Hello, fellow investor! Art as an investment class has typically been reserved only for the most wealthy and knowledgeable investors due to issues such as high initial cost, storage, security, insurance, etc. This has resulted in $1.481 trillion of assets held in art and collectables by ultra-high-net-worth individuals in 2020.
Masterworks looks to democratise investing in high-end physical art for the ordinary folk. In a nutshell, Masterworks makes it possible to buy shares (fractions) of physical art from some of the most famous artists in history.
So far, they have amassed 800,000+ members and $800+ million in assets under management. They offer 200+ paintings from some of the most famous artists, such as Picasso, Banksy, Claude Monet, Andy Warhol, and more. The company itself was founded in 2017 by Scott Lynn and has over 200 employees.
Their large marketing presence in digital media makes it very likely that you already heard about them. So let’s dig a bit deeper to find out what the investing process looks like and what are the pros and cons of using Masterworks!
1. Masterworks Overview
One of the main selling points of Masterworks is the exposure to the alternative asset class of high-end art, which was so far almost exclusively available to high-net-worth individuals. Furthermore, art historically shows a low correlation to stocks and other traditional asset classes, making it desirable when constructing a portfolio.
Masterworks also does all the physical “dirty work” in the form of finding, purchasing, insuring, storing, and selling the artwork.
However, art is also considered speculative, very volatile in price, and not well-regulated. When investing with Masterworks you don’t automatically get a diversified portfolio of artworks, but rather, you create your own portfolio by choosing which particular artworks you want to invest in. If we draw an analogy with stocks, the investing process looks more like individual stock picking than buying a stock index fund or an ETF.
This means that it’s a good idea to be familiar with the high-end art world to make informed decisions. Furthermore, you don’t actually own a fraction of an artwork directly. Still, you own the Class A shares of an LLC (Limited Liability Company) created by Masterworks for each painting individually, which owns the artwork itself.
The planned investment horizon is 3-10 years, even though Masterworks has previously sold paintings after much shorter time horizons. There is no guarantee that the LLC shares will be liquid, as stated on their website: “Investors should be prepared to hold their Class A shares for an indefinite period, as there can be no assurance that the Class A shares can ever be tradable or sold.”
There is, however, a secondary market where Masterworks users can trade their shares between them (peer-to-peer), thus increasing the shares’ liquidity. The secondary market is available only to US-based investors, with no additional trading fees. You can read more about it here.
|🗺️ Supported countries||Primarily the US & Canada, but they do accept limited users from UK, France, and Spain|
|💰 Fees||1.5% management fee per year (paid in the form of equity) + 20% future profits + an additional mark-up fee when buying the stock|
|💰 Minimum deposit||Each offering has a stated investment minimum of $15,000 (but could be lower after discussing with their representatives).|
|🎮 Demo account||No|
|💻 Automated investing||No|
|📈 Secondary market||Yes|
|📍 Investment instrument||Physical high-end art (in the form of shares of an LLC company owning the artwork)|
The platform itself looks well-designed and easy to use. However, the fees associated with investing are fairly high. The most prominent ones are the 1.5% management fee per year (paid in the form of equity) and a 20% fee on future profits. It is also important to note that there is also an additional fee concerning finding, purchasing, insuring, storing, appraising, and selling the painting in the form of a mark-up fee (varies for each investment) when buying the shares.
They also offer extensive market data on both the artworks and the artists, but it is important to note that past returns are not indicative of future returns. It is also hard, in general, to even get a fair estimate on the expected returns of high-end art as an asset class, let alone individual artworks.
Masterworks often cite returns in the neighbourhood of 10-15% per year (net of fees), but those numbers are based on a fraction of paintings that they have already sold for profit. Unbiased institutions most commonly estimate contemporary art to have somewhere between 7 and 8% return per year, with art as a whole having even lower returns (with relatively high risk).
Even Masterworks encourages investors to utilise art in a relatively smaller part of their portfolio and that “the investment is suitable only for persons who can afford to lose their entire investment”.
