Masterworks Review 2022: Invest in The Great Artwork!
You’ve probably seen the news stories about expensive artwork fetching $99 million or more at auction. What about the tale of the man who discovered a picture at a yard sale that turned out to be worth millions?
You might be thinking to yourself, “Art sells for a lot of money.” Perhaps this is a good place to make an investment? There is, in fact, and people have been investing in art for hundreds of years.
But in recent years, developments in the field of investing have made it possible for people to buy fine art, even works that are worth millions of dollars. You can purchase a portion of ownership in a piece of art with Masterworks.io.
Let’s examine Masterworks to determine whether it is appropriate for you.
Who Are the Masterworks?
A New York-based firm called Masterworks.io is revolutionizing the art market by enabling smaller art buyers to acquire great works of art.
“Artwork created by some of the most notable artists in the world tends to appreciate at the highest rates, but due to the price point, relatively few people can access them. By providing the chance to invest in works of art at a low entry cost, Masterworks hopes to enable anyone to do so, according to CEO Scott Lynn in a press statement.
Masterworks has risen to prominence in the art market during the past few years, offering it extraordinary chances and power.
How Does It Function?
Masterworks is able to sell art at a significantly cheaper entry point since it buys the work and then sells investors fractions of it. Lower value does not imply a lower entry point. The artwork is still valuable.
How to Use Masterworks
Masterworks examines the evolution of certain works of art. It seeks to acquire works of art with the greatest potential for future appreciation. Smaller collectors will receive a refund in this manner. As the art market is heavily dependent on the artist, not the work itself, one of their main goals is to buy the best pieces from specific artists.
After choosing a piece, Masterworks purchases it and registers the artwork with the Securities and Exchange Commission (SEC). This secures the work of art. The artwork can be listed for sale on Masterworks.io’s platform once it has received SEC approval.
Investors can follow the development of their work throughout time thanks to the website. The investor can decide whether to wait for an exit or sell their shares on the secondary market for a profit as it increases.
The aim of Masterworks is to surpass the S&P 500. “Since 1995, contemporary art prices have exceeded the S&P 500 returns by nearly 174 percent,” reads their main page.
Cheryl Ellzysmith, a studio artist from Philadelphia who is 29 years old, told CNN that she “saw this gap between the value of art and the ability of the average person to be able to invest in — or own — ‘blue-chip’ art” in order to comprehend some of the drivers behind investors purchasing fractional shares of art. The potential growth in value of art of this calibre and quality is almost infinite.
“Since paintings are ageless, investing in them is very secure. It is comparable to real estate investing in that regard.
Masterworks’ fee structure is comparable to a hedge fund’s. Hedge funds charge a 2 and 20 fee, which translates to a 2% yearly management fee and a 20% profit share. The fees for Masterworks.io are 1.5 and 20. That comes up to a yearly charge of 5% and 20% of revenue.
Fees for masterworks management
Is it a decent offer? It’s difficult to tolerate that much. Any gains will be severely reduced by 20 percent. But if Masterworks performs, you might end up winning. Additionally, you benefit from the team, legal, and professional services provided by Masterwork.
It’s crucial to keep in mind that, because the investment lacks liquidity, you’re not actually paying that 1.5 percent yearly. You are paying that 1.5 percent as accumulated equity, which is repaid along with their part of the proceeds at the liquidation event.
Let’s imagine, for instance, that artwork typically generates a 20% profit (which is very high). Your $1,000 initial investment should increase to $6,191 over a ten-year period as a result. A 1.5 percent yearly management charge, however, would make that amount $428 less, or $5,763.
Then, depending on the method of sale of the painting, there may be auction costs, which can run anywhere from 10 to 25 percent. We’ll use a 13 percent estimate, or $749, for our computations. In contrast, Masterworks claims that the typical commission up to this point has been roughly 5% considering their volume.
Then you deduct your 20% share of the profits ($803), bringing the total down to $4,211. So, despite all of these expenses, you are still witnessing an incredible compound yearly return of about 15.5 percent over ten years. It’s a highly optimistic situation, though.
To determine the impact of fees on your investment, use an investing fee calculator to perform similar arithmetic.
The math becomes less appealing if you start receiving returns that are less than 20% annually. Let’s assume that it drops to a yearly return of 10%. As a result, your $1,000 investment grows to $2,594.
If this item sells at auction, you would lose $337 ($13 percent fee) and gain $2,257 instead.
After paying Masterworks’ 20% commission on the profit (or $251), you would still have $2,006.
Thus, after fees, your investment increased by $1,006 over a period of ten years for a compound yearly return of about 7.5 percent. a little below the historical average for the stock market.
The painting’s sale at an auction or through a private party is another important factor to take into account in this situation. The costs of a private party sale will be substantially cheaper than those of an auction.
The Artprice100 index has returned over 450 percent since 2000, compared to less than 200 percent for the S&P 500. It’s crucial to realise that 450 percent represents an index’s return. To earn that return, you needed to own a wide variety of paintings. Additionally, it disregards fees like 1 and 20. What are the chances that you have picked all the appropriate fractional shares that will return 450 percent over the course of 18 years if you are only purchasing a few individual shares? One can only speculate.
Also take note that the Artprice100 index essentially lists the 100 best-selling artists who have sold their works at auction in the preceding five years and who meet a crucial liquidity condition (at least ten works of comparable quality sold each year). Each artist’s weight varies according to their annual auction revenue over the relevant time.
Primary Market
Investors in Masterworks’ shares can buy and sell on a secondary market that has been established. You can sell a fractional share that you possess on the open market. You can browse the classifieds as a buyer and submit a bid.
Additionally, you can view historical information on items that are sold on the secondary market. If you want to get some cash out of your partial ownership before selling a painting, this function is fantastic.
Final Reflections
The platform Masterworks is intriguing. It is appealing to be able to invest in fine art, and some investors who are trying to diversify into alternative assets may find it interesting.
There is no assurance of appreciation, and the costs are relatively high when compared to equities and ETFs (but comparable to other illiquid investments like real estate and private equity). Even though the recent history appears favorable on paper, there are still many unanswered questions.
We don’t deny that owning a Picasso or Warhol would be desirable. We do, however, advise avoiding investing money that you can’t afford to lose until Masterworks’ platform has been thoroughly tested over time, especially over the 3 to 10 year period that Masterworks expects to keep the artwork for.
