Investing in art? Check out this IIM Ahmedabad index

Is there a way to track how artworks of different artists fare at auctions and use that to chart pricing trends in Indian art market? A new index, launched recently by the Indian Institute of Management, Ahmedabad, or IIMA, aims to do exactly that. In December 2021, IIMA and Mumbai-based Aura Art decided to collaborate on developing IAIAI (IIMA-AuraArt Indian Art Index).

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The first batch of data shared by Aura Art included auction results of nearly 9,000 Indian artworks across 11 auction houses around the world. The transaction value of these artworks between 1 April 2001 and 30 June 2022 is estimated to be around ₹4,500 crore.

Scope of the index

Any index should be able to broadly represent the market in which it is operating and its constituents should have some liquidity for pricing variability. As the art market is not so liquid, India’s top 25 artists that have seen the highest number of works auctioned in last 21 years, were included as the index’s constituents. At the higher-end of the spectrum, an artist has had as many as 9,000 observations; at the lower-end, there are 100 observations. These observations are basically the prices at which these artists’ work are sold at different auctions.

Besides tracking prices, the index also adjusts for the impact on pricing of different variables such as medium (oil, gouache, watercolour, etc.), art subject, seasonality, art title, style (impressionist, abstract realistic), physicality (which is the largest factor), artist identity, auction house, marketing, etc.

Professor Prashant Das of IIMA explains, “Suppose, we are talking about Husain who always does olive oil, and then some other artist who always does watercolour. When we compare their works, we don’t know whether it is the artist effect or the medium effect. Our index methodology separates these two and we are able to flesh out the artist effect from the medium effect. And then we do a ranking of pure-play artist effect. Had Husain done a watercolor painting with similar characteristics, would his painting be sold at higher or lower price?”

“Using our database models, we are able to explain 80-83% of what influences the pricing of the top 25 artists in India,” Das adds. The IAIAI will be updated on a quarterly basis and presented semi-annually, with free access to the public.

How has the index performed?

The IAIAI has delivered 17% compounded annualized returns between 1 April 2001 and 30 June 2022, while Nifty 50 delivered 13% compounded annualized returns in the same period.

However, IAIAI saw heightened volatility during this period. The index saw a strong bull run starting from 2002-03 just like all other asset classes in India. This was also the time when the auction market came into play in India. Over next 5-6 years, the IAIAI delivered compounded annualized returns of 80%. But then, with the 2008 financial crisis, there was also a huge meltdown in this art index.

Rishiraj Sethi, director, Aura Art Development, the peak in Indian art market was actually seen earlier. “The IAIAI’s peak was in 2006. This is because around this time, art funds had started to come into the market and deployed large sums. They would have raised and deployed around ₹250 crore, which would have been 25% of the entire Indian art market size back then.”

In 2009-13, the IAIAI tested its bottoms. This was also the time when these art funds were looking for exit, before winding up eventually.

One such example is Osian Art Fund, which was a close-ended scheme that pooled funds from investors with the objective of generating income and capital growth from investing in art works. However, as the art market collapsed, it was not able to meet its investor obligation. The fund was not registered with the capital market regulator Securities and Exchange Board of India (Sebi). Eventually, Sebi had to intervene and finally order wind-up of the scheme.

Global art indices

Globally, there are already a few art indices,including one that uses artificial intelligence. Artnet is the oldest art index provider. Founded in 1989, the company offers several art indices using its extensive database of more than 1,800 auction houses, going back to 1985.

The Mei Moses is art index provider, which is now owned by Sotheby’s. The Mei Moses indices were inspired by Home Price Indices, which used repeat sales of single-family homes. The index creators – Professors Jianping Mei and Michael Moses, were of the view that repeat sales were an appropriate way to track price trends of unique objects such as art. The reasoning: such sales expressed price changes of specific underlying assets better, than average or median of the market. It was important to look at such methodology to avoid skewing the data.

With the help of artificial intelligence (AI) Wondeur looks at pricing patterns for 240,000 artists born after 1900s.

The future

Family offices and wealth management firms can use this index as a point of reference to interpret the current phase of the Indian art market, whether there is a bull run or a consolidation phase.

IIMA’s Das says art funds can possibly use this index in future to serve as a benchmark. If there is more institutional participation through alternate investment funds (AIFs) or other investment vehicles, it can make the art market more liquid.

Even globally, there aren’t very large funds investing in art, although there are a few examples. The British Railway’s pension fund has an allocation for physical art.

“If there are funds, then investors can take exposure to private equity, rather than art itself, because this asset class requires certain specialization for its upkeep and maintenance,” Das points out.

However, after the Osian Art Fund episode, Sebi would need to ensure that there are adequate and appropriate regulations to govern art funds.

Separately, if you want to invest in artworks, do note that short-term capital gains will be taxed at your income-tax slab rate and long-term capital gains, which is applicable after three years, will be taxed at the rate of 20%.