Masterworks is an investment platform that lets the average Joe buy fractional ownership of fine art for just $20 a share, widening access to blue-chip artwork beyond the super wealthy and to the masses.
The concept is similar to real estate crowdfunding platforms (e.g. Fundrise, Groundfloor) that allow small investors to invest in commercial real estate projects. But instead of real estate, you’ll be putting your money towards priceless works of art.
The goal is to sell the art for a higher value at a later date.
Why Invest In Art
Art is noncorrelated. Asset correlation measures how your investments behave in relation to each other. For a diversified portfolio, you’ll want assets that move in opposite directions. When one goes up, the other goes down. This offers some protection should the market take a downturn.
Art is the “picture perfect” non-correlated asset. While other stocks react daily to news and swings, the art market moves at a snail’s pace. Appreciating slowly and steadily and in complete disregard for how the broader market behaves.
Art is resilient. When the market crashed in 2008, it took eight months before it reached the art world. And even then, the effects weren’t nearly as catastrophic. During this economic crisis, the value of the S&P 500 fell 51%+ while the art index fell 27%.
Art is global. Art is a global commodity and can be bought and sold by anyone, anywhere in the world. Most stocks and bonds are limited to within the United States, or other countries where those assets are traded. The large, global network of potential buyers protects the art market from country-specific economic downturns and provides a constant source of new investment.
Art is in demand. In 2005, approximately $630 million flowed into the market for artwork sold at auction at $5 million or more. The value of these pieces almost quadrupled in value by 2008 – amidst the financial crisis – selling for $2.2 billion at auctions. And it didn’t peak there. In 2015, the art market achieved a remarkable $4.2 billion record in sales.
Art outperforms the stock market. On average, art assets posted returns of 10.6% compared to the S&P 500 total return of 5.1%. According to Artprice, blue-chip artwork has outperformed the S&P 500 by over 250% since 2000.
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What Is Masterworks?
Masterworks lets anyone purchase fractional interests in valuable works of art. Here’s how the company makes it happen:
Masterworks purchases blue-chip art. Blue-chip art refers to pieces that have been created by world-renown artists whose popularity is reflected in exceptional sales volumes over the years, like Warhol, Van Gogh, Kahlo and Basquiat. The Masterworks team behind the purchases have 75 years of combined experience as art collectors, dealers and auction house workers.
You make an investment. Once Masterworks purchases a painting, the company files an offering circular with the Securities and Exchange Commission. Once the offering is qualified by the SEC, you can make an investment for as little as $20 per share. The minimum to invest is $1,000.
You monetize your investment. After 7 years, if shareholders do not have any other means to sell or redeem their shares, Masterworks will try to sell the painting on or before the 10-year anniversary of the offering. Profits are then distributed accordingly. You can also sell your shares to other investors via Masterworks or a third-party, but this option is not always available.
How Do You Sign Up For Masterworks?
With Masterworks, you don’t need to be an accredited investor to start investing in their alternative platform. Instead, the process to join is a bit more personalized. You’ll need to request an invitation and become a member, which involves participating in a phone interview.
You might assume that a company as cutting-edge as Masterworks would have a fully online sign-up process. However, they prefer to establish a personal connection by having you speak with a real person over the phone to join.
Sure, it might be a little less convenient than an online process, but Masterworks believes in building a one-on-one relationship with each of their clients. This interview is also a great opportunity for you to ask any questions you may have and discuss your investment goals.
As for the minimum investment requirement, each share on the Masterworks platform is priced at $20. Keep in mind that there is a minimum investment amount, which is tailored to you and will be discussed in the phone interview.
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Masterworks Step-By-Step
Masterworks offers a streamlined and straightforward approach to investing in art, allowing you to add valuable artwork to your portfolio in just a few simple steps.
- Artwork Acquisition: Masterworks uses algorithms to select renowned artists based on more than 1 million art auction records. By targeting artists with a proven history of appreciation, they focus on artworks that have demonstrated annual returns ranging from 9% to 39%.
- Share Creation: After acquiring the art, Masterworks registers it with the SEC and issues shares in increments of $20. No single investor can hold over 10% of the shares for a specific artwork.
- Holding Period: During this time, Masterworks holds the artwork and may even showcase it in their exclusive gallery located in New York City.
- Artwork Sale: The company typically plans to sell the artwork within a 3 to 10-year timeframe.
- Profit Distribution: When the artwork is sold, the generated profits are divided among investors, with Masterworks retaining a 20% commission.
For investors looking to exit their investment early or buy shares of an artwork being sold, Masterworks provides a secondary market on their website. However, this option is only available to U.S. investors.
Both members and the general public can access a free database and blog on the Masterworks website to research artists and evaluate investment opportunities.
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Masterworks Fees
Masterworks charges a 1.5% annual management fee which covers distribution costs, regulatory expenses, storage and gallery space, insurance and more.
If the painting is sold at an increased value, Masterworks takes 20% of the profit.
Masterworks Risks
Before you drop $1,000 on a piece of fine art owned by Masterworks, let’s take a look at the risks involved.
Untested business model. Masterworks uses a combination of blockchain technology and art that, although unique, is untested and unpredictable.
One type of asset. Although Masterworks will purchase different pieces of artwork, they’re still dealing with just one type of asset. And relying on a single asset as an investment comes with high risks.
Illiquid asset. Masterworks plans on holding on to a piece of art for five to ten years before trying to sell it off. During this time, investors can vote to decide if they want to take the offer. In a nutshell, your investment funds are tied up for the long run.
The subjective price of art. Because the cost of art is subjective, there’s no guarantee that the price of your art will appreciate over time.
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Is Masterworks Legit?
