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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What is Masterworks?
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:
- They purchase blue-chip art and hold the most expensive pieces in their inventory.
- They “securitize” the artwork and sell “shares” to investors, allowing anyone to invest in this high-end asset class.
- When possible, they sell acquired assets at a profit and split the proceeds appropriately.
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 home. 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 Review: Features
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:
- Andy Warhol
- George Condo
- Jean-Michel Basquiat
- Alexander Calder
- Keith Haring
- Agnes Martin
- Pablo Picasso
The Masterworks Market
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 Fees and Pricing
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.
Masterworks Review: Pros and Cons
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.
- Art education: Masterworks profiles all the artists on their platform. This provides unfamiliar investors with a chance to educate themselves in the world of high-end art.
- Diversification: When it comes to investing, there are only so many asset classes available to and affordable for the average investor. High-end art provides a new asset class almost entirely removed from the stock market and government interference.
- Potential for high returns: According to the Masterworks website, premium artwork returns far outpace the S&P 500. While there’s no guarantee, this gives investors a chance to seek higher gains while diversifying their portfolios.
- The Newness Factor: Through their value-weighted index, Masterworks provides an entirely new asset class that was previously unavailable to the masses. Thus, as a new market, it has plenty of potential room to grow.
- Illiquidity: Unlike stocks, high-end artwork cannot be traded quickly. Typically, it takes weeks to months to line up a buyer and agree upon a selling price. This means that investors may not get their investment back if they want out of the game. To compensate for the nature of the art market, Masterworks provides an internal secondary market to trade shares. (But there is no guarantee you will be able to cash out here, either.)
- Speculative: Securitizing high-end artwork is a new practice with a limited reach. As such, it’s riskier than many other asset classes and subject to price fluctuations. Additionally, unlike a stock backed by fundamental data and corporate balance sheets, artwork is incredibly difficult to price.
Masterworks: Potential Returns
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.
Masterworks Review: Investment Risks
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.
- Capital Appreciation. This is the term for the process of an asset increasing in value. And when it comes to art, it’s the only way to see returns on your investment. In contract, stocks may pay dividends on top of increasing in value. Additionally, since the secondary market has limited reach, you’re not likely to see a profit until Masterworks sells their holdings.
- Liquidity. Liquidity is how quickly you can buy or sell an asset. Stocks are highly liquid, and many brokers offer some type of stock trading services. Rare artwork is very illiquid, which means that Masterworks may spend years searching for a suitable buyer.
- Value. For the most part, stocks are easy to value because of all the backing data available. But because artwork is both personal and unique, assessing a “true” or “fair” value is much more difficult.
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.
A Final Word in Our Masterworks Review
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 potential. 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.