Masterworks is an invite-only platform that allows investors to purchase fractional interests in blue-chip art. It was founded in 2017 and is currently headquartered in NYC. In our Masterworks review, we’ll cover more about who they are, what they do, and what steps you have to take to get involved.
Before we continue, Financial Professional wants to remind you that this review is informational in nature and does not constitute investing advice. Although we may receive financial compensation (at no cost to you) from affiliate links in our reviews, our opinions are our own.
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First up, we’ll review Masterworks‘ modus operandi.
The Masterworks system is set up somewhat unusually, but it allows for serious investors to get involved in what Masterworks believes to be an overlooked asset class. In short, Masterworks works like this:
Traditionally, investing in high-quality art is reserved for the ultra-wealthy. And, while some wealthy investors sell their art for profit or donate them to museums, many tuck them away from the light of day – and public eyes – to enjoy in the comforts of their homes. By investing in these assets and keeping them in circulation, Masterworks brings both the enjoyment of and profit from art to a broader range of investors.
And so far, they’ve been fairly successful, too – Masterworks currently boasts a community membership of 95,000.
Masterworks buys high-quality artwork and then allows you to purchase shares in the paintings and profit when (and if) they sell it at a higher price. In this sense, Masterworks is similar to a real estate investment trust. In a REIT, a management team buys and manages properties, and then allows investors to share in the profits.
Here, the management team is Masterworks, and the property they manage is valuable artwork. The biggest difference is that, unlike real estate or stocks, artwork does not generate income. Thus, the only way to profit from your investment is to sell it at a higher value than you paid.
Fortunately, Masterworks reviews and researches the pieces they buy before they invest. And for the most part, they stick with artwork that has sold at auction before so they have a history of pricing and demand. A few notable artists featured on Masterworks include:
Masterworks also leads the way in cataloging art market performance and evaluation to provide their investors with more insight. This fills the gap in publicly available research since most people don’t have the means to invest in high-end art on their own.
According to their website, Masterworks has reviewed and collected data on 300,000+ auction transactions and analyzed more than 3 million data points. From this information, they have created indices based on similar approaches in the real estate market, with the end goal of crafting a value-weighted art index.
Below is an example dataset that highlights a few pieces, previous sales prices, and the historical return of the assets in question.
Masterworks uses a securitization method that is not unlike the kind used by companies. There is an initial offering of shares in a painting (the Initial Public Offering) and then there is a secondary market where investors can buy and sell shares to each other.
Masterworks uses a securitization method, not unlike the kind used by public corporations. They offer initial shares of a painting in an IPO-style forum and then provide a secondary market for investors to buy and sell shares internally. This secondary market is an attempt by Masterwork to give their investors added liquidity since it can take months or even years to trade high-quality artwork.
(As an example, the New York Stock Exchange or NASDAQ both count as secondary stock markets in traditional investing.)
Masterworks is free to join, though you need to request an invitation to become a member. Once you’re in, they charge a 1.5% annual management fee, similar to a hedge fund. You pay this fee in the form of equity, plus 20% of the proceeds (after all fees and expenses) if any paintings in your portfolio increase in value and sell at a profit.
For this price, you get access to Masterworks, the ability to trade shares on their platform, and access to their built-in indices. Plus, Masterworks cultivates tons of resources on their website for users to learn more about high-end artwork.
When it comes to personal finance, every tool has its pros and cons. But because every person’s goals vary, a feature that works for one investor may hinder another. That said, let’s review the pros and cons of Masterworks.
According to their research, over the past 25 years, their Contemporary Art index is up 13.6% annually versus a return of 8.9% for the S&P 500. Additionally, the high-end art market seems to respond fairly independently of the general economy. Evidence of this was seen in early 2020 when the stock market was tanking and unemployment skyrocketed, the Masterworks art index was still up 5.5%
To accurately determine how much their artwork costs, Masterworks uses a technique called historical appreciation. They define historical appreciation as the median annualized appreciation rate across paintings (unless otherwise noted) that have sold at least twice at public auction by a given artist, including purchase and sale commissions paid to the auction house.
Essentially, they evaluate public records of art that has been sold at auction and what it sold for and then track how these prices increase over time.
However, they emphasize that these appreciation rates should not be compared to returns on Masterworks shares. The reason for this is that they do not update data in real-time and their site may not include the most recent auction results for any particular artist.
Masterworks is constantly working to sell their artwork at a profit, although as the investor you will likely need to hold on for the ride until they do.
Before investing in high-end artwork, it’s important to understand the differences between art investing and stock market investing. Although both revolve around the principle of buying low and selling high, comparing the two highlights some key differences.
All this to say, high-end art investing is an inexact science with real risks outside Masterwork’s control. Masterworks themselves is the first to say that they offer highly speculative investments – in fact, they provide a full risks disclosure here. As such, only investors who are comfortable losing their entire investment should request an invitation to join.
Of course, if you’ve weighed the risks against the rewards and decided high-end art is for you, it’s worth noting that Masterworks has a lot of skin in the game. As “the” marketplace, they are responsible for buying, holding, and selling the artwork – and they don’t see a profit until you do. As such, it’s in their best interests to transact as efficiently as possible.
Masterworks is a unique, new avenue to explore if you’re looking to branch out from conventional asset classes. According to Masterworks’ statistics, investing in high-end art has plenty of potentials. Plus, high-end art generated a higher return than the stock market over the past 25 years.
However, high-end art investing is also much more speculative than investing in stocks, bonds, or real estate. To that end, investors should ensure that they fully understand the risks before diving in.
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