Artfully Dodged

I HAD THE OPPORTUNITY to view Gustav Klimt���s most famous work of art, The Kiss, while visiting Vienna a few years back. It depicts a couple locked in an intimate embrace. It���s an oil painting with a significant amount of gold leaf���quite distinctive.

A few weeks later, I had an opportunity to buy a Klimt. I was in a gallery in Salzburg and came across a drawing of his which was titled Stehender��R��ckenakt - 1913. I can���t remember the exact price. But since I didn���t buy it, it most likely cost a little more than I thought it was worth���or more than I currently had in my wallet. Still, I���ve always wondered what it would look like in both my living room and my portfolio.

This pleasant memory all came back to me recently when a friend emailed me a link offering me a second chance to add artwork to my portfolio. I must admit I was a little leery when I first clicked on it and the newly opened web page allowed me ���to skip the waitlist!��� It announced that I was now ���invited to join an exclusive community investing in blue-chip art.���

The link also informed me that Masterworks is a company that buys multi-million dollar works of art, creates a Delaware limited liability company to own each one and sells shares in that company to the public. It resells the art a few years later, presumably at a higher price, and then disburses the proceeds to shareholders. Masterworks enables the fractional ownership of art���basically art for the little people.

I accepted the offer and opened an account. Before I could start investing, I needed to make an appointment with Masterworks��� registered financial advisor so he could learn more about me and answer any questions I might have. I also now had the ability to review the four works of art that Masterworks is currently securitizing.

I immediately started to imagine telling people at cocktail parties���or grocery store lines���that I owned a Picasso. Specifically, Homme a la Pipe, which is, of course, one of a series of Pablo Picasso���s important later works that feature the subject of the Musketeer. These are easily identifiable by the Musketeer���s colorful regalia and various accouterments, such as pipes, knives and swords.

Well, Evan the advisor called a few days later and explained, among other things, that the fee structure was 1.5% per year and 20% of the future profit. The management structure: Masterworks, via its B shares, determines when to sell the artwork and for how much. Where my Picasso would be stored: in the Delaware Freeport in Newark, Delaware, though it might sometimes be on display in Masterworks��� New York City office for my personal appreciation.

For those of you not in the know, the Delaware Freeport is a��newly opened 36,000-square-foot, state-of-the-art temperature- and humidity-controlled warehouse. It offers various storage services to art investors, with the most important being avoiding New York City���s 8.875% sales tax.

Evan failed to mention that Masterworks takes an 11% ���true-up��� fee off the front end to facilitate a ���reasonable compensation for Masterworks��� services, capital commitment and outlay in sourcing and acquiring��� my Picasso. It was mentioned in the prospectus. But to read it required a measure of squinting that would make Clint Eastwood proud.

I also learned Masterworks wouldn���t be a part owner of my Picasso. If it had some skin in the game, that would keep our interests better aligned. But as things stand, Masterworks might view my Picasso a little less as an investment and a little more as a wallet adorned with colorful regalia and various accouterments, in this specific case a pipe.

Evan also recommended that I diversify and buy some shares in a painting called Ripe by Ed Ruscha. That artwork is far more decipherable than the Masterworks��� fee schedule as it has the word ���Ripe��� written in pomegranate juice on a 59-inch by 55-inch yellow canvas. I thought, much as you might, ���I���ll stick with my Picasso, thank you very much��� as who in the hell is Ed Ruscha?��� By the way, you philistines, it���s pronounced roo-SHAY.

My Picasso would be insured against damage or theft, but not against competing ownership claims. Evan said that Masterworks only purchases paintings with impeccable provenance, so this shouldn���t be an issue. Still, I was a little concerned. If, in this day and age, my mortgage company requires me to obtain title insurance for my $500,000 house, you���d think the same coverage might be nice for my $17 million painting.

I also take issue with the risk of this type of investment. When I invest in stocks or bonds, I know that their prices may drop, but���in the end���there���s some underlying value. This is not necessarily true of works of art like Ripe. Tastes change. On top of that, there���s the added risk that my investment might be stolen, damaged or counterfeited, and therefore tied up in insurance claims and litigation.

Despite what I���ve written, I think there may be something to investing in art. I just returned from a visit to Crystal Bridges Museum of American Art in Bentonville, Arkansas, where Sam Walton���s daughter spent hundreds of millions of dollars to create a museum from scratch. It appears that the filthy rich���s appetite for money is only exceeded by their appetite for ridiculously expensive works of art.

By investing in paintings, it just may be possible to separate rich art dilettantes from a small portion of their money. I just don���t like the structure and fee schedule of this particular investment���not to mention I know almost nothing about art. On the other hand, if there was a way to invest in ridiculously expensive casks of bourbon���.

Michael Flack blogs at��AfterActionReport.info. He���s a former naval officer and 20-year veteran of the oil and gas industry. Now retired, Mike enjoys traveling, blogging and spreadsheets. Check out his earlier articles.

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