Paint By Numbers

Howe, J. (2005) "Paint By Numbers," WIRED magazine, (New York: The Condé Nast Publications Inc.), Vol. 13.04, April issue, pp. 84, 88-89.

Paint by Numbers

It's high art meets high finance. It's social security for starving artists. How a tech whiz kid launched the first museum-quality pension fund.

By Jeff Howe

Being young, rich, and handsome in New York can be awfully boring. Just ask Moti Shniberg. In 2002, at the age of 30, Shniberg sold his interest in the tech company he founded, a pattern recognition firm called ImageID. Though he netted "a few million," he quickly found that a life of leisure didn't suit him. Restless, he discovered the next big thing in the backseat of a taxi, where he and an artist friend were discussing her work. "I asked her what sort of retirement plan she had," he recalls. "She said, 'None.'" Originally bound for a museum, Shniberg and his friend instead repaired to a Central Park bench, where he peppered her with questions and scribbled on a yellow legal pad.

The idea was simple: Create a pension plan for artists by gathering a collection of their works and gradually selling them off to build a cash account. Over the course of their careers, some artists would succeed wildly; most would fail miserably. By spreading that risk of failure among a large pool of artists, Shniberg figured he could provide financial security to a group of workers unaccustomed to a safety net.

In the three years since, Shniberg has transformed his scribbled notes into the Artist Pension Trust, with offices in New York, Los Angeles, and London. Some of the most respected names in the worlds of art and finance have joined forces with him. In New York, the APT last year recruited its freshman class of 50 artists.

Luis Gispert is one of those early acquisitions. At 32, Gispert pulls in about $100,000 a year from the sale of photographs and sculptures - more than most artists make in a lifetime. He possesses impeccable credentials: A master's degree from Yale's fine arts program and a spot in the 2003 Whitney Biennial, which does for young artists what Sundance does for young film-makers. Later that year, the Whitney awarded him an even more prestigious honor, commissioning an installation for its midtown--Manhattan branch, a small gallery that highlights the work of a single artist. Gispert responded with his most ambitious work to date, a room-sized multi-media piece featuring a 40-foot turntable arm connected to a giant base-ball hat. Though Gispert received a bunch of offers for this work, he chose to transfer ownership to the Artist Pension Trust instead.

It's the first of 20 pieces Gispert will give to the APT. Under the terms of the trust, he's expected to provide nine more works over the next five years, five more during the following five years, and then one every two years until the trust matures in 2024 - for a total of 20 pieces in two decades. What he gets in return is peace of mind. Even if he never sells another work, he'll still receive roughly half a million dollars, paid in regular installments after he turns 63. And if his career continues its upward trajectory, his total payout might exceed $1.5 million. Gispert sees the fund as a hedge against the fickle art market. "My sales right after the Biennial were amazing, but then last year was rough," he says. "The pension provides security that I wouldn't have otherwise."

The New York trust will recruit 50 artists a year until it reaches 250 artists in 2009. At that point, Shniberg says he'll start a second New York trust and repeat the process. In the meantime, Mutual Art, the company Shniberg founded to administer the program, this year established similar trusts in London and Los Angeles - and plans a total of 12 trusts from Mumbai to Moscow. If all goes according to plan, Mutual Art will soon control one of the largest collections of art in the world. As the works are sold, Mutual Art will take 20 percent of the revenue as its management fee. The rest will be split between a common fund and the artists' individual accounts. Mutual Art will invest the proceeds in the common fund to maximize returns; the artist is responsible for managing the money accruing in his own account. All told, APT expects to pay out at least $1.5 billion to the artists in the first 12 trusts; with an anticipated dropout rate of 20 percent, that's an average of more than $600,000 per person.

But the benefits of the trust extend beyond the artists who participate. Shniberg sees the day when all sorts of people who traffic in intellectual property - from software coders to filmmakers - can insure themselves against abject poverty. "We could offer finan-cial security in exchange for a cut of their royalties," he says. Artists may never starve again.

In 1998, NYU business school professors Michael Moses and Jianping Mei began an unusual experiment. They would track every transaction involving objects that had sold more than once at auction at the major New York houses since 1875. By creating a single database, they could see how art performs against traditional investment vehicles like stocks and bonds. Four years and 13,000 data points later, they published the Mei Moses All Art Annual Index. What it proved ran contrary to conventional wisdom in the worlds of finance and art.

The index revealed that fine art was a far more reliable investment than is commonly thought. In the five decades after 1953, fine art appreciated at 10.4 percent, a compound annual rate remarkably close to the Standard & Poor's 500 index, which posted a return of 10.9 percent. Moses and Mei also disproved the hoary maxim that masterpieces make the best investments. They showed that lesser-known (and thus cheaper) works appreciate at a higher rate.

Finally, the index suggested that the art market floats independently from the stock market, giving it resilience against boom-and-bust cycles. Over the last five years, for instance, the art market gained 7.3 percent, while the S&P fell by 2.4 percent. For investors, this is significant. In theory, fine art could be used to minimize volatility in an investor's portfolio.

