Why the Masterworks Approach to Fractional Art Investing Makes Sense
Art investing has undergone a renaissance, with fractional investing changing how investors approach opportunities.
While the headlines are dominated by wealthy investors spending tens of millions of dollars on rare pieces of art, everyday investors are increasingly getting in on the action behind the scenes.
Masterworks, a company that offers investors the opportunity to own fractional shares in potentially lucrative pieces of art, and other platforms like Noyack, are playing a critical role in popularizing art as an investment choice for the ordinary investor.
Art is often a lucrative investment choice. Since 1995, this asset class has returned 14.5%, compared to the S&P 500's 9.9%. While each investment platform works differently, Masterworks's approach is perhaps the most attractive for the ordinary investor. Here's why.
Accessible legal structure
On the surface, opportunities on the Masterworks platform seem high-priced. The system requires a minimum investment of $15,000, capping the maximum investment at $100,000. Investors typically hold onto their positions for three to 10 years before works are sold when returns are potentially realized. However, the underlying structure of these investments shows why Masterworks's model works.
Masterworks allows investors to own fractional shares in a single work of art. The company opens a Limited Liability Company (LLC) associated with each piece and issues shares in the LLC for investors to purchase.
Investors on the platform can then buy shares in the LLC, with each share’s value dependent on the eventual sale price of the painting or sculpture. Assuming Masterworks sells the painting for a profit, the company's shares reflect it, giving investors a nice gain.
This approach is in contrast to the competing platform Yieldstreet's model. Yieldstreet offers shares in a mutual fund that invests in a basket of famous pieces of art, instead of a single one. Typical mutual fund rules apply, with management fees and lockup periods where investors cannot redeem their positions for cash.
Masterworks offers investors flexibility since people on the platform can sell their shares at any time to each other. While these shares are not the most liquid, they give investors complete control over their portfolios. Since Masterworks ties one piece of art to a company, investors can evaluate prospects better, instead of trying to value an entire basket's worth of art.
A huge diversity of art on offer
Masterworks does not limit the kinds of physical artwork investors can access. The platform offers everything from older works by Monet to modern pieces by Banksy. A wide range of choices is important since most investors in this niche are not necessarily expert art appraisers.
Masterworks is not unique in offering several choices, with competing platforms offering similar choices. However, the way the platform packages these works of art is distinctive. Having launched four years ago, Masterworks also benefits from being one of the oldest platforms on the fractional art scene, giving it better access to lucrative opportunities.
Newer entrants do not have this access, forcing them to find a niche by limiting their breadth. For instance, some platforms focus solely on modern or contemporary art. Others involve artists as co-investors in a fund to lend credibility.
These measures limit opportunities. For example, including artists as partners is possible only in the case of newer pieces, excluding classical art that has the highest intrinsic value. Investors who prefer safe returns over speculative ones will find limited opportunities in such an arrangement.
In addition, Masterworks's decision to offer investors access to single pieces, instead of a diversified bag of art, boosts returns in the long run. While it increases the risk inherent in the investment, smart investors treat art as an alternative asset that does not demand a huge portion of their portfolio, typically less than 10%.
Their objective is to maximize gains, and diversifying their holdings defeats the purpose of investing in an alternative asset. Masterworks's structure, therefore, makes sense when viewed from a holistic portfolio perspective.
No digital art yet
Non-fungible Tokens or NFTs have dominated art circles recently, and Masterworks doesn't offer any opportunities yet. Platforms like Fractional.art and Unic.ly give investors several fractional NFT possibilities. However, they are not the most accessible, with investors having to navigate the blockchain and crypto wallets.
Digital art is yet to reach the eye-watering valuations physical art has attained. Over time, fractional art investing platforms will undoubtedly offer opportunities here.
For now, though, if Masterworks does begin offering NFT fractionalization, its ability to slice an opportunity into shares for investors will likely give it a head start in a crowded marketplace.
Opening new vistas
Fractional art investing has given ordinary investors the chance to diversify their portfolios beyond mere stocks and bonds. While investors have several choices, Masterworks probably offers the most accessible and easily understood method of investing in art.
While only the future will reveal how the market performs, there is no denying that savvy investors must position themselves right now to leverage this lucrative asset class.
