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  • CFO Magazine

Investing in Oils

Indulging your passion for the finer things in life may help you collect handsome returns.

Twenty-five years ago as a nearly broke graduate student, Walter Manninen gazed upon a dreamy vision of four courtesans and knew he had to have them. So the aspiring banker borrowed $2,000 and purchased a 1914 Theresa Bernstein oil painting entitled Lilies of the Field.

Thus began a lifelong love affair with art that has yielded both aesthetic and financial rewards. Today, Lilies of the Field is worth an estimated $150,000 and is one of approximately 150 paintings in Manninen’s collection. Manninen, the former CFO of publishing company CXO Media, spends between $25,000 and $50,000 annually on art and estimates that it accounts for some 40 percent of his net worth. At any given time about 60 of his paintings hang on the walls of his home north of Boston, with the surplus carefully racked in a climate-controlled room. Each week he rotates different paintings into view.

“My art assets have outperformed everything else over the past 25 years,” including individual stocks, bonds, property, and other collectibles, says Manninen. Across his entire portfolio, he has seen 11 to 12 percent annualized growth, in large part thanks to his art. Some of his recent acquisitions have nearly doubled in value in just 5 years.

Parlaying a love of art into financial success is not easy. You need a keen eye, hours of research, and perhaps a savvy adviser or two to discern good values. Art is a fairly illiquid investment that may require ongoing maintenance. Should you manage to sell it, you will likely sacrifice 20 percent or more of the proceeds to brokers’ fees, and any profit will be subject to a 28 percent federal capital-gains tax. But while art is “not a traditional asset class and probably won’t be one for some time,” says Stephen Horan, head of private wealth for the CFA Institute, it is gaining ground. One key selling point: returns from art generally boast a zero to slightly negative correlation with returns from other asset classes, says Horan, making art a great portfolio diversifier. And considering the eye-popping returns that some art categories have yielded, buying beautiful objects may offer a very appealing safety net.

Visions of high returns owe much to Web-based sources of information, which shed light on what was once a specialist’s realm. David Darst, chief investment strategist for Morgan Stanley’s global wealth management group, says the abundance of available data has helped more people get comfortable with the idea of art as an investment. Manninen, for one, swears by AskART.com, a subscription-based site that offers auction prices for works by more than 50,000 artists.

Broad art indexes also give would-be investors a useful tool. One developed by two New York University professors, Jianping Mei and Michael Moses, tracks prices for artworks in four basic categories that have sold multiple times at auctions, and compares those results with the performance of financial indexes. According to the midyear 2006 data, art produced a one-year return of 22 percent, handily beating the 8.3 percent increase in the S&P 500 Total Return Index. Moses says the data “has consistently shown that art is very democratic.” For example, New York sales in 2006 showed lower-priced art (“low” in this case meaning as low as $25,000 and up to $500,000) producing the highest returns (12 percent), while art purchased for more than $500,000 saw an 8 percent compound annual return.

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