Art as an alternative investment?

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WHY collect art? Is collecting art about possession, obsession, digression or pretension? Is it about defining oneself and looking beyond our own mortality? To buy art is to be part of history, to tell a story, and to reflect one’s taste.

Equally, it is to buy a pretty thing and yes, it is also sometimes about pretension, to buy into acceptability on moving up on the social hierarchy. It has become hip. This is especially the case when value is defined as the price of the painting.

Collecting art has moved from beyond the realms of royalty to the ordinary person. Previously the exclusive domain of royalty and the nobility, art is being appreciated and collected by a wide spectrum of society today. Even Jho Low was recently reported to have bought Jean-Michel Basquiat’s 1982 painting “Dustheads” for US$48.8 million in a Christie’s New York auction in May 2013.

Over the past 20 years, art is appreciated less and less for its aesthetic value and the expression of ideals, but as an investment. The art industry is worth over US$3 trillion with an annual turnover of over US$3 billion. There are art Indices and huge publicity on record-breaking art prices, much like the stock, bond and property markets.

Unlike these other investment alternatives, art has an absolutely limited supply. This is especially so if the artist is no longer alive. Unlike wine, it generally does not spoil. And it has the best ability to survive wars and economic downturns. Just look at the paintings in museums across Europe — they are hundreds of years old.

When financial markets are in turmoil, art as an alternative asset class for diversification makes logical sense. Art prices have low correlation with the equities market, and price appreciation defies logic. You do not buy it for yield and you cannot calculate expected future cash flows.

The greatest risk of investing in art is the low transparency of the market. Art is a heterogeneous asset. Liquidity is low and transaction costs are high.

In the US and Europe, museums — funded by endowments and grants — are the biggest buyers and move the market. The art market in Malaysia is less robust.

The Edge is promoting art with the aim of democratizing art as a means of collection and investment. Through our various media, we seek to educate, promote and inform the public.

The art exhibitions at The Edge Galerie in Mont’Kiara complement The Edge by showcasing the work of both local and regional artists. Admission is always free. The many “no sale” shows, where we exhibit private collections, are a means to bring the art works kept away in private homes to be shared with art enthusiasts and the public.

This coming Sunday, we are hosting The Edge Auction for Southeast Asian Art. Come join us. There are a total of 136 lots on auction, with a wide range of art styles to suit all preferences and budgets. There are works by top artists like Ibrahim Hussein and Chen Wen Hsi. Paintings from Malaysian modernist and senior artists like Yusof Ghani, Awang Damit, Jolly Koh, Sharifah Fatimah and Khoo Sui Hoe are also featured.

Ahmad Zakii Anwar’s charcoal on paper “Equus” and Kow Leong Kiang’s “Malay Maiden” are two art works that I am sure will delight most collectors.

This year, The Edge Auction is also featuring the works of newer artists as well as prints. Consequently, there are many lots where the starting reserve price is only RM1,000.

But look, even if the price of the painting you bought does not appreciate, at least you get to appreciate it daily hanging on your walls. You can’t have the same joy owning equities or bonds. And maintenance charges are lower than that of an empty home.

Now, back to the more mundane routine of my Value Investing Portfolio. Shares in my portfolio did not fare so well last week. A few of the stocks that had chalked up strong gains in the preceding weeks succumbed to some profit taking.

Total value for the portfolio was down 1.2% for the week, in contrast to the 1.2% gain for the FBM KLCI. I am not unduly worried.

Whilst last week’s losses pared my portfolio’s total returns since inception to roughly 6.7%, I continue to outperform benchmark index, which has fallen by 1.4% over the same period.

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I bought 3,800 shares in Lii Hen last week.

InsiderAsia has featured quite a few wood-based furniture manufacturers over the past few months. By and large, these stocks have fared very well, thanks to a confluence of factors including the weakening of the ringgit that favours exporters.

Having caught the upcycle early, I believe there is more upside to the sector, given that the recovery in the US is still in nascent stage while Europe appears to be stabilising.

Lii Hen (Fundamental score: 2.5/3, Valuation score: 2.4/3), for instance, is still priced at attractive valuations. The stock is trading at 1.2 times book value and a single-digit PER of only 8.2 times.

It has pretty solid underlying fundamentals — it is in net cash position — and pays consistent and fairly generous dividends. The growth in its net profit over the past five years has far outpaced expansion in its fixed assets. Return on equity stood at 18.8%. The company is sitting on net cash of RM36.1 million.

Almost 95% of Lii Hen’s sales are derived from export, of which the US is its single largest market. The latter accounted for more than 80% of total sales last year.

 Lii Hen has consistently paid dividends, with payout ratio ranging from 30% to 50% of net profit in the past five years. Dividends totaled 14.5 sen per share in 2014, giving a higher than market average yield of 3.6% at the current price.

After this latest acquisition, my portfolio is now about 56% invested.

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This article first appeared in The Edge Malaysia Weekly, on March 23 - 29, 2015.