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Masterworks Review – An Easy Way to Invest in Fine Art

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At a Glance
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4.5 / 5
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Masterworks

  • Process. Masterworks sources and buys whole artworks, possibly below market price thanks to dealer relationships and advanced auction strategies. Masterworks then registers an investment offer with the Securities and Exchange Commission (SEC), qualifies the offer, and sells shares to qualified members of the public. Investors can attempt to sell shares on Masterworks’ secondary market at anytime. Eventually, the artwork is sold, with the net proceeds after expenses distributed to investors.
  • Advantages. Built-in portfolio diversification; far cheaper than buying whole artworks; easier than traditional art investing; artwork obtained at below-market price yields higher returns for investors; historical returns exceed S&P 500 by >200%.
  • Disadvantages. Art is not a fully liquid asset class, despite Masterworks’ secondary market; requires a thorough onboarding process; involves significant risk not present in standard investments; may require a long time horizon.

In my social circle, the general consensus is that investing in art is something for other people. Specifically, people blessed with vast financial means and considerable leisure. Accessible art investing is not.

Not yet, at least. Masterworks, an upstart digital platform that allows members to take fractional stakes in investment-grade works of art, is trying its best to change that. It’s following in the footsteps of cryptocurrency exchanges and investment-grade wine clearinghouses – places where it’s reasonably easy to buy and sell alternative investments without spending a fortune.

Masterworks isn’t quite there yet. With about 20 qualified offerings, Masterworks’ inventory isn’t representative of the fine art world’s vast diversity. But the platform is adding new offerings at a regular clip and maintains a growing secondary market for investors looking to buy and sell holdings after the initial offer period closes. For prospective investors without the means to purchase million-dollar paintings on their own dime, the upside is clear.

Intrigued by Masterworks’ promise? Here’s what you need to know about how Masterworks functions today and how it could look tomorrow.

How It Works

Each Masterworks investment follows the same basic pattern. The Masterworks team handles much of the work behind the scenes, but investors get glimpses into – and sometimes actively participate in – these distinct phases.

Sourcing the Painting

Masterworks looks for paintings its team believes are likely to increase in value over the coming three to seven years, the benchmark holding time recommended by Masterworks. (Investors aren’t required to hold for this long, however.) Masterworks uses sales data for comparable works – for instance, contemporaneous works by the same artist or in the same school – targeting appreciation rates between 9% and 15%.

Buying the Painting

Once the Masterworks team identifies a suitable acquisition, they attempt to buy the painting at the fairest possible price. Masterworks claims its advanced auction strategies and personal relationships with auction houses give them an edge in the market.

Qualifying the Offer

Before Masterworks can sell interests in an acquired work, it must file an offering circular with the SEC and work with the agency to qualify the offering. This phase is colloquially known as “testing the waters” and requires Masterworks to prove there’s sufficient demand to fulfill the offering.

Selling Shares

Once the offering is qualified, Masterworks can officially market shares to the general public. Qualified investors can purchase shares on the Masterworks platform. Initial pricing is always $20 per share. As with any investment, secondary market prices may fluctuate based on changes in the value of the underlying asset. According to Masterworks, shares have never priced below $20 on the secondary market as of July 2020, but the Masterworks does not guarantee that this will remain the case in the future.

Vetting & Onboarding Members

Members must be confirmed to purchase shares in a Masterworks holding. Applying to become a Masterworks investor is more involved and intense than opening a regular old securities account. Applicants must complete a thorough onboarding process that includes a live interview.

Masterworks doesn’t specify any investing minimums or spell out precisely what it’s looking for in its investors. But you should expect to demonstrate you’re serious about investing in art.

Displaying the Painting

Masterworks operates a members-only gallery in New York City’s SoHo neighborhood, where it displays works from time to time. When not on display, Masterworks’ artworks live in a museum-grade secure storage facility.

Monitoring & Tracking the Investment

Although art isn’t as liquid or transparently valued as high-volume exchange-traded securities, Masterworks does what it can to track the value and performance of its investments. They display this information in your account dashboard along with details about your holdings.

Selling the Painting & Distributing Returns

Following the closing of a sale, Masterworks distributes returns proportionally to shareholders after deducting its management expenses. Masterworks’ first offering circular reveals three distinct expense classes likely to apply to all future works:

  • True-up Fee. This fee is intended to offset the cost of acquiring and maintaining a work during the pre-offering period. The amount of the fee is the lesser of 10% or the painting’s estimated historical appreciation rate during the pre-offering period.
  • Administration Fee. This fee covers Masterworks’ ongoing expenses during the holding period. It’s set at 1.5% of the value of total shares outstanding per year.
  • Reimbursement for Extraordinary Expenses. This is a catch-all category that covers expenses Masterworks incurs during the holding period that it can’t reasonably expect to offset through the administration fee. Because of the inherent uncertainty of “extraordinary expenses,” Masterworks can’t estimate their impact ahead of time.

After its first offering circular, Masterworks rolled out a more straightforward expense structure with just two components:

  • Annual Administrative Fee.Masterworks charges a 1.5% annual administrative fee that it says covers all “distribution costs, regulatory expenses (filing and ongoing audit expense), storage and gallery space, insurance, and other expenses.”
  • Share of Profits. After they sell the work, Masterworks takes a 20% share of profits, if any.

According to Masterworks, this pricing structure is industry-standard. It’s unclear whether the new structure retroactively applies to its first work, but Masterworks has not revised or withdrawn that work’s SEC offering circular, so investors who’ve already purchased shares in that work should assume it does not until advised otherwise.

