How the Team at Masterworks Uses Data to Identify High-Yield Fine Art Investments

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Masterworks

While typical conversations about investments focus on assets like stocks or gold, the success of the Masterworks app shows that fine art can continue to grow in relevance as an investment opportunity in the digital age.

Masterworks not only delivers opportunities for everyday investors to purchase shares in works of fine art in the same way they would purchase shares of a stock; it leverages data to identify fine art investments that are likely to yield the highest returns.

Fine Art as an Investment Asset

Why choose fine art as a venue for selling fractional investments in the first place? It largely comes down to the historic performance of fine art as an investment asset.

For example, in 2021 it was reported that contemporary art had delivered a 14% average annual return over the previous 25 years, compared to a 9.5% annual average return by the S&P 500.

Notably, at the same time, despite the art world as a whole being relatively slow to adapt to new technology, online art sales have seen significant growth in recent years. A CitiGroup report found that online art sales grew from roughly $1.5 billion in 2013 to $4.8 billion in 2019.

Part of the growth in online art sales can be attributed to Masterworks, which sought to bring art investing to the masses by allowing everyday investors to purchase fractional shares in works of fine art. The company behind the investing app reported over $25 million in payouts to its user base last year. 

Using Data to Identify the Best Investment Opportunities

Like any other investment, there is always a level of risk that comes with purchasing a piece of fine art, or even a fractional share. Some pieces will deliver much higher returns when resold in the future. Others might decline in value.

To help minimize the influence of guesswork from the process, Masterworks uses its own proprietary data to analyze artist markets and find artists and pieces with the most momentum and growth potential.

In an interview with The Investors Podcast, Masterworks CEO Scott Lynn explained, “There’s this really huge deep data set in the art market that helps us understand trends and value for a particular artist for a particular period. So when we’re looking at acquiring a painting, we’re looking at historical comparable paintings that have been sold by the same artist of the same style that are roughly the same example to try to understand how [have] paintings similar to ours appreciated collectively. How do we think our painting is appreciating historically to try to predict future appreciation rates.”

According to Lynn, historical auction records, and looking at comparable pieces by different artists, are among the most valuable tools that help his company evaluate the potential for each piece — and each artist. Notably, much of this data isn’t readily available digitally, requiring extensive hands-on research.

In an interview on the Wall Street Unplugged podcast, Lynn explained, “There’s never really been a great clean data set that you can easily access to understand what prices paintings have sold for historically…. We have a large data collection team of one to two dozen people that are just manually collecting data on different things in the art market all the time so our research team can actually analyze it.” 

Leveraging New Technology 

Researching and understanding art data can be a complex and time-consuming process. It should come as no surprise, then, that as a tech-driven startup, Masterworks has continued to adopt new tools to help its team better identify high-yield art investments. 

As Lynn explained in his interview with Wall Street Unplugged, “We use basic machine learning models within our research team to try to predict where our prices are going for each of these artists markets in conjunction with those data sets. But we’re still in the early innings of doing that with this asset class.”

While much of this adoption is still in its early phases, the combination of human insight and machine learning is poised to further streamline and improve how the company uses its data. 

Identifying Winning Investments

While fine art as a whole shows strong returns over time, the returns achieved by individual artists can vary. Much like the stock market, some artists will deliver stronger returns than others. Some pieces can even decline in value or remain stagnant as interest in artists and art styles wanes.

Looking at past and current sales trends enables the Masterworks team to gauge the level of returns an artist’s work is likely to achieve. Lynn shared a compelling example in his interview with The Investors Podcast.

“Based on all the data we have now, Monet, in particular, we see a very low likelihood that his painting declined in value,” he said. “When we look at all of the paintings that we have by Monet that have sold two or more times, we only see a 3% chance that Monet has ever declined in value based on the second sale. That’s a very interesting data point.”

Thanks to the extensive work by the Masterworks data collection and research teams (in conjunction with its tech tools), the company’s acquisitions team can then use this information to guide its art purchases. With data-backed parameters for art acquisitions, the company is able to make selections that are more likely to deliver strong returns.

While past performance is never a guarantee of future results, Masterworks’ use of data and the general strength of fine art as an investment show that this model can deliver quality returns for investors.

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