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August 23, 2011

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Art funds paint beautiful profits

WANG Jie finds that art investment funds have developed a model offering good returns at low risk for wealthy Chinese fearful of inflated property and stock markets.

Chinese art investors may have been spooked when Belgian industrialst Baron Guy Ullens and his wife Myriam sold their entire collection of ancient, modern and contemporary Chinese artworks in an April auction.

The sale came at a time when art prices were at historical highs and contemporary Chinese art had even started dipping - sending out a clear sell-signal in a volatile market where the price peaks are only outdone by price falls.

Still insiders remain bullish about the future growth of the art market that continues to attract increasing capital flows and continues to break price records, although they do shy away from contemporary works for now.

The reason is simple, Chinese institutional investors are using a tried-and-tested Western art investment fund model to rake in big profits through spreading their risk among modern and ancient artworks.

And they remain confident that the high prices will be sustained as art investment differs from stock investment, which thrives the golden rule of buying low and selling high.

The art investors' "buy high, sell high" ethos was artfully illustrated by Liu Yiqian, a renowned stock market and art investor, who in May sold a painting by modern Chinese artist Qi Baishi for 425.5 million yuan (US$66.5 million), a record high for modern and contemporary Chinese paintings and calligraphy.

After the sale at the China Guardian 2011 Spring Auctions in Beijing, Liu revealed that he had purchased the painting for a sizeable 20 million yuan a few years ago.

According to figures released by Artprice, a French art price website, the total sales of works by modern master Qi Baishi in 2010 reached US$339.2 million, only second to Pablo Piccaso.

The sale echoed Liu's previous comment that "any art has no value until it becomes the target of capital."

Beijing Bonwin Contemporary Art Investment Co Ltd, China's first art investment company, also believes the investment future of Chinese ancient and modern art remains bright.

As the sole art consultant for Minsheng Bank, Bonwin helped the bank establish China's first art investment fund in 2007, with an initial investment pool of 60 million yuan. Upon its termination two years later, the fund's average annual yield came in at 12.75 percent.

However only VIP clients at Minsheng Bank, with a minimum saving of one million yuan, had access to the fund.

Bonwin President Chen Bo said the fund's portfolio included traditional Chinese ink-wash paintings and Chinese contemporary artworks, bought in appropriate percentages.

Although these funds are still new in China, they have a long and rich history in the West.

Possibly the first example was when in 1905 French financier Andre Level formed an art investment fund called La Peau de l'Ours targeted at art lovers who couldn't afford to buy modern masterpieces on their own.

With their combined buying power, the investors bought over a hundred paintings and drawings, including works by Picasso and Matisse, and in 1914 sold all the art at a giant Paris auction.

La Peau de l'Ours quadrupled the investors' original capital and firmly established the viability of art investment funds.

Another successful example is the British Rail Pension Fund, which ploughed US$100 million, about 3 percent of the fund, into around 2,500 paintings in a bid to offset inflation. During the following 25 years, the fund made US$300 million from these paintings and showed that art could be a safe bet - safe enough for extremely risk averse pension funds.

So it's no surprise that China today has around 10 art investment funds in operation with more eagerly waiting in the wings, according to a China Business News article published in June.

These funds have cleverly positioned themselves to attract an affluent clientele who seeks solid returns, but see no hope in the inflated property, bond and stock markets.

To illustrate their growing popularity, the second financial art product issued by Bonwin and Minsheng Bank sold out in eight hours last March, drawing 150 million yuan in capital.

In April, a one-year art trust fund co-established by Bonwin, Bohai Bank and Zhongrong International Trust Co Ltd, sold out in three days and raked in 60 million yuan in funds. The expected return for the financial product is 10 percent.

"As opposed to the new art shares at the cultural artwork exchanges around the country, art funds are quite mature in the West," comments Zhou Tiehai, the vice director at Minsheng Art Museum.

"Compared with art shares, art funds or other financial art products are more stable, because they normally have a one or two-year investment period. The investors just need to hand their money to a professional team to select artworks with potential value. A reasonable rate of return, one or two years of duration and low risk are all attractive for buyers," he says.

Normally clients who buy into art funds have no idea which art pieces the fund buys. But if the fund decides to invest in an artwork worth more than half the fund's total size, then it is their duty to ask permission from their clients.

Due to the uncertainty of China's contemporary art market, most of the current art funds focus only on China's modern ink-wash paintings and calligraphy.

"Only the first Bonwin art product included contemporary Chinese art, our later financial art products mainly focus on China's modern ink-wash paintings and calligraphy such as those by Qi Baishi, Zhang Daqian and Fu Baoshi," says Cao Liang, the media manager at Bonwin.

"This is because the value of China's modern ink-wash paintings and calligraphy is widely considered to be fairly low risk. Yet price fluctuations make the Chinese contemporary art market a bit unclear right now."

Most of the art investment funds realize their profits at auctions, but sometimes they also find big collectors who are interested in what they hold.

"The best cash-out opportunity is still at auctions," recognizes Chen Bo, the president at Bonwin. Chen points out that "any investment has risk, with no exception for art. Global economic risk, fake art pieces or the moral standards of sellers are always unpredictable."


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