December 7, 2021

Masterworks Review

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Want to invest in a unique alternative asset class, normally reserved for the wealthy? Investing in art with Masterworks may be right for you.

Masterworks

Overall Score

3.3

Minimum Deposit

3.0

Customer Service

4.0

Commissions and Fees

3.0

Ease of Use

4.0

Liquidity

2.5
5-point scale (the higher, the better)

Pros and Cons

  • No accreditation required
  • Secondary market to sell shares
  • High historical returns
  • Limited selection of artists
  • Higher fees and commissions

Bottom Line

Unique platform to invest in fine art to diversify your portfolio

These days, almost anything can be crowdfunded. Startups, commercial real estate, farmland.

And now, even classic art. Enter: Masterworks.

As the only fine art investing platform, it acquires collectible artworks from well-known artists and securitizes them so everyday investors can buy shares of a painting.

Is it safe? And is investing in art worth it? Find out how to invest in Masterworks and how much you can expect to earn in this guide.

What is Masterworks?

Masterworks is a platform for investing in artwork. It was founded in 2017 by contemporary art collector Scott Lynn with the goal of democratizing the $1.7 trillion art market.

They purchase contemporary art from sought-after "blue-chip" artists, such as Banksy, Kaws, and Basquiat. Then, they securitize it by offering shares to the public. When you purchase shares, you own a "slice" of a painting.

Investors can buy and sell these shares in the secondary market created by Masterworks. Or you can hold onto your shares until Masterworks decides it's the right time to sell the painting at auction, and then collect the proceeds.

It's free to join Masterworks and you do not need to be an accredited investor to invest.

Type of InvestmentBlue chip artwork
Management Fees1.5% (plus 20% of future profits)
Wealth RequirementOpen to everyone; no accreditation needed
Minimum InvestmentUsually $1,000, depending on your personal situation
Investment Period3-10 years
Secondary Market?Yes; buy and sell shares to other Masterworks users
Investment Returns15% average historical returns

Masterworks statistics to date:[1]

  • Number of investors: 250,000+
  • Total number of offerings: 80+
  • Value of securitized paintings: $300+ million
  • Net returns: 15%

Pros and Cons

Eager to invest with Masterworks? Review these quick pros and cons to find out whether it's a good fit for your portfolio.

Pros

  • No accreditation required
  • Ability to choose the art you want to invest in
  • The only platform that makes fine art accessible
  • Art returns historically not correlated to the stock market
  • Secondary market offers some liquidity
  • Incentive fee aligns Masterworks' interests with investors'

Cons

  • Masterworks takes 20% profit
  • Long 3 to 10 year lock-up period
  • Limited selection of artists and art pieces

How Does Masterworks Work?

The Masterworks team is constantly researching and monitoring the contemporary art market to see which artists are gaining popularity.

Here's how they acquire and offer the artwork to invest in:[2]

  1. Once they've identified a quality painting at a fair price, they will make the purchase.

  2. Next, Masterworks files a offering circular with the Securities and Exchange Commission (SEC). This allows them to offer it to investors on their platform (much like a company goes public on a stock exchange).

  3. Masterworks holds the painting in a secure facility. Or they may show it at a private members-only gallery in NYC.

  4. The painting is held for 3-10 years until there's a good opportunity to sell. Once the painting is sold, profits (minus fees) will be distributed to investors.

How to Get Started with Masterworks

You do need to complete a phone interview to join Masterworks. But don't worry, it's not as intimidating as it sounds. Here's what you can expect:

  1. Submit a membership application.
    You'll have to say how much you'd like to invest and when you want to start. These are just estimates, so don't worry about being locked in to your answers.

    Use our link below to skip the waitlist.

  2. Schedule and complete a phone interview.
    Then you'll be prompted to schedule a 15-minute phone interview.

    The phone interview is meant to get to you know you. The rep will help you determine a minimum investment that's right for your financial situation. Based on other users' experiences, the minimum is usually $1,000.

    You don't need to commit to an investment during the phone interview. You can ask questions and carefully make a decision later. There is no obligation to invest.

  3. Browse the offerings.
    You'll get full access to the current paintings available. You can see a detailed report about the potential returns of the painting and auction sales of similar pieces.

  4. Fund your account.
    Once you are ready to invest, link your bank account and transfer the funds.

How Do You Make Money with Masterworks?

Masterworks will usually hold a painting for 3 to 10 years after it's initially acquired.

When the painting has been sold (hopefully at a higher value), Masterworks will distribute the proceeds to all investors. You'll earn profits in proportion to the number of shares you own.

If a painting cannot be sold to a private buyer after a number of years, then Masterworks will consider selling it at an auction. This reduces your profit, since auction houses also take a percentage. But you still make something.

Is Masterworks legit? What is the risk?
Masterworks is legitimate. They are the only platform out there currently unitizing art work for investors. The biggest risk is obviously that artwork has no real tangible value - its value is entirely in the eye of the beholder and therefore subject to wild price swings.

Is There a Secondary Market?

If you don't want to wait for the typical 3 - 10 year holding period, Masterworks does have a secondary marketplace where you can sell your shares directly to other investors. You can also buy their shares.

There is a peer-to-peer marketplace, so there's no guarantee that your shares will sell. The prices listed on the secondary market are set by other investors.

Even though there's no guarantee, it still offers a small degree of liquidity. If you need the money right away, you may need to lower your offering price to encourage a quick sale.

What is the minimum investment?
Once a painting is listed on the platform, the price for one share is usually $20. Generally, you'll need a minimum investment of $500 - $1,000. The price in the secondary market will obviously deviate with the ebb and flow of the market forces.

