Art Looks Better in Private Collections Sale of Sotheby’s takes one of the few listed art companies off the market—but such stocks haven’t lived up to investment hopes anyway Unflattering PictureTotal shareholder returnsSource: FactSet%S&P 500 IndexSotheby's1990’94’982002’06’10’14’18-100010020030040050060070080090010001100 Sotheby'sxJan 16, 1989x34.5% By Carol Ryan June 21, 2019 6:08 am ET The art world has been on a tear since the financial crisis. But you wouldn’t suspect it from the share price of Sotheby’s , BID -0.30% the 275-year-old auction house that this week was sold to French telecom billionaire Patrick Drahi for $3.7 billion including debt. It will find a better home in his private collection than investment portfolios—an argument that applies to publicly traded art assets generally. The auction house’s 30-year run as a listed company has been mixed. Including the 60% takeover premium Mr. Drahi is paying, it delivered annual shareholder returns of 8% since it began trading in the late 1980s, according to FactSet data, underperforming the 11% gains of the S&P 500 index. Not even an unprecedented boom in the global art market since the financial crisis, caused by frenzied bidding within the world’s growing population of art-collecting billionaires, helped matters much. In 2018, $67.4 billion of art was sold globally, according to the Art Basel and UBS Global Art Market Report, a 70% increase since 2009. That is comparable to the growth of the world-wide luxury market over the same period. Yet before Monday’s pop in the auction house’s shares, publicly traded luxury brands owners like Hermès or LVMH Moët Hennessy Louis Vuitton delivered almost double the annual returns that Sotheby’s managed since 2009. Sotheby’s shares didn’t fully benefit from what was happening in the art world for a couple of reasons. Headlines about multimillion-dollar bids for paintings by Picasso or Rothko are deceptive. These can be among the lowest-margin sales for auction houses. So while the boom at the top of the art market flatters Sotheby’s top line and generates publicity, it isn’t lucrative. Employees hold “Matinee Sur La Seine” by French artist Claude Monet at Sotheby's auction house in central London in April 2018. Photo: will oliver/epa-efe/rex/shutters/EPA/Shutterstock Unlike luxury brands, which manufacture what they sell and control prices, auction houses need to compete for the best lots. Sotheby’s often cuts the fees it charges sellers, or even guarantees a set price, to beat rival Christie’s for a masterpiece. The terms of such guarantees aren’t public, so the market can get caught out when they go wrong and profits take a hit. Sotheby’s shares fell 6% last August when investors learned the company made no upside on Modigliani’s “Nu couché” and Picasso’s “Femme écrivant,” two of the highest-profile lots of the year, when the paintings sold below expectations and price guarantees squeezed profit margins. A lack of transparency in the art world more generally makes it hard for investors to judge which way profits will move, adding volatility to the stock. Nor has it been easy to smooth out spikes in the art market. Sellers have less incentive to put artworks on the block when the economy is weak, leading to boom-bust cycles for auction houses and other companies that depend on turnover. Luxury realtors like Savills have offset a similar problem during downturns in the property market by building steadier income from management fees. Sotheby’s did branch out into advising clients on private sales and financing painting deals, but these activities are also vulnerable to economic slumps. Art businesses may just be a poor fit for public markets. Sotheby’s main auction rivals, Christie’s, Phillips and Bonhams, have long been private. One of the few remaining listed art stocks is MCH Group, which runs the Art Basel fairs. Its has delivered negative 4% annual returns on average over the past decade, although this can partly be explained by idiosyncratic problems at its Baselworld luxury-watch fair. “It is far better to buy a print, enjoy it at home, and invest the rest of your money in low-fee ETFs,” says Roman Kräussl, a professor at the Luxembourg School of Finance who has researched the returns of listed art companies. Of course, art assets can come good when, like Sotheby’s, they are sold as trophies at huge premiums. MCH, which is controlled by the states of Zurich and Basel, may decide to sell the international art fair business, given issues in the watch division. A trophy price would give the stock a lift. When art masterpieces disappear into private collections, the downside is that they vanish from public view. Investors have less reason to mourn the loss of art stocks like Sotheby’s. Write to Carol Ryan at carol.ryan@wsj.com https://www.wsj.com/articles/art-lo...shareToken=stdd2a07e4cc444e068c18a93ca10d33b2
Depending on your entry points, like many public companies, Sotheby's has been a terrific buy and a great short over the years.