1. Art – Investment – Analysis Lajos GOLOVICS – David RÁCZ June 6, 2011

2. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. Why do people collect art pieces?  Aesthetic reasons  Investment considerations How to define the value of an art piece if you are an investor? I.Art expert’s estimation based on the unique properties of the artpiece and its place in the life - work of the artist II.Analysis of statistical data on previous list and hammer prices  The above focuses on uniqueness, while the following on common features, and the valuation of the market  Probably using both techniques together can lead to more precise and robust estimations The value of art

3. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. How to compare art with other investments?  Provide the performance of art market by determining an art index, which can be compared to financial markets’ indexes  An art index is a typical portfolio of artpieces  A portfolio is a basket of elements  Possessing a portfolio of artpieces leads to favorable risk compared to owning only one artpiece  According to portfolio theory the individual risks of single artpieces can mitigate each other if their prices do not move completely together  Due to data availability in Hungary painting market can be valued by creating an index Art as an investment

4. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. There are three methods in literature 1.Repeated sales regression (Mei and Moses) 2.Hedonic regression (Artprice.com) 3.Average and median based ( Graeser) The f irst two methods require great databases with numerous parameters (e.g. size, painting technique, era) and long time series In Hungary the modern era of art auctions started only in the mid 90s There