WHEN a painting by J. M. W. Turner went under the auctioneer’s hammer at Christie’s in New York this month, onlookers may have wished that their ancestors had been able to buy the work for future generations.

The painting, Giudecca, La Donna della Salute and San Giorgio, had changed hands for 6,800 guineas in 1897. That price, according to art experts, was generous for the time. Yet the latest successful purchaser parted with $35,856,000 (£20 million) for this particular depiction of Venice, making it the most expensive British painting sold at auction.

With memories of the stock market collapse at the beginning of the decade in mind, investors have been turning to works of art. Last month ING, the bank, hosted a sale of 104 pieces on behalf of the Cancer Resource Centre. Diana Dunrossil, head of fundraising at the charity, believes that many of the buyers were there with an eye for an investment.

“A lot of the younger people were buying because they have flats or houses to decorate,” she says, “but they do see it as an investment. There was definitely a sense that this was a good thing to invest in.”

Nevertheless, the art market has its own risks. Michael Moses, an art economist at New York University’s Stern School of Business, says that selling art is not always as easy as selling other assets. “Those people buying art have to understand that if they have a price that they want to achieve in the future, it’s not quite as easy as trading on the London or New York Stock Exchange,” Professor Moses says.

“It’s better to have something that you like and can live with for a few years as you sell it, rather than something that you don’t like but just want as an investment.”

With his colleague Jianping Mei, Professor Moses developed the Mei/Moses Fine Art Index, tracking the prices of artworks sold by Sotheby’s and Christie’s since 1950.

The index covering Old Masters showed growth of 18.8 per cent in 2005, while the index covering postwar and contemporary art rose 8.3 per cent. Over the past five years the average annual returns were 3.1 per cent and 17.7 per cent respectively.

The Mei/Moses index outpaced the S&P 500 stock market index in the United States in the four decades to 1994, but the dot-com boom left art investors behind as the stock market surged.

Professor Moses cites rising wealth among the rich as one of the key drivers of art prices, whether that be surging pay packets on Wall Street, rising property valuations or entrepreneurial success.

The figures also illustrate the inherent volatility in the artwork market. Values can be affected by the latest fashions, raising the prospect of bubbles that inflate but then burst, just as with stock markets.

Transaction costs can be high, with auction or sale charges taking a significant chunk out of the sale price. The ability to make a good price can also depend on timing, making short-term investments risky. One way to reduce risk is to use an investment fund. Just as investors pool their money through a professional fund manager to buy shares or bonds, now investors can do the same with art.

Philip Hoffman, a former deputy managing director at Christie’s, launched the Fine Art Fund in March 2004. The UK-based fund invests in anything from Old Masters to contemporary pieces. In its first 15 months it notched up an average gain of 54 per cent, but the fund’s target is growth of between 10 and 15 per cent over a ten-year period.

The idea of an art fund is nothing new. In 1904 André Level, a French financier, brought together 12 art-lovers to launch his own fund. Each partner committed themselves to contributing 250 francs a year to be invested in art. The plan was to run the scheme for ten years, allowing each contributor to hang or display works in the collection in their own homes. The group liquidated its collection in 1914 and found that they had quadrupled their investments.

Art funds are not for everyone. Those that exist are typically aimed at individuals with a few million pounds to spare, with the minimum investment typically about £150,000 or more.

Such funds also allow individual investors to tap into overseas art markets. As with the stock markets, art experts are keeping a close eye on India and China, as wealth in those countries increases.

“History has it that most indigenous people tend to buy their indigenous art when they have an opportunity to do it,” Professor Moses says.

For all their investment potential, pieces of art have one, key flaw: the only dividend that is earned is through the enjoyment and appreciation of having a piece of art on your wall or in your home. The real danger is that those who buy art as an investment will begin to enjoy this particular dividend a bit too much.

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