Selling Shares on the Secondary Market

Masterworks shares are liquid, at least in theory. The platform operates an internal secondary exchange where buyers and sellers connect to exchange shares at agreed-upon prices. The market is nowhere near as lively as an established securities exchange, but it works, and (per Masterworks) no investor has sold at a loss as of July 2020. Participation is limited to Masterworks members, but secondary buyers needn’t have invested in their target works’ initial offerings to purchase shares after the fact.


Advantages

  1. Built-In Portfolio Diversification. Art is a nontraditional investment that may perform relatively well when the broader markets don’t. Art was a noted safe harbor during the market turmoil of the late 2000s and was among the only asset classes to eke out positive performance during 2018, another underwhelming year for the equities markets. In other words, for sophisticated investors, art offers sorely needed portfolio diversification.
  2. Far Less Expensive Than Buying Whole Pieces. Investing in fractional interests in high-end art is far less expensive than buying whole pieces. Masterworks’ first offering, for the Andy Warhol piece, involves nearly $2 million in shares outstanding – well out of reach of the typical retail investor.
  3. Easier Than Traditional Art Investing. Investing with Masterworks is also far more accessible than traditional art investing, which is a time-intensive process that requires specialized knowledge – or trusted contacts with specialized knowledge. Masterworks handles all the legwork for its investors, whose sole responsibilities are to understand what they’re investing in and bring sufficient capital to the table.
  4. Masterworks Uses Proprietary Price-Reduction Strategies to Boost Returns. Masterworks’ proprietary auction strategies and relationships may – but aren’t guaranteed to – produce below-market acquisitions. That could wind up being good news for investors.
  5. Impressive Historical Returns. Past performance is not indicative of future returns, but Masterworks is correct that investment-grade art has historically outperformed broader market benchmarks. According to Masterworks, return on investment in the “blue chip” portion of the art market – defined as the top 100 artists by sales – has outperformed the S&P 500 by approximately 180% since 2000.

Disadvantages

  1. Not a Fully Liquid Market. While Masterworks is taking real steps to democratize art investing, the solution has limits. Among the most significant drawbacks is the lack of a vibrant secondary market. Masterworks investors can buy and sell shares on the platform’s internal secondary market, but the size of the investor pool remains small, so mutually agreeable transactions aren’t guaranteed. This will change, hopefully, as Masterworks grows.
  2. Investing in Art Has Inherent Risks. Art is an alternative investment. Unlike the exchange-traded stocks and funds in your 401(k), art valuation is opaque and subjective. Individual works may experience serious price volatility, as well. In short, even with Masterworks’ relative ease of use, this isn’t an investment for the faint of heart.
  3. The Membership Application Is Involved. Masterworks requires all prospective investors to complete a thorough onboarding process that provides no guarantees of acceptance. Applying demands more time and effort than opening a typical brokerage account, an interview that apprises prospective investors of the risks of investing in nontraditional asset classes.
  4. Relatively Few Investment Opportunities. As of July 2020, Masterworks has about 20 qualified offerings available for purchase. Though this figure is set to increase with time, prospective art investors still don’t have their pick of the litter here.
  5. High Management Fees. Although it’s not out of line in the world of less-liquid nontraditional assets and certainly understandable that Masterworks feels the need to preserve its upside, Masterworks’ fee structure – an ongoing 1.5% annual management fee and 20% take on profits – is significantly higher than the fees and expenses charged by well-regarded index funds.
  6. May Require a Long Investing Time Horizon. Masterworks recommends a holding period of three to seven years. Though investors are free to try to sell their shares on the secondary market earlier on, Masterworks shares still may not be suitable for folks with short time horizons.

Final Word

Masterworks has real potential to revolutionize the way people buy and sell high-end art. For aesthetics of relatively modest means, it represents the first real opportunity to invest in fractional art holdings at scale. You could fit the number of Americans with the means to purchase million-dollar paintings into a handful of sports stadiums. Millions can afford to set aside a few thousand dollars.

Still, whether Masterworks can deliver on its promise is an open question. If its promised share exchange gets off the ground, the platform may prove unstoppable. But it’s too early to say for sure.

Either way, if you’re intrigued by Masterworks’ promise, why not request an invitation and see what all the fuss is about?

Would you consider investing in art through a platform like Masterworks?

Verdict
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4.5 / 5
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Masterworks

Masterworks is a one-of-its-kind platform that aims to democratize art investing. Its goal is nothing less than making investment-grade art accessible to millions of well-off — but not inordinately wealthy — individuals for whom art investing would typically be out of reach.

However, Masterworks has yet to find a solution to the inherent risks of investing in art. By all means, sign up if you believe fine art is a suitable investment given your goals and risk tolerance, but keep your expectations in check.

Because Masterworks is new and unproven, it’s challenging to rank the platform objectively.

Our high rating accounts for Masterworks’ considerable potential. If Masterworks continues to grow, makes good on its promise to improve its mechanism for trading artwork shares, and eventually notches successful sales that produce attractive returns for investors, it could be a real game-changer for sophisticated investors seeking diversification without prohibitive cost.

Even in this rosy scenario, Masterworks will still have significant drawbacks, including the inherent (and difficult to surmount) risks of investing in art.

Editorial Note: The editorial content on this page is not provided by any bank, credit card issuer, airline, or hotel chain, and has not been reviewed, approved, or otherwise endorsed by any of these entities. Opinions expressed here are the author's alone, not those of the bank, credit card issuer, airline, or hotel chain, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

Comments Disclosure: The below responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

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