Can art trusts work?

One reader wrote me the following:

…artists who put works into the pool are depositing them at full value, tax free, right? If they instead sold these works, they’d lose 50% to a gallery and then another 50% (the marginal tax rate of any minimally successful self-employed person, even me) to Uncle Sam etc. In other words, if they sold art and invested the cash they’d only have 25 cents on the dollar to put into stocks and bonds. The question is whether any money manager could overcome this enormous handicap.

Besides, most artists tend to have more works than they can sell into such an inefficient market. For this and the reasons above, the cost of contributing to this fund may be close to zero for all but the most wildly successful participants.

What does it cost to set an art work aside?

Let’s say that the art trust can store the work at the same cost as a gallery. Then the artist already has done all the storing that he or she wants to do. Storing more works, all other things equal, is a cost rather than a benefit. And tax must be paid once the works are sold, in any case. Furthermore, when it comes time to sell the works and get the best price possible, the trust is no more effective than a gallery, and arguably less so. In fact the trust might resort to a gallery or auction house in any case, simply postponing the selling costs.

Perhaps the artist has pictures that he cannot sell at all. Why not put them into the trust? Fair enough, but if no gallery will take these pictures, how can the trust make them profitable?

The deal makes the most sense when an artist currently has an exclusive dealing agreement with a gallery. Such an artist might prefer to siphon off works to other channels, as a form of price discrimination, but is not allowed to. The sponsoring gallery does not want its market to be ruined. The trust might allow the artist to achieve market segmentation without it being labeled as such.

Nonetheless the artist pays a price for this new outlet. You have to accept a risk position in the pictures of others. Furthermore this price discrimination motive suggests that each artist will be putting his lesser pictures into the trust. You don’t want to “shade price” on your very finest pictures.

Another reader wrote:

I’m not persuaded that the art trust wouldn’t be an effective model. It doesn’t seem a lot different than the risk dilution idea of a blackjack team or the cross-trading that goes on between friends in a large poker tournament.

Again, a very good point. But you wish to share risk in this fashion when you know that you (and your team) can beat the market. In this case you are confident but want protection against bad luck. If you felt that the artists in the pool were all above-average, relative to their current prices, you might find the trust attractive. This would require each artist to judge the other artworks in the pool, which involves high information costs.

Perhaps the trust helps solve a “durable goods monopolist game.” That is, the artist wishes to precommit not to sell works in the near future. Buyers may be afraid that if they buy today, the price will be lower tomorrow. Perhaps the trust can take works off the market more effectively than a gallery can. This would provide some argument for the trust. But of course the artist must also prove to buyers that he has locked up his future output to the requisite degree; this may prove difficult.

A final issue is one of trust in the intermediary. Life insurance, or savings banks (pre-deposit insurance), promise to pay you back in a distant future. Virtually all depositors or policyholders have preferred large, solid institutions with high levels of capitalization. Older banks had fancy columns to signal they will be around for the long run. Otherwise there is simply too much risk that a small intermediary will go under. If you are “lending” a painting to an artistic venture, why not look for the most conservative and thickly capitalized institution possible?

In closing, I will repeat my bottom line from my previous post on the topic:

…decompose the transaction. Half of your income stream remains tied up in your own art and thus risky, minus the twenty percent of course. With the other half of your pension you decide to invest in not-yet-totally-famous artists. Would anyone recommend such purchases on their own merits? Is that your idea of insurance?

That being said, it is the market, not I, who will have the final word in this matter.


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