How Much Does it Cost to Invest?

Masterworks charges a 1.5% annual management fee. On top of that, it takes 20% of profits when a painting is sold.

Let's say you invested $1,000 into a painting, and it was sold for double the price. You would collect $1,800 and the other $200 (20% of $1k) would go to Masterworks. You would also pay $15 per year for the management fee.

This fee structure is similar to the hedge fund space, where there is both a management fee and an incentive fee, which is a percentage of profits that Masterworks is entitled to upon a sale.

Is Masterworks only for accredited investors?
No, Masterworks is available to investors of all sizes. However, trading in their secondary market is currently limited to U.S. investors.

Masterworks Returns

You're probably wondering what kind of returns you can get. Masterwork's track record (since its inception in September 2019) shows 15% average returns. This is after fees have been taken out.

Historically, contemporary art from 1995 - 2021 has seen a 13.6% price appreciation (while the S&P annualized return is 9.5%).

Here are some figures for similar contemporary artists as those listed on Masterworks:

ArtistHistorical Appreciation
Banksy14.10%
Andy Warhol11.60%
Jean-Michel Basquiat18.40%
Mark Rothko13%
Keith Haring16.72%
Alexander Calder12.70%
Joan Mitchell15.78%

Note that these are only meant to give you an idea of the historical appreciation for sought-after contemporary paintings. It doesn't mean that Masterworks owns paintings by all these artists. Also, past performance is no guarantee of future results.

Is Masterworks a Good Investment?

Unlike buying art for your own home, Masterworks allows you to own a "slice" of a painting.

Therefore, Masterworks is best for:

  • Niche investors looking to dip toes into alternative markets
  • Any investor looking to diversify away from stocks, bonds, and real estate
  • Investors who are okay with having their money locked up for 3 to 10 years and not receiving any dividends

And if you do invest in Masterworks, it's best to diversify across many paintings and artists unless you really have a knack for picking up-and-coming artists.

Why Invest in Art?

Art can be a good investment for anyone looking to diversify their portfolio away from just stocks and bonds.

That being said, it's not for everyone. The art market is:

  • Very illiquid
  • Prone to information bias
  • Mostly off limits to retail investors

Investing in art usually means buying an individual painting and finding a nice spot to hang it above your mantle while waiting for its value to (hopefully) appreciate.

But choosing a painting with good ROI requires intimate knowledge of the art market. And buying likely requires a big chunk of cash, depending on the artist.

These drawbacks aside, the Artprice100 (a "blue-chip" art market index) has had a healthy annualized return of ~8.5% since 2000.

Plus, art has low correlation to stocks and bonds, meaning it would add to the diversity of a standard portfolio.

What are the Risks of investing with Masterworks?

When you invest in a public company, you can make an educated guess at what the business is worth and what it might be worth in the future by scrubbing its financial statements.

There are certain metrics, such as their assets, liabilities, revenues, and expenses, that can be accepted as universally correct and comparable across other companies thanks to regulatory initiatives.

In the world of art, beauty is truly in the eye of the beholder, and therefore what a painting is worth is largely up to what wealthy collectors are willing to pay for it, which could certainly be $0 in some cases.

When investing in art, you must accept this truth, and therefore it would make sense to diversify your art investment across many artists and paintings.

Survivorship Bias in Art Indices

Another risk that must be accepted by the art investor is that although the Artprice100 index saw strong historical returns, this index is somewhat biased.

It tracks a portfolio of artworks representing the 100 most important artists on the art market. Importantly, the index only receives an updated price for a painting when and if it is sold at auction.

This means that less desired paintings in the index, which are less likely to ever make it to auction, would never contribute to the index's valuation.

This gives way to the index returns being higher than they otherwise would be if they also included updated values for the paintings that collectors don't want to buy.

Other ways to invest in Artwork

While the crowdfunding space is booming right now, there aren't any other platforms that allow you to buy and sell pieces of individual paintings.

Art indices are also not investible (since outside of Masterworks you cannot buy a fraction of a painting), so the only other way to invest in art would be to buy an entire painting.

Masterworks vs. Yieldstreet

There aren't any other platforms that allow you to buy fractional artwork. YieldStreet does offer art investing, but in a different way.

YieldStreet offers a variety of different alternative investments, from real estate to art to supply chain and litigation financing.

This includes debt financing that is backed by verified pieces of valuable art. For example, if a museum or art gallery is looking to fund an expansion or new exhibit, YieldStreet might offer them a loan that is backed by the borrower's art collection.

This is a very different exposure to the art market than Masterworks. With Masterworks, you actually own the art and are entitled to 100% of the valuation changes (up and down) over time.

With YieldStreet, you receive interest payments (8%-10%) in exchange for lending funds. You would only be entitled to their art in the event they defaulted on the asset-backed loan. This gives you a less risky exposure to the art market, though the returns may not be as high.

Bottom line: Is Masterworks Legit?

Masterworks is legit, and it's currently the only platform where retail investors can buy a slice of a painting from highly sought-after artists.

While art isn't necessary for a balanced portfolio, diversified exposure to luxury art has shown historical returns that are uncorrelated to stocks and bonds.

This would lend to better portfolio diversification. Additionally, a small allocation to the art market might make sense for investors with a knack for identifying up-and-coming artists.

References

  1. ^ Masterworks, Our Track Record, Retrieved 1/10/2022
  2. ^ "How it Works": Masterworks, 2021.
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