Fine art has long been a popular alternative asset class among the ultra-wealthy, but the capital required to buy paintings (which often cost in the millions) — not to mention the knowledge of which ones to buy and how to properly care for them — makes it unrealistic for most people.
Masterworks aims to solve that problem by offering ownership shares in blue-chip paintings, thus giving average investors a potentially enticing way to diversify their portfolio.
This Masterworks review will help you decide if the platform is a good idea in your situation. We’ll explain the details of how it works, break down the fees, and compare the pros and cons.
If you’re already familiar with how the platform works, you can skip to my analysis, which details why I chose not to invest.
Masterworks provides fractionalized fine art investment opportunities. The company lets non-accredited investors buy ownership shares in blue-chip paintings, charging a 1.5% annual management fee and a 20% fee on all profits. Most Masterworks’ paintings are held for 3 to 10 years, and there's an option to try and sell your shares on a secondary market if you want to liquidate prior to a sale. Due to a high fee structure and risks with investing in individual works of art, Masterworks isn't an ideal alternative investment to construct a balanced portfolio. Instead, it's an option for art-loving investors who already have a well-diversified portfolio and who are interested in learning about art investing with limited initial exposure.
- Handles the entire process of buying, storing and selling art.
- Open to non-accredited investors with low investment minimums.
- Masterworks’ returns since inception, based on internal appraisals (minus fees), have slightly outpaced the S&P 500.
- Masterworks is a new company with a limited track record.
- Liquidity on the secondary market isn't guaranteed.
- There’s an interview and application process required to access the platform.
Masterworks at a Glance
Masterworks is an online art investing platform founded in 2017 by Scott Lynn, who created the company after realizing that the long-term growth opportunities offered by fine art were inaccessible to most investors.
If you learned about Masterworks through an advertisement, there’s a good chance you’ve seen or heard the company compare contemporary art returns to the S&P 500. We’ll touch on that in greater detail later in the article. However, it’s important to note from the outset that art indices tracking returns prior to 1995 do not show such strong performance.
The chart below is the one Masterworks highlights to demonstrate potential returns:
Unlike traditional art investing — which requires you to travel to auction houses to find and buy famous paintings — Masterworks lets eligible investors purchase shares of blue chip art (defined as art that costs $500,000 or more) online.
The idea is that this kind of fractional ownership makes investing in art more practical for people who can’t afford to buy and store paintings worth millions of dollars.
The Masterworks Investment Process
Buying and selling blue chip art can be more complex than investing in individual stocks. In this section, we’ll discuss the Masterworks investment process, from account creation to generating returns on your assets.
Creating a Masterworks Account
The Masterworks platform is open to non-accredited investors in the United States.
Masterworks requires prospective investors to fill out an application and “request an invitation” to the platform. While they mention a waitlist to join the platform, going directly to their homepage from a browser tab (at the time of publication) allows you to “skip the waitlist.”
After your application is submitted, Masterworks’ customer service team conducts a phone interview with you, during which you’ll talk to the company about your investing goals and how the art investing process works.
When discussing changes to your portfolio with another person, we suggest always working with a fiduciary — i.e., someone legally or ethically required to act in your best interest. Masterworks’ advisers are not fiduciaries, which can create a conflict of interest.
As such, if you’re considering investing with Masterworks, it’s essential to understand where fine art fits into your financial planning and/or retirement goals before the phone call.
That said, you do get access to view the offerings available on the platform prior to the interview, as shown in the example below.
After the interview, if the company thinks you’re a good fit for art investing, they’ll help you open your Masterworks account so you can start buying shares of blue chip artwork.
Masterworks does not provide information about how they determine fitness for the platform, and we could not find evidence of any potential investors being turned away. However, there are anecdotal reports that higher net worth investors are encouraged to make larger investments, suggesting that the initial phone call functions as a sales pitch.
Searching for Investment-Grade Art Opportunities
All of the art available on Masterworks is hand-selected by the firm’s researchers based on its potential long-term value. If the Masterworks team thinks a piece of fine art could be a good investment, it acquires that work from an auction or gallery sale.