There are also some specific risks regarding the physical artworks themselves that are worth noting. They may not be likely, but they have to be taken into consideration. The most prominent ones are:
- Theft: artworks are insured based on their purchase price, not current appraisal
- Title claims: if the ownership of an artwork is claimed by another party, the loss is unrecoverable
- Counterfeits: even though the artworks are inspected by experts, it is possible that some of them prove to be counterfeit in the future
2. Masterworks Pros and Cons
- One of the only platforms to offer fractional high-end art as an investment
- Possible low correlation with traditional asset classes
- Well-designed and easy-to-use platform
- Masterworks handles finding, purchasing, insuring, storing, appraising and selling the artworks
- Secondary market is available (only in the US), with zero trading fees
- You don’t own a piece of the actual artwork, but of an LLC that owns the artwork
- Not a well-regulated platform
- High fees in general (mark-up when buying + yearly management fee + fee for future profits)
- Relatively high-risk investment with no recurring income
- You have to construct your own portfolio (choose the artworks)
- Limited liquidity of the investments
- Specific risks such as counterfeits, title claims, and theft
3. Investment Platform
In general, the platform is well-designed, with the interface being simple and intuitive to use.
It is easy to get market data about each individual artwork through their price database. These include past performance, Sharpe ratio, comparison to all art or other asset classes, and more. There is also a short biography and top reasons (in the opinion of the platform) why the particular artwork or artist is worth investing in.
You can also see momentum data about each artist, including total yearly auction sales, average prices, all-time record prices, and more.
There is also a “My portfolio” section, which displays your total portfolio and other sections, including educational content and the option to invite friends and thus enable them to skip the waiting list.
However, it is important to note that a lot of data is based on only a handful of data points, regards estimates, or is not disclosed by Masterworks at all and is thus not publicly available. These include the percentage of profitable users or their average return after fees.
4. Investment Products
As mentioned before, Masterworks offers an indirect way to invest in high-end art made by some of the most famous global artists, valued at more than $1 million per piece. Instead of spending that kind of money on a single painting (or a handful of them), Masterworks users can access this investment class at a much lower cost and potentially diversify their investments inside it.
In practice, users don’t own a fraction of the physical artwork but rather Class A shares in an LLC (Limited Liability Company) that owns the artwork. The user is responsible for choosing which artworks to invest in since there is no automated investing option.
The recommended holding period for the artworks is 3-10 years, even though Masterworks has sold artworks after shorter time periods previously. If you can’t wait until the time of sale, there is also a secondary market (available to US-based investors only) on which you can trade your shares with other users of the platform with no additional fees.
When buying shares on the primary market, the most prominent fees while investing with Masterworks are the yearly 1.5% management fee (paid in the form of equity) and 20% on future profits. This fee structure seems similar to the one commonly used at hedge funds.
However, there is also a front load mark-up fee in the share price (called true-up by Masterworks) when purchasing the share, approximately standing at around 11%. This fee is not obvious at first glance, and it concerns sourcing, acquiring, securitising, and selling the actual artwork.
All these fees combined are a very heavy load on future investing performance.
As discussed before, there are no additional trading fees in the secondary market. It is important to note that there could be issues with liquidity in the secondary market since it is a far smaller market (both in the number of participants and tradeable assets) than most other financial markets.
6. Safety & Reliability
Right off the bat, it is important to note that Masterworks is not registered as a broker-dealer, or an investment company with the SEC or FINRA. However, all their investment vehicles (shares of LLCs owning the artwork) are SEC-qualified (mostly under Regulation A).
It means that the issuer of the shares (Masterworks) “may make sales of the securities described by the offering statement. It does not mean that the SEC has approved, passed upon the merits of, or passed upon the accuracy or completeness of the information in the offering statement”.
Regulation A is essentially an exemption from registration in public offerings and thus forgoes much of the reporting and auditing requirements compared to a standard share offering.
While Masterworks partners with other companies registered with SEC and FINRA to provide primary and secondary markets for the LLC shares, they are not held to the same regulatory standards. This, in practice, gives investors significantly less protection than with more standard investment companies.
You can find more detailed information about Masterworks’ safety, reliability, and more in their disclosure.
7. Customer Support
In general, customer support seems to be more accessible and individually tailored than on most other platforms. There is a live introductory call, and after that, you can reach customer support both through phone (Monday-Friday; 9 am – 6 pm EST) and email.
Their reviews on Trustpilot are mostly positive (but not big in numbers), often citing good customer support and an easy account opening process as major pros. Some of the most cited cons include aggressive marketing (mainly through email) and limited liquidity of investments.
9. Supported Countries
The vast majority of Masterworks customers come from the US & Canada. Still, they do accept limited users from the UK, France, and Spain (due to high taxes and compliance issues in those countries).
That being said, you can open an account as a resident of other countries, but you may not be able to invest using their platform. It is best to email or book a call with their representatives to check your country’s availability if you’re not on the list of the previously mentioned countries.
It is also important to note that Masterworks is not registered to offer investment services in any non-U.S. jurisdiction, making investor protection very limited.