, art as an asset outpaced the 10 other major asset classes according to Citi’s data. And, it’s proving its resilience again.
Even with the recent stock market turmoil, an expert said “the art market is carrying on as normal.”
Art Market Outlook
The art market behaves in a peculiar manner. It doesn’t ebb and flows like the stock market, however, there is a science to it.
According to Masterworks’ CEO, “Investing in art is like buying a call option on the ultra-wealthy — when the 1% do well on a global basis, prices will tend to go up.” Further, with the growth of countries like China, more capital has been flowing into art than ever before. The total net worth of American billionaires rose about 70% during the pandemic.
Thanks to this surge in wealth, the art market boomed in the past year.
Last November, over $1.6 billion worth of art was at auction houses in less than two weeks. And in all of 2021, over $65 billion worth of art was bought.
The Chairman of the Christies auction house boldly said, “People don’t care if they have to pay $1 million for a piece that’s priced to sell for $60,000, they’re making up their own rules.” The Wall Street Journal even declared that “art is among the hottest markets on Earth.”
High Demand For Art
Masterworks believes this high demand will continue to push the value of art up more and more. And it’s already beginning to show.
Andy Warhol’s silkscreen portrait of Marilyn Monroe sold for $195 million at Christie’s earlier this May. That’s enough to buy nearly 400 Miami homes.
The Wall street journal observed this sale “underscored the global strength of the high-end art market at a time of volatility in broader financial markets. Collectors often regard fine art as an investment hedge because art values don’t necessarily move in tandem with securities.”
Since many experts have slashed their stock returns of less than 5% for the next 10 years, art has positioned itself as possibly the most desirable type of asset you can find.
Deloitte estimates the wealth held in the art to be worth $1.7 trillion, which is roughly 2x larger than Bitcoin’s entire market as of 2Q2022. But they predict that number to grow by $1 trillion by 2026. In other words, more capital has been flowing into art than ever before.
Masterworks Performance In 2022 And Beyond
Masterworks has attracted investors with its expertise and ability to innovate. They have brought the order of the financial world to the elusive art market. In other words, this platform has helped transform art into an investable asset class.
Being able to invest in smaller portions across artworks, allows you to diversify your diversification in real assets.
Masterworks is an example of how investing in the world is changing and backing art as an asset class. Their story is only beginning. The more they build their track record and grow, the more they can offer to their clients as well.
If you want to add art to your portfolio, you can get priority access to Masterworks here.