Around the time Moses and Mei were reaching their conclusions, Shniberg was having his taxicab epiphany. So during a trip to his native Israel, he took his scribbled notes to Dan Galai, one of the foremost experts on risk and diversification and his former professor. (Shniberg briefly pursued an MBA in 2002; "I decided I had nothing to learn, so I dropped out.")

"My first reaction was that this plan faced many hurdles, many challenges," Galai says. For one, art is nothing like traditional commodities. Its value is determined strictly by what someone is willing to pay for it, unlike stocks and bonds, which have set prices determined by the market. Art is also illiquid - you can sell a work only if someone wants to buy it. Still, Galai was so intrigued that he became Shniberg's partner. "Students have approached me with business plans before," he says. "But this is the first one I went in on."

First, they needed to devise a strategy for selling off the works. "We had to figure out how and when we would liquidate our holdings, and then how to distribute the money," Galai recalls. Then there was the question of quality. "You can't dilute a pool of good artists with bad ones. Who decides which is which?" Further, Galai and Shniberg would have to convince Washington regulators that their pension deserved tax-deferred status like any other retirement account. "We're still working with the Department of Labor to make sure we comply with all their regulations," Galai says.

After several meetings, Galai began to see a way to apply risk-management theory to Shniberg's idea. It all came down to the time-honored principle of diversification: Galai determined they could reduce uncertainty by spreading risk across as many variables as possible: medium, style, even where the artist lives. Most important, Galai identified what he calls "time diversification," the ability to wait out a cool market - for decades if necessary.

Shniberg and Galai spent months running simulations. They discovered that even if the majority of the art in the collection failed to appreciate, the trust would still meet its financial goals.

The key, Galai says, is making sure every artist enters "at the same starting line, like a horse race." Each must fit the Luis Gispert profile: promising, but not wildly successful. For all the attention Gispert has received from critics and museums, the market value of his pieces is still relatively low. "We look for artists who are selling their works for between $5,000 and $10,000 apiece," Galai says. The rigid profile is meant to combat the phenomenon of adverse selection: Include too many established artists, and the less successful get lazy; include too many artists without any track record, and the most promising ones will reject the invitation to join. If the trust is going to spread wealth evenly, then every artist must go in with an equal chance of hitting the jackpot.

Of course, Galai's clever risk-management techniques don't mean a thing unless the trust can spot real talent. How do you make sure that you have the next Damien Hirst (the 39-year-old British conceptual artist whose early large-scale sculptures are now worth up to $13 million) and not just a warehouse full of wannabes? For that, Shniberg and Galai turned to David Ross, former director of the Whitney Museum of American Art and the San Francisco Museum of Modern Art. "It's all about finding the X factor," Ross says. "X doesn't equal talent. Loads of artists have that. X equals promise. X equals the potential to hit it big."

It's Ross's job to choose a selection committee, whose members nominate artists they believe fit the APT's specifications. The members then rank each artist on a scale of 1 to 5 - without seeing how other committee members vote. Finally, they meet in person to choose the roster of artists to be invited. This rigorous process is all part of Galai's system of diversification. "It's critical to keep each judgment independent," Galai says. Equally important is that individual members of the selection committee possess varying tastes and specialities. "We need to make sure our holdings represent a wide selection of media and approaches to art making," Ross adds. "The way the trusts are structured, we're diversified geographically as well as aesthetically."

Of course, the best way to manage risk is to reduce it as much as possible - even if that means tilting the market in your favor. The goal is for the trust to work as a sort of seal of approval. And so the APT will aggressively promote its collection, lending to museums and galleries to enhance the reputations - and market values - of its members. There's a name for this sort of manipulation, and it's no compliment: prospecting. Unscrupulous collectors - like British advertising tycoon Charles Saatchi - are famous for buying up emerging artists, exhibiting them prominently to inflate their critical reputations, then dumping them on the market to cash in. It can ruin a career. And while no one is accusing the trust of illicit motives, some art world observers are openly skeptical.

Robert Storr is a critic, curator, and historian who has studied the interplay between markets and art. He says that while he's all for artist pension plans, the APT's emphasis on market speculation should make artists a little uneasy: "It requires them to think of art as a commodity."

"What's wrong with that?" Ross asks. "People are going to manipulate the market, for better or worse. Why shouldn't the artist, or someone representing him, be doing it?"

They'll join a rapidly growing crowd. A dozen art investment funds are slated to open this year. One of the largest is the Fine Art Fund, founded by Philip Hoffman, a former deputy managing director at Christie's. The fund began buying art last spring and expects to raise $350 million. The Dutch bank ABN Amro Holding has even created a "fund of funds," which will invest exclusively in art-backed financial instruments.

For his part, Gispert rejects any perceived conflict between making art for the ages and making art for the masses. "The idea of 'artist' is less sacrosanct than it once was," he says. "I could have easily gone into commercial photography or the movie business. Why should I suffer because I make art instead?"

Contributing editor Jeff Howe (jeffhowe@wiredmag.com) wrote about pirate media distribution networks in issue 13.01.

http://www.wired.com/wired/archive/13.04/pension.html?pg=1&topic=pension&topic_set=

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