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Trades and Trends by Altan Insights: Masterworks Trading Update

Trades and Trends by Altan Insights: Masterworks Trading Update
July 7, 2021
Dylan Dittrich

In messaging to the public and to investors, the Masterworks team has been fairly clear: the fine works of art on offer through the platform are best thought of as 7-10 year holds rather than short term trading vehicles, both from a suitability perspective and to most effectively realize capital appreciation potential.

As Masterworks founder and CEO, Scott Lynn, detailed on our Grails podcast, "the challenge with the asset class, and the challenge to a certain extent for some investors investing in Masterworks is that you do have to be willing to hold an investment for 7 to 10 years broadly speaking before recognizing a return. Investing in art does require an illiquid hold period that maybe some other asset classes like ETFs don't require."

Still, rather than shut the doors of liquidity entirely, the platform does offer bulletin board style trading, in which buyers and sellers post their orders and the counterparty is free to fill a posted order or negotiate for more favorable terms. Though trading is not necessarily the primary focus on Masterworks, they have recently updated and upgraded the secondary market, and it bears watching to better understand liquidity on offer, trends in the space, and contrast to trading on other fractional platforms.

We examined the trading data for the month of June and derived some key takeaways for fractional investors on the platform and elsewhere.

Starting at a high level, there were 702 trades on Masterworks in June across 32 works of art. As a reminder, Masterworks assets become eligible for trading 90 days after the full closing of the offering. Of those 702 trades, 298 were executed at levels higher than the asset's IPO price, 160 were executed at the IPO price, and 244 were executed below the IPO price. While those high level numbers alone skew positive, it's helpful to zoom in to better understand the distribution of results.

Looking at the histogram, it's clear that the data skews positive, at least in terms of how frequently trades are executed not only in positive territory, but at levels 10% or greater to the positive. There were 124 such trading instances 10% or higher than the IPO price, while there were just 27 instances of trades 10% or lower than the IPO price.

Of trades executed below the IPO price, 78% were 5% or less below the IPO level. Given the distribution of trades below IPO level, it seems that sellers on the platform are willing to liquidate at a discount to exit their positions in many cases, but only at a relatively minor discount, not one that crystallizes a 20%+ loss in a matter of mere months. In fact, the worst trades executed were 15% below IPO level, and there were just two such instances. This may be the result of the messaging mentioned earlier; of course, the fewer sellers lining up for the exit and the more shareholders steadfast in their decision to hold for the long term, the less downward pressure on prices for those who do seek liquidity. Selling can also beget more selling, an unfortunate outcome of investor psychology, so the decision by the platform to not mark their assets based on secondary market activity may play a role in reducing panic sales. The platform instead reflects the "fair market value" of assets held in an investor's portfolio, and that value is based on an internal valuation done by Masterworks. It's updated quarterly, starting 6 months after an offering closes. Certainly there are some potential cons to this approach as well as pros, but one can see how it might lead to less frantic secondary market activity. Of course, the lack of harsh downside trades may also reflect the strength of the assets, but in other fractional arenas, we have seen sharp selloffs that have little to do with the asset itself.

The results aren't all positive, however. In fact, looking on an artwork-by-artwork basis, 19 of the 32 assets trading on the platform had a negative share-weighted average return vs. IPO price. At the bottom were "The Mosque" by Jean-Michel Basquiat, "Coup de vent" by Claude Monet, and "Rhubarb" by Joan Mitchell. The former two assets were among the most frequently traded during the month. Warhol's "Little Electric Chair" was traded the most (63 trades), followed by Monet's "Coup de vent" (53 trades), and Basquiat's "The Mosque" (50 trades). Notably, all of those assets (both in the bottom 3 and most traded) are among the larger assets currently trading on the platform, so there is a larger pool of investors, and therefore a larger absolute number of investors may seek liquidity relative to other works.

Leading the way in average return vs. IPO price were "Girl Trouble" by Cecily Brown, "Tracing" by Sam Gilliam, and "Selina/Star" by Barkley Hendricks. Just 8 of the 32 artworks had an average return vs. IPO greater than 5% in either direction. "Girl Trouble" in particular stands out as an outlier relative to the field. Trades were frequently and consistently executed throughout the spring at levels approaching and exceeding 40% above the painting's IPO price.

"Girl Trouble" was acquired at a Christie's auction in February 2020, where bidding was considered relatively thin at the higher end of the market. The price paid for the work, $1.9 million, was just over the $1.8 million low estimate. The Masterworks team capitalized further on tentative bidding at that auction, purchasing "The Mosque" by Basquiat for $5.1 million, which was below the low estimate. In the same month, Masterworks was the lone bidder at a Phillips auction for "Far Away Friends" by KAWS. Backed by a wealth of historical data that provides some level of confidence on expected annual returns, Masterworks is empowered to act with confidence in purchasing works of certain artists.

The price paid for "'Girl Trouble" was just 1.1x the previous sale of the work in 2018, with that seller realizing 3.7% annualized appreciation, further hinting at the weakness of that moment. Just months after Masterworks purchased the painting and shortly after offering it, in early May 2020, Brown's "Figures in a Landscape 1" sold for $5.5 million, the second-highest price reached by one of the artist's works at auction. Alongside Günter Förg and KAWS, Brown is an artist who CEO Scott Lynn has highlighted as one of the artists Masterworks likes most with the greatest absolute returns accelerating most quickly.

In our analysis, we cut the June data in one more interesting way. Masterworks categorizes each artist according to respective risk profile. Artists are scored based on factors like the length of their auction history, annual auction sales, average auction sale price, annual lots sold, career stage, and the percent of repeat sales with a loss. Weightings are then applied to these factors, and an artist is determined to have a "reduced" or "A" risk profile, a "moderate" or "B" risk profile, or an "elevated" or "C" risk profile. An "A" or "reduced" risk profile corresponds with higher total sales, higher average sales, a longer track record at auction, and fewer repeat sales at a loss. A "B" profile typically belongs to a living, mid-to-late career artist approaching $50 million in annual sales. A "C" risk profile would be fitting of artists somewhat earlier in their careers who haven't yet consistently breached $10 million in annual sales and are seeing average sales in the mid six figures. These risk profiles essentially refer to the estimated variability of returns for an artist's market. So, an "A" artist would be expected to have lower standard deviation of returns, i.e. less volatility in sales outcomes.

Artist Risk Profile Raw Score Criteria. Source: Masterworks Offering Circular
Raw Score Criteria Weighting. Source: Masterworks Offering Circular

In June, the average (not weighted) transaction for those artists defined as "A" artists was 0.9% above IPO price, whereas for "B" artists, transactions were 4.1% above IPO price on average. Historically, you would expect "B" artists to have higher absolute returns, in the mid-teens range annually, whereas "A" artists typically produce high single digit to low double digit returns. The additional distinction, of course, is risk or volatility, with the "B" artists having larger standard deviations of return versus "A" artists. As a result, risk-adjusted returns over time prove to be fairly similar despite the absolute return differential. So, to see trades for "A" artists works more closely clustered around zero versus "B" artists makes sense intuitively.


These results will matter little to the Masterworks investor following guidelines for a long-term hold and awaiting steps taken by Masterworks to expertly sell the work when the moment is right. Still, as fractional markets continue to mature, the secondary market merits monitoring, first to understand the liquidity available to those desperately seeking exit, and second to examine whether those hold periods might shift shorter with increased secondary market maturity and efficiency. On the latter point, the impact of the messaging around trading and the trading system itself are worth following over time, as the fractional space more broadly weighs how best to offer liquidity for assets that have historically achieved their strongest results over longer hold periods.

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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.   

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