Art market ‘outperformed even gold’ in past period of inflation, strategist says

Allen Sukholitsky, Masterworks Chief Investment Officer, joins Yahoo Finance Live to discuss new ways to invest in art.

Video Transcript

RACHELLE AKUFFO: Welcome back to Yahoo Finance. As investors seek out safe havens over uncertainty over Ukraine and Fed rate hikes, art often serves as a hedge against inflation. To help us explore ways to invest in times of volatility, I'm joined by Allen Sukholitsky, Masterworks chief investment officer. Thank you for joining me today. So let's start with inflation then. What are some of the ways that you're seeing that affecting your industry and your portfolio?

ALLEN SUKHOLITSKY: Sure, so, you know, the challenge for investors when it comes to inflation is that inflation ultimately can erode the value of an investor's portfolio. And so what we did is we actually, we went back in time and we did an analysis on how the art market performed from 1973 to 1981, when inflation in the US was running at around 9% on average each year.

What we found interestingly is that the art market actually outpaced gold. And the reason I say that is because gold is often thought of as a popular tool for a portfolio when there's inflation. But as it turned out, art actually outperformed even gold. It had very attractive performance during that period of time.

RACHELLE AKUFFO: So this might be welcome news for a lot of investors. And so with this approach that you take in fractional investment in art, how do you see people using this as a way to grow wealth? If you're a new investor to this space, how should you approach investing in art?

ALLEN SUKHOLITSKY: Sure, so we have a website that a lot of our self-directed investors go to. It's We now have more than 350,000 registered users on our platform. So what they do is they sign up and we schedule a membership interview with them.

And basically, our membership team talks to our investors, what their portfolios look like, what their goals are, their time horizons. We really do kind of a thorough check on each investor to make sure that art investing is appropriate for them. And then from there, we can go ahead and build the appropriate portfolio with the different paintings that we have on offer on the platform.

RACHELLE AKUFFO: But as you look at the selection of art that you do have on there then, what sort of returns are customers seeing in this space?

ALLEN SUKHOLITSKY: So the returns have been quite attractive. The paintings that we put on platform, they have historical appreciation rates that are typically, call it, 10% to 30% historically for similar paintings. And so those are basically the returns that investors have been achieving. Now, if you even take a look at our platform as a whole, across all the different offerings, the track record looks overall at around 15.8%. So it's really a way to say that the performance of all these different paintings has been very broad-based. And investors are seeing attractive performance.

RACHELLE AKUFFO: Now I want to get your opinion on what we're seeing with NFTs because, obviously, we're seeing art and NFTs combining now. There's a lot of buzz, but investors are still quite divided on its worth and the potential for a lot of scams as well. What are your thoughts about investing in NFTs and how that affects the traditional art investment market?

ALLEN SUKHOLITSKY: Sure, so, in a lot of ways, we think they can go hand in hand, call it NFTs and more traditional art investing. They are, at the end of the day, quite different from each other in some regards. So what we focus on at the moment at Masterworks is bringing blue chip artworks, real, tangible works of art to the investment community for investment. NFTs, of course, are more digitally oriented than kind of an artwork that you can actually hold in touch and look at in front of you.

But our business is always up for evolving. I mean, who knows? Maybe one day, down the line, we'll consider the NFT market as part of it. But at the moment, we are primarily focused on real, tangible works of art that we bring to the platform.

RACHELLE AKUFFO: So then, beyond just art then, what other opportunities do you see for retail investors versus some of these larger institutional investors who might be interested in this space?

ALLEN SUKHOLITSKY: Well, you know, a lot of what we're doing is actually bringing similar opportunities to retail investors, as well as the broader investor community. So the retail platform-- I mentioned this earlier-- we have more than 350,000 users now. We've had that business for several years now. We actually also recently launched what we're calling a diversified art portfolio that is catered for financial advisors and the institutional investor community. That portfolio is anticipated to hold, call it 60 to 80 works of art. It's intended to give diversified exposure to the art market for those specific channels.

So at the end of the day, if you think about what Masterworks is doing overall, it's really just trying to bring art investment to the entire investor community. We started on the retail side, and now we're expanding our distribution channels.

RACHELLE AKUFFO: And as we take it back to inflation, which is obviously still weighing on the markets amid everything else, we did hear Fed Chair Jerome Powell supporting a 25 basis point interest rate hike this month, while also being open to a more aggressive approach if inflation doesn't cool fast enough. With markets responding positively to that, how do you adjust your portfolio for the potential for more rate hikes this year?

ALLEN SUKHOLITSKY: So it's-- the thing with Jay Powell is that he's in a little bit of a challenging situation. And the reason why is because on the one hand, he should be raising rates if you're just focused on the inflation outlook. But on the other hand, we're in an economic growth environment that's been slowing for the last several months. We also have the unemployment rate, which has basically bottomed at this point in time, which means from here on, it might only be rising.

So Powell has to be increasing rates at a time when the growth environment and the unemployment rate are not exactly the most favorable. Is it necessarily the best time to fully reallocate your portfolio? Usually when it's a volatile environment, you don't want to make drastic changes to your portfolio. But what we would suggest for consideration is adding some allocation to alternative investments. Art, as we've been discussing, is one type of alternative investment. We think it's one that can help manage risk in a portfolio and ultimately generate attractive appreciation over time.

RACHELLE AKUFFO: Well, certainly one to watch. We do appreciate your insights. Allen Sukholitsky there, Masterworks chief investment officer, thank you for your time this afternoon.