Art investing is a great way to boost portfolio returns, and Masterworks has been making a splash in this sector recently. The platform gives ordinary investors a chance to fractionally own blue-chip paintings – without investing millions.
Here’s a review of how Masterworks operates, along with a breakdown of details like fees, returns, and legal grounds.
What Is Masterworks?
Masterworks is an online fractional art investing platform for ordinary investors, available for both iPhone and Android. The platform allows you to buy investment-grade pieces of art in fractional amounts, helping you capture any gains as the price of the artwork appreciates.
As far as the art investment opportunities go, the platform is style-agnostic and offers shares in artwork from many movements, primarily those created after World War II. The company has more than 215 employees with more than 75 years of art curation experience, having acquired 300 paintings to date, for a total of $800 million in assets under management (AUM).
Masterworks Features
One of Masterworks’ biggest advantages is that it allows non-SEC accredited investors access to art investing. To receive accreditation, investors must have a net worth of over $1M or income that exceeds $200,000 over the past two years. These numbers are beyond the reach of the average investor, and as a result, alternative investments remain inaccessible to them.
Art is an alternative investment, and Masterworks removes this hurdle for ordinary investors by securitizing its investment opportunities with the SEC so that platform users don’t have to themselves.
Art Selection Simplified
Once your application is approved, Masterworks’ team will offer opportunities to invest in different pieces of art. These pieces are selected by the company’s experts, who work extensively with market data to identify the paintings most likely to see the most value appreciation in the years ahead.
The platform claims to use artist sentiment data and resale transaction data to determine which pieces of art are gaining popularity, giving investors the chance to buy fractions of it and potentially profit. Alongside every opportunity, Masterworks offers a thorough prospectus for download, so users can review the reasons why the team believes each painting is likely to yield significant returns.
Fractional Ownership and Liquidity
Every time Masterworks selects a work of art to invest in, the company securitizes it by filing with the SEC. Securitization, in this sense, means that the platform creates an LLC tied to the artwork and issues shares in the LLC to you, in line with your investment. Thus, you own shares of an LLC, instead of the artwork itself. Since the aim here is to profit from the piece of art, not own it outright, this arrangement suits most investors’ needs.
One of the biggest disadvantages of investing in physical assets like art is that they are largely illiquid – meaning, they can be difficult and take a long time to sell, should an investor have an immediate need to cash out. Masterworks offers a secondary market for its shares, allowing users of the platform to buy from and sell to each other and essentially enabling liquidity.
Sales
Investors in Masterworks have two exit options. They can hold onto their shares until Masterworks sells the piece of art for a profit in a private sale, or they can sell their shares in the secondary market to other investors. The first option usually takes between three to 10 years to bear fruit, so you will have to be patient.
Note that price appreciation is not guaranteed, so there is a possibility of your investment not beating the overall stock market. However, Masterworks has averaged 14% annual returns since inception, a highly promising track record. The second option gives you the chance to pull money out whenever you want to. However, finding buyers in the secondary market might be challenging. Despite this, it remains a good option for investors who want flexibility in their investments.
Fees
Masterworks does not charge any loading or signup fees. The investment minimum is $15,000, and the platform charges a 1.5% annual fee. This fee covers all storage, transportation, and insurance costs for the works of art that the company owns.
On a sale, Masterworks charges a 20% fee on all profits, and they waive this fee if your share prices (that is, the price of the artwork) haven’t appreciated. This structure leaves investors with enough room to earn a profit in case of a price appreciation.
The Masterworks Story
Launched in 2017 by Founder Scott Lynn, Masterworks’ successful exits have returned over 30% annually to date. Lynn is a serial entrepreneur, having founded his first company in Kansas City at the age of 15.
An avid art collector since the age of 20, Lynn recognized that art investments return more on a
risk-adjusted basis compared to mainstream investment avenues. Unfortunately, ordinary investors did not have access to artwork because of their steep prices.
Fractional ownership has been a common theme in several investing classes, most notably real estate. Lynn’s vision combines the high return potential of artwork with the fractional ownership model prevalent in real estate investing. The result is that the art world is now democratized, with everyday investors now having the opportunity to diversify their portfolios with this high-performance asset class.
Is It Worth the Investment?
Masterworks’ returns are impressive, even if the company’s track record isn’t the longest. In the investing world, a track record of a decade or more inspires confidence and gives investors a clear view of a company’s ability.
However, Masterworks’ expertise is evident despite the short time horizon. The company has achieved successful exits and publicly discloses current investments and its method of evaluating artwork. This transparency is a hugely positive sign for investors.
While the platform has competitors, Masterworks is the pre-eminent platform in this field, giving it an edge.
Final Thoughts
Art investing can be intimidating for those unaccustomed to it. Yet, this is no longer a hurdle if you want to boost your portfolio with investments in alternative assets. Art is a great hedge to the broader stock market and Masterworks is giving investors access to a lucrative field.
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