Consolidating and deriving insights from historical art transaction information has helped this startup to identify lucrative trends – and to provide an attractive on-ramp for ordinary investors.
Software development, coding – illustrative photo. Image credit: Pxfuel, free license
The art finance world is a tightly knit place, and until recently, sourcing information about art sales over time was impossible for those of us on the outside. When the company was first founded, Masterworks, an art investment platform for retail investors, its leaders knew that providing easily accessible sources around art sales was going to be pivotal to its success.
Masterworks’ founders faced a significant challenge. Art investing never received significant exposure in retail investment circles, resulting in little knowledge of the asset class amongst ordinary investors. They had to convince retail investors that investing in this long inaccessible alternative asset was worth their time and money.
Highlighting the sector’s lucrative performance – indeed, art returned 14.1% from 1995 to 2020, compared to 9.9% for the S&P 500 – was one way of showing the opportunity here, but gaining user trust called for richer resources to demonstrate trends specific to artists and their individual paintings.
The startup needed to show people how data could power their investment decisions and that Masterworks’ investment offerings were not based on guesswork or subjective decisions. Masterworks needed a proprietary database that could host art sales data, which the company could use to build investment cases and offer investors a peek at the reasons behind artwork selected for investor offerings.
The need for a database
Alternative investment classes have long been inaccessible to retail investors. Art, firmly an alternative asset, was no different. Physical art sales occur in auction houses catering to wealthy clientele, leaving ordinary investors out in the cold. Art dealer networks and experts also cater to wealthy collectors, ensuring valuable information about artwork never leaves privileged circles.
There’s also the seemingly subjective nature of art evaluation. One artwork in an artist’s portfolio might not command similar prices as another due to the story behind it or the artist’s maturity when they created it. Choosing the right piece is just as important as the artist’s pedigree.
Ordinary investors lack data that can help them derive such knowledge. There was no central database that tracked an artwork’s price or valuation data. Art sales are notoriously opaque.
While the major auction houses like Christie’s and Sotheby’s publish auction sale prices, not every artwork goes under the hammer. Unsold pieces are not disclosed, skewing sales data toward successful auctions. Other auction houses don’t even disclose sales data, and this before considering the private sales that dominate the art world.
Masterworks needed to establish a database to bring transparency to art investing by tracking artwork prices. This database would help retail investors apply traditional indicators like sales momentum and historical price moving averages to inform their investment decisions.
Masterworks’ database centralized all art sales data. Compiling this database was no small task. The team scoured through auction catalogs, auction websites, online databases for art appraisers, and even paper sales records going back five decades to populate the database.
Investors could then look at hard data instead of relying on word of mouth or unreliable rumors. This naturally increased their confidence in art investing. It also gave Masterworks’ acquisitions team the opportunity to vet promising artwork for investment and offer them to its clients.
Custom metrics
The database went beyond centralizing data for Masterworks. It gave the company space to build upon this data and offer even more value to its investors. For instance, Masterworks offers investors metrics like historical appreciation rates, record prices, and median repeat sale pair appreciation.
That last metric is indicative of the innovation Masterworks has brought to the art world using data. Artworks are unique assets thanks to a combination of artist, the date they were created, and other factors like size and the artist’s maturity at that point. Unlike stocks, where investors can quickly lump sector stocks together and track a sector’s performance, artwork doesn’t lend itself well to indexing.
Masterworks borrowed from the real estate investment world when developing its “repeat sales” approach. Real estate is also a collection of unique properties, but the practice of creating comparables, or “comps,” when valuing opportunities, is well established. A comp uses sales data of similar listings to arrive at a proposed sale value.
Masterworks tracks sales of an artwork through time to build a picture of price momentum. It creates comps of similar artwork using its database to establish an index that tracks similar artwork. The median sale pair appreciation tracks the amount by which sale prices increase, giving investors a picture of price momentum.
Analysis of this kind flies against the traditional view of art investment valuation. Typically, people visualize an art expert lecturing prospective investors about the artist’s life, their views, and other nuances connected to the artwork. Masterworks’ database has turned that view on its head, giving investors data much like ordinary equities and bonds. It has brought new types of investors to the art world, specifically those who shied away from art due to its perceived air of privilege and specialization.
While Masterworks does offer investors insights into an artist’s background, it augments its analysis with data. This gives even inexperienced investors a better-rounded picture of an offering, ensuring they’re entering an investment with all facts in hand. The result is significant investor confidence and a higher likelihood of high-performance returns.
Advanced analytics
Masterworks’ quest to offer investors data-backed insights extends beyond establishing a database and offering metrics. The company acquired Arthena, a machine learning (ML) startup that brings greater transparency to art world data.
Masterworks’ ML algorithms gather and scan pricing data from several points of sale. Art sales occur in disparate places, and deriving relationships between them is critical.
If two paintings from the same artist sell for dramatically different prices within a few months, what does this mean when valuing the rest of that artist’s portfolio? Might an investor spot potentially undervalued offerings? ML crunches data and answers these questions, finding great opportunities and connecting threads faster than a human being can.
As a result, Masterworks is now using technology to create advantages for its investors. It has moved beyond relying on word of mouth and art dealer anecdotes to value paintings and bring value to its investors.
Technology for art investing
Masterworks has revamped the way the art world operates by bringing a unique mix of data and machine learning to the sector. What was once a walled-off alternative asset reserved for the privileged few has turned into a viable retail investment alternative.
Technology is driving this change, and Masterworks is set to innovate even more, bringing more advantages to ordinary investors.