Masterworks serves as a genuine alternative investment platform, providing a more accessible route to invest in blue-chip artwork. However, it’s essential to recognize the inherent risks associated with this asset class. Investing in art can be volatile, and Masterworks does not guarantee any returns on your investment.
Additionally, liquidity is not assured, despite the presence of the platform’s secondary marketplace. While this marketplace does offer an avenue for buying and selling shares of artwork, it doesn’t guarantee that you’ll always be able to liquidate your investment when desired.
In summary, Masterworks offers a unique and accessible way to invest in high-end art, but it’s crucial to understand the potential risks and uncertainties involved. As with any investment, it’s important to carefully consider your risk tolerance and financial goals before diving into this alternative asset class.
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Who Should Invest With Masterworks?
Masterworks is specifically designed for investors who wish to diversify their portfolios beyond traditional assets such as stocks, bonds, and other securities. It’s an attractive option for those seeking to hedge against inflation or provide some downside protection to their investment portfolios through alternative assets.
Contemporary artwork, as an asset class, has the potential to deliver strong returns. Masterworks often highlights that top artists can frequently outperform benchmarks like the S&P 500 or other assets, such as real estate.
However, if you’re looking for regular income through investments, Masterworks may not be the right choice for you, as it doesn’t pay dividends. Additionally, it’s important to remember that liquidity isn’t guaranteed, even with the availability of a secondary marketplace for U.S. investors.
Masterworks presents an excellent opportunity for those interested in adding artwork to their investment portfolios. While the potential to outperform the market exists, it’s essential to understand that such outcomes are not guaranteed.
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Masterworks Pros & Cons
Pros:
- Strong performance: Masterworks has demonstrated solid returns on its exited investments thus far.
- Expert research: Reputable institutions, such as Citi, rely on Masterworks’ research to analyze art performance.
- Art market data access: Masterworks’ “Price Database” provides valuable insights to help you learn about the art market.
- Comprehensive service: Masterworks manages the entire process, from identifying and purchasing artwork to ensuring its secure storage.
- Mobile app availability: The platform now offers a mobile app, enhancing accessibility and user experience.
- Early liquidity options: Masterworks’ secondary market provides investors with the opportunity to access liquidity before the scheduled exit of an investment.
- Diversification: Investing in art through Masterworks allows you to diversify your portfolio beyond traditional assets, potentially reducing overall risk.
- Unique asset class: Masterworks grants access to high-quality, blue-chip art investments that were previously exclusive to elite collectors and institutions.
Cons:
- No income stream: Fine art investments do not generate regular income, so consider this investment option primarily for capital appreciation.
- Potential long holding periods: Without relying on Masterworks’ secondary market, it could take between 3-10 years to sell a painting, which may not suit investors seeking shorter-term commitments.
- High fees: Masterworks charges hedge-fund-like fees, although it’s worth noting that their net annualized returns are calculated after deducting these fees.
- Limited historical data: As less than 10 investments have been exited, it can be challenging to thoroughly evaluate the platform’s performance track record.
- Liquidity concerns: While the secondary market offers some level of liquidity, it is not guaranteed, which may pose challenges for investors who need to liquidate their assets quickly.
- Inherent risks: As with any alternative investment, fine art carries inherent risks, including market volatility and the potential for changing tastes and trends in the art world.
Bottom Line
The opportunity to invest in high-quality, blue-chip artwork is undoubtedly exciting and offers a unique way to diversify one’s investment portfolio. The platform’s strong performance on exited investments thus far and its expert research capabilities are certainly appealing.
Masterworks manages the entire process of finding, purchasing, and storing artwork, which makes the investment experience relatively hassle-free. Additionally, the availability of a mobile app and early liquidity options through the secondary market are valuable features.
However, it’s important to recognize the potential downsides of investing in fine art. The lack of a regular income stream may not suit those looking for dividend-paying investments. The potential long holding periods, ranging from 3-10 years, may also be a concern for investors seeking shorter-term commitments. High fees and limited historical data for evaluating the platform’s performance add to the list of considerations.
Given these factors, my take on Masterworks is that it can be an exciting and rewarding investment platform for those interested in the art market and looking to diversify their portfolios. However, it’s essential to weigh the potential risks and downsides against your personal investment goals and risk tolerance.
Apart from acquiring blue-chip art directly as a high-net-worth individual, I believe that Masterworks presents the most exceptional opportunity for investment in fine art.
As with any investment, carefully consider your unique financial situation and objectives before diving into the world of art investing through Masterworks.
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Frequently Asked Questions (FAQs)
Masterworks is an investment platform that allows the average investor to buy fractional ownership of fine art for just $20 a share. The concept is similar to real estate crowdfunding platforms, with the goal of selling the art for a higher value at a later date.
Investing in art offers several benefits, including noncorrelation, resilience, global appeal, strong demand, and potentially higher returns compared to the stock market.
Masterworks purchases blue-chip art, files an offering circular with the SEC, and allows investors to buy shares for as little as $20 each. The company plans to sell the painting within a 3 to 10-year timeframe, with profits distributed among investors.
To join Masterworks, request an invitation and participate in a phone interview. There is a minimum investment amount, which will be discussed during the interview.
Masterworks charges a 1.5% annual management fee and takes 20% of the profit when a painting is sold at an increased value.
Risks include an untested business model, reliance on a single asset type, illiquid assets, and the subjective price of art.
Yes, Masterworks is a genuine alternative investment platform, providing a more accessible route to invest in blue-chip artwork. However, it’s essential to recognize the inherent risks associated with this asset class.
Masterworks is designed for investors seeking to diversify their portfolios beyond traditional assets such as stocks, bonds, and other securities. It’s an attractive option for those seeking to hedge against inflation or provide some downside protection to their investment portfolios through alternative assets.
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