Art Is Among Worst-Performing Investments, Merrill Lynch Says

Art is one of the worst ways for investors to try to make money, even as paintings by Picasso and Klimt sell for more than $100 million apiece, according to a Merrill Lynch & Co. study.

While stocks or bonds are almost certain to make investors a profit over five years, art has a high chance of declining in value, the world's biggest brokerage company said. The probability of losses on small-cap stocks, corporate bonds and long-term treasury bonds is 3 percent or less if they're held for five years. Art investors have a 17 percent chance of losing money over five years, Merrill said.

Soaring prices for art stirred interest from banks and dealers in 2004, when about 12 art funds seeking to raise as much as $150 million were planned. Only one or two, including London's Fine Art Fund, ever got off the ground. Merrill's investment strategy report, dated July 17, helps to explain why.

``Art, gold and commodities offered the least attractive risk-reward potential, providing inferior returns while generating substantially more risk,'' Merrill said. The three asset classes ``may be more appropriate investments for those who have truly long-term horizons,'' it said.

Merrill's study uses data on returns going back to 1969 for most assets and to 1976 for art, provided by index-maker Art Market Research, which tracks auction prices. Merrill aims to show that most investors do better if they hang on for three years or more, while many day traders and short-term investors lose money.

Klimt Purchase

Modern art prices have more than doubled since 1998, and some contemporary price indexes have trebled in 10 years, according to Art Market Research. Broader measures of the art market haven't fared as well and modern and contemporary prices are being buoyed by a narrowing group of the most expensive paintings, the indexes show.

Ronald S. Lauder, the cosmetics magnate, made headlines in June when he paid $135 million for a Gustav Klimt portrait in a private transaction -- more than any painting has ever fetched at auction. The top auction prices are a Pablo Picasso work that sold for $104.2 million in 2004 at Sotheby's in New York, and the same artist's portrait of his mistress, ``Dora Maar au Chat,'' which fetched $95.2 million at a Sotheby's New York auction in May.

Philip Hoffman, who runs the Fine Art Fund, said he's made big profits by selling paintings within a year or so and aims to expand. However, he has never officially disclosed the size of his fund, or which paintings he sold.

Gold Tops 1970s

Art has done worse in some decades than in others. In the 1970s, art had the lowest 12-month return of eight asset classes and the highest chance of losses, Merrill calculated. Gold was the best investment in that decade, outperforming stocks and bonds with less risk.

Art swapped places with gold in the 1980s, doing better than stocks, bonds and real estate. In the 1990s, art was again a loser, only a little ahead of commodities and gold, which racked up 12-month losses more than 50 percent of the time. Standard & Poor's 500 shares were the best investment.

Real estate and small U.S. stocks are faring best in the current decade. Art, foreign stocks and S&P 500 shares are the worst performers, Merrill's charts showed.