By Daniel Archibald | CFA
For over two hundred years, the sons of the English nobles spent their 'gap year' (usually much longer than a year) wandering the halls and pavilions of the continents greatest art galleries. Known as the "Grand Tour", this practice was somewhat of a rite of passage for the elite, and consisted of an itinerary that included French lessons in Paris, hiking through the Alps and art appreciation in Italy.
One of the premier stops on the tour was the Uffizi gallery in Florence (which was then part of the Grand Duchy of Tuscany). It was then, and continues to be, a home to some of the most important renaissance art and roman sculptures in the world. Interestingly the gallery itself, began life as an administrative block (hence the name, which in English means "office"), sitting next to the city palace. During the reign of the Medicis, the building was used to house different functions of Government and even had a secret passage way that ran from the old palace to the new one across the river.
Florence, and the region of Tuscany, was ruled by the wealthy banking dynasty of the Medicis, and their city was the backdrop for the birth of the renaissance. And as the wealth of the family grew, so too did their collection of art and ancient wonders. By the time that the house of Medici was extinguished in 16th century, the Uffizi complex contained an overwhelming amount of artworks. And priceless works by the likes of Botticelli, da Vinci, Raphael, Michelangelo, Titian, Caravaggio and Veronese are now on display for more than just rich English teenagers (though expect to pay double if you don't want to wait for a couple of hours).
Today, there is plenty of artworks around the world that are more expensive than a house or blocks of gold, and good art investors can make a fair return from their art collections. Artworks, like other investments, can be rented for an income or sold for a capital gain. And like some commodities, they can have a convenience yield (benefit from being able to hang it in your house, etc), but they are likely to have storage costs (insurance, etc).
However, not all art is priceless. There are many struggling artists, whose works remain unhung and unappreciated. Vincent van Gogh only sold one painting while he was alive, and the artists' life can be a penniless one. However, like the artworks by van Gogh, the value of such an alternative investment can appreciate over the years and become a worthwhile asset to hold.
It is unlikely that an investment in art, which would fall in the alternative assets bucket, would make up a large portion of a well diversified portfolio. However, recognising the ability of artwork to provide returns that might be uncorrelated with the business cycle and other traditional assets, investors would be wise to consider the benefits of including art in their asset allocation mix.