According to the company, less than 2.2% of artwork that gets reviewed passes this analysis process.
When Masterworks purchases art pieces, it files an offering circular (a type of prospectus) with the Securities and Exchange Commission (SEC). This SEC filing lets Masterworks turn blue chip art into an investable securities.
By turning its holdings into securities, Masterworks makes it possible for people to purchase fractionalized shares. Investors receive a K-1 from Masterworks each year, which can increase the cost of your tax return.
Making an Investment
After Masterworks buys and securitizes artwork, the company lists each piece on its marketplace. At the time of initial publication in July 2022, there were just four investment opportunities on the platform, as shown in the screenshot below:
From here, account holders can purchase artwork shares to add to their portfolios. The sale period for each piece of art on the marketplace lasts 90 days.
Masterworks states that there is no minimum investment requirement for account holders. However, you’ll need to have enough cash on hand to cover the cost of at least one share of whatever painting you want to invest in.
The cost of a single share can vary, though a look at Masterworks’ marketplace shows that most share prices are between $15 and $40.
Selling Your Investment
Selling fine art isn’t as streamlined as trading shares of mutual funds and stocks. Liquidity is always a concern with an alternative asset class like fine art, so this is something to keep in mind before opening a Masterworks account.
With Masterworks, you have two options for selling any ownership shares you have in a piece of fine art.
Option 1: Wait for Masterworks to Sell the Art
Your first option is to hold onto your shares until Masterworks sells the underlying painting. Masterworks states a target hold period of 3 to 10 years.
If you hold your ownership shares until Masterworks decides to sell the painting, you’ll receive a share of the profits from the sale.
Masterworks distributes 80% of earnings from paintings to shareholders based on the number of shares each investor owns.
Keep in mind that Masterworks is not required to adhere to that 3 to 10 year target period. It has no obligation to sell the securitized artwork. This means there’s a possibility that your investment could be tied up indefinitely.
Option 2: Sell Your Shares on the Secondary Market
If you don’t want to wait for Masterworks to sell the artwork, your other option is to try and sell your shares on the company’s secondary market, which allows you to liquidate your assets (and gives others a chance to gain shares of past offerings).
The secondary market is a nice idea in theory, but there is no guarantee that you’ll be able to sell your shares at any given time. Masterworks has a relatively small number of active investors (under 500,000 as of the time of writing), so it’s reasonable to think that your potential liquidity via this secondary market is relatively low.
The image below shows an example of sell and buy orders on the secondary market:
As a seller on the secondary market, you set a desired price per share and then wait for offers from interested buyers. The minimum number of shares required for listing on the platform is five, and there’s a 1.5% wire fee upon sale.
Buying shares on the secondary market potentially gives you the ability to acquire shares at a discount. Of course, as a seller that means you may end up losing money in order to liquidate your assets.
Looking at the current offerings, sellers significantly outnumber buyers. For example, for the Bansky painting, “Exit Through the Gift Shop,” 60 people are looking to sell and only three are looking to buy. While sellers are asking for a minimum of $19.99 per share, the highest bid price on the buy side is $18.80.
At the time the painting was acquired in December 2021, Masterworks valued it at $7,428,000. Selling shares at $18.80 would value the painting at $7,010,000.
Masterworks has a 1.5% annual management fee that it levies based on the value of your account. Additionally, the company takes a 20% cut of any profits it earns from selling paintings.
Any trades that you make on Masterworks’ secondary market are fee-free, except for the 1.5% wire fee.
There are no other fees on the platform.
Masterworks vs. Yieldstreet
Yieldstreet is another popular online platform for investing in alternative assets, such as art. Here’s a look at the similarities and differences between Masterworks and Yieldstreet:
|Investor requirements:||Open to non-accredited investors.||Open to accredited investors only.|
|Minimum investment:||None.||$10,000 for artwork.|
|Fee structure:||1.5% annual fee + 20% of profits from sales.||Fees vary from investment to investment. They tend to be complicated and expensive.|
|Investment offerings:||Shares of ownership in a specific painting.||Shares in a fund that invests in art and art-backed loans.|
|Liquidity:||A secondary market is available, but share liquidity is not guaranteed.||While there is a secondary market on YieldStreet for some alternative assets, no such market exists for art.|
There are some advantages to art investing through YieldStreet, especially if you’re hoping to generate passive income from your investment before it matures. However, YieldStreet’s high investment requirements — including the need to be an accredited investor — make it impractical for most people.
Masterworks is a legitimate company that offers real investment products. The company owns all of the art that it lists on its marketplace and all of its offerings are registered securities with the Securities and Exchange Commission (SEC). But there are risks involved with investing in art, and returns are never guaranteed.
Masterworks charges a 1.5% annual management fee + 20% of the profits it makes from selling art. If you sell shares on the company’s secondary market, there’s a 1.5% wire fee.
Masterworks accepts non-accredited, U.S.-based investors. However, while Masterworks is open to most investors, as explained below, it’s not the right choice for everyone.
Is Masterworks Right For You?
If you’re considering investing in art with Masterworks, there are some essential things to know before you start.
First off, understand there’s some important context surrounding the 13.8% returns since 1995 statistic often cited by Masterworks.
Since this is the hook that gets a lot of investors interested in the platform, it’s important to recognize that this figure comes from a December 2020 Citi research report performed on a specific art sector during a particular period.
The indices used to track performance in the Citi research were the Masterworks.io All Art, Contemporary Art and Impressionist Art price-weighted indices.
However, other indices that aim to track the prices of art show different results.
For example, from 1950 to 2021, the Sotheby’s Mei Moses Index (see screenshot below) posted a compound annual growth rate of 8.5%. Remember, this figure excludes any potential costs and fees.
From 1950 to 2021, including dividends, the S&P 500 returned 11.54%.
On the front page of its website, Masterworks links to the same Citi study, saying:
“[…] the long-term correlation coefficient of 0.12 between Art and the S&P 500 Index, which is a very low level of correlation. This is why we believe that contemporary Art plays a key role in diversifying any portfolio.”
However, a Stanford Graduate School of Business study found that art investments don’t improve the risk-return profile of a traditional portfolio.
“Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 6.5 percent, down from 10 percent for traditional uncorrected repeat sales regressions, and Sharpe Ratios drop from 0.24 to 0.04. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy once selection bias is accounted for.”
Another important aspect of investing in fine art is that paintings are taxed as collectibles. While stocks have a maximum long-term capital gains tax rate of 20%, the long-term tax rate for collectibles is 28%.
I’d bring these points up with anyone considering investing in art.
When it comes to Masterworks specifically, I correlate investing through the company (and the limited offerings they make available) to using an active fund manager for an alternative investment class.
That’s because Masterworks isn’t offering you the ability to invest in the S&P 500 of the art world. Instead, they allow you to invest in a few specific paintings they are willing and able to purchase and securitize.
As such, I’d liken it to investing in individual stocks, or a handful of real estate deals, as opposed to the S&P 500 or a publicly-traded REIT.
As more of an active fund manager, Masterworks has performed well. They calculate their net annualized return as 14.3% from inception in 2018 through March 2022. With dividends, the S&P 500 has returned 13.36% from the start of 2018 through March 2022.
However, Masterworks has only successfully exited three paintings to date. So that 14.3% figure is calculated based on internal appraisals of the company’s portfolio, which consists of over 120 paintings.
My stance is that if one invests in art — be it on Masterworks or anywhere else — it should be for personal reasons rather than portfolio diversification or the expectation of better returns than a traditional retirement portfolio would provide.
Masterworks Review: Final Verdict
When you purchase a fractionalized share of a painting, you don’t get the benefit of hanging the art on your wall. So in the end, you’re paying hedge fund type fees to invest in an asset class that has been shown to provide little benefit for the average investor. Given that, I think there are better alternative investments out there.