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BRUCE D. TAUB

Appreciating Picasso

PABLO PICASSO'S pink period masterwork, "Garcon a la Pipe," sold for $104 million last week, setting a record as the most expensive individual work of art ever sold at auction. How is it that a single painting can be valued comparably to the production cost of a Hollywood movie or the market value of some publicly traded companies? First, "Garcon a la Pipe" ("Boy with a Pipe") is a spectacular painting. It surpasses all the art market's traditional benchmarks for value: quality, scarcity, provenance, and time off the market. The artist and the period are contributing factors, too; Picasso, arguably the most important painter of the 20th century, is hotter than ever, as are many of his contemporaries.

Moreover, the art market itself is sizzling; witness the $72 million purchase of a Rubens by Canadian billionaire Lord Thompson in 2002 and the Getty Museum's acquisition of a Titian last November for $70 million. Spectacular sales such as these make for splashy headlines and animated cocktail chatter but raise a larger question: How long must the worlds of fine art and investing intersect only in the rarefied air of the super rich?

Not much longer, perhaps, for three reasons. First, interest in art as an investment is accelerating due to the highly variable returns of other asset classes over the last few years, Wall Street's fascination with alternative investments, and the excitement that accompanies record-setting auction prices.

Second, academics and economists, armed with newly mined historical data, have demonstrated that including art in an investment portfolio can yield important diversification benefits thanks to the low correlation between art returns and those of stocks, bonds, and other traditional asset classes.

Finally, financial innovators continue to develop creative strategies to make formerly out-of-reach opportunities accessible to a broad range of investors. These include widespread securitization (credit card receivables, mortgages, bank loans) and the success of popular hybrid investment vehicles such as real estate investment trusts. The art market is ripe for such innovation.

There are obstacles, of course. Compared with equities or, until recently, real estate, art suffers from low liquidity, high transaction costs, low transparency, and highly differentiated products. Yet experienced investors know that the least efficient markets present the greatest opportunity for financial gain, provided superior market insight is employed.

Such insight into the art economy is emerging. As the numbers get larger, greater attention is drawn to its unique market dynamics viewed through the lens of traditional investment discipline.

That said, if the art market is to find broad favor with average investors, a certain level of efficiency or, at the least, logic must prevail. In fact, there is logic to the prices being paid in many high-profile auctions, including the breathtaking price paid for "Garcon a la Pipe." The painting was purchased by Betsey and John Hay Whitney in 1950 for approximately $30,000. Having sold for $104 million, it produced, net of the auction commission, $93 million, which is a 16.05 percent compound return over a period of 54 years. That makes it an outperformer, but hardly an outlier. Had the Whitneys invested a similar amount in General Motors -- and it is not unreasonable to imagine they might have -- their art investment would have performed significantly better. Substitute IBM for GM, and "Garcon a la Pipe" would have been a laggard.

Facilitating a more thorough analysis of the investment attributes of art, a number of academic researchers and small private companies have recently developed market indices that include clearly definable sectors and subsectors -- French impressionists, Dutch Old Masters, 19th century European, for example. Similar to sectors within the equities market (e.g., technology, energy, health care) these move in and out of favor over time, providing new choices for the sophisticated investor.

The inevitable democratization of the art market will spark a flow of new capital into the art economy, with exciting consequences not just for investors but also for the public. Creating a world in which the average investor owns shares of a Duchamp alongside shares of DuPont will reinvigorate interest in art history, appreciation, and sensibility. It will trigger deeper exploration of less-well-known artists from all periods, as well as more support for new talent, styles and mediums. Employment opportunities will blossom for those with superior abilities to understand and forecast the value of our cultural heritage.

Until this happens, it is heartening to remember that the inexplicable value within art -- its meaning and wonder -- remains available to almost anyone with the desire to experience it. But it is imperative that art's economic value, which is formidable and growing, be equally accessible to everyone with the desire to harness it. After all, it is the economic value of "Garcon a la Pipe" that will contribute so significantly to the Whitneys' lasting legacy.

We should look forward to the day when average investors own a piece of the next record sale, helping them fund lasting legacies of their own.

Bruce D. Taub is chairman of Fernwood Art Investments LLC. 

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