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How Masterworks Decides What Paintings to Offer on Its Investing Platform

How Masterworks Decides What Paintings to Offer on Its Investing Platform

Masterworks is a fractional investing platform for fine art that was established in 2017. It was the first platform to open up investing in high-end contemporary art. 

In just a few years, Masterworks has built a reputation for positive returns and trustworthiness that has attracted over 700,000 active members and more than $7.5 million of assets under investment. The company even branched out into the physical world this year, announcing the opening of a gallery in New York’s Upper East Side. Notably, Masterworks has achieved 29.03% net annualized returns on six recent exits.

How does the Masterworks leadership team achieve this? How do they know what artists and paintings to invest in, and offer to their community of users as fractional investment opportunities, to achieve such impressive results? What data do they look at, using what criteria? Let’s take a closer look.

Why Do People Invest in Fine Art?

Before we approach Masterworks’s strategies head-on, it’s important to understand a bit of context on what makes art a compelling asset class.

Alternative assets – meaning almost anything apart from bonds, stocks, and shares, which are seen as conventional investment vehicles – have seen rising popularity in the last few years. Alternative assets tend to have a low or negative correlation against the stock market, which makes them appealing when stock markets are turbulent. 

High net-worth individuals and institutional investors often use alternative assets as a hedge against market downturns, and to diversify their portfolio to mitigate exposure to risk. Alternative assets can also bring higher returns than traditional stocks and shares. 

Fine art is one of the most trending alternative assets, although people have invested in paintings, sculptures, and other artworks for centuries. Art market research firm ArtTactic calculated that over the last 25 years, art auction sales generated an average annual return of 7.1%, compared with 6.6% for the S&P 500, while ArtNet noted that in 2021, the blue-chip art index outpaced both the S&P 500 and the MSCI World Index. 

But alternative assets can encompass almost anything that’s likely to rise in value, including vintage fashion, antique jewelry, fine wines, and comic books. Interest in the sector has certainly grown recently due to global economic volatility, but the rise of fractional investing platforms like Masterworks has likely played a role as well. 

If you’d like to know more about how Masterworks selects the paintings it offers on the platform, read on. 

How Masterworks Chooses Art for Investment

In this video, Masha Golovina, Masterworks’s Director of Purchasing, explains that the platform’s main priority is to identify the right artists whose works are likely to appreciate in value. 

“Thousands of artists are sold at auction every year, but not every one is right for the Masterworks platform,” she explains. “What we look for in an artist is for them to either have good momentum or historically significant returns.” 

In order to choose the right artists, Masterworks’s research team collects and analyzes data from artist markets, crunching the purchase and sales prices of over 60,000 paintings. Scott Lynn, CEO of Masterworks, tells us that this data “helps us understand which individual paintings and therefore which artists are appreciating or depreciating within the art market.”

In this way, Masterworks narrows down a list of thousands of artists, to focus on approximately 40 with potential for driving profits. These are either blue chip artists, like Monet, or what Golovina terms “established artists,” who are newer to the art scene but have great momentum. “These artists tend to be younger, so while you have potentially higher risk you also will likely see higher returns,” says Golovina. 

Once the research team settles on the best artists for Masterworks to invest in, it informs the purchasing function, which then looks for the best quality examples of work by those artists. Masterworks buys art at auction and through private sales. 

Golovina and her colleagues estimate the fair market value for each painting, to ensure that they aren’t overpaying. Masterworks strives to buy artworks at a discount, so as to maximize returns on each investment. The team also examines the painting, to check that it’s in good condition and verify its provenance. 

“We inspect it to make sure that it is …clearly recognizable as being by the artist and very representative of their work,” says Golovina. 

Applying the Fractional Investment Model 

Once the painting has been acquired by Masterworks, it becomes available for fractional investing on the platform. But what is fractional investing?

Just like stock markets sell shares in a company, fractional investing platforms sell shares in an alternative asset. In the case of Masterworks, those shares are portions of a painting – or, more precisely, a securitized holding company dedicated to owning a specific painting. You might need millions of dollars in liquid cash and a network of art trade contacts to invest an entire blue chip painting, which puts art investing out of reach of regular retail investors. 

Fractional investing platforms like Masterworks democratize access to blue chip art investing by splitting the same painting into multiple units, so you can buy into the market with a much smaller stake. They also provide plenty of resources and information to increase transparency around art sales and help investors make better decisions.

The impact of these platforms is undeniable. ArtTactic observes that more than $625 million worth of art has been sold through fractional investments since 2017. Masterworks alone has purchased 259 pieces. 

How Masterworks Manages Fractional Blue Chip Art Investing 

Once the team at Masterworks purchases a new painting, they convert it into a qualified investment by registering it as an LLC with the Securities and Exchange Commission (SEC). Anyone who buys a share in that LLC owns part of the corresponding artwork. Investors can buy into a new acquisition, or trade shares on Masterworks’s secondary marketplace. 

Masterworks holds onto each painting for between three and ten years, depending on market performance, and then sells them at auction. When a painting is sold, each shareholder receives a percentage of the profits. 

One of the benefits to using Masterworks is that the company makes all the difficult decisions about which artists are most likely to appreciate in value over time, and puts in the legwork tracking down promising paintings and verifying their provenance. 

This way, investors can benefit from the art market, even if they don’t know their Manet from their Monet. 

Masterworks Takes the Guesswork out of Fine Art Investing

Apart from the cost of most artworks, one of the main barriers to investing in fine art has been the need to make an educated decision about which works to buy. For retail investors without much background in art appreciation, this felt like too much of a gamble. But Masterworks’s data-driven strategy for art investing, together with the lower investment amounts, make it possible for everyone to diversify their portfolio, hedge against a market downturn, and invest in fine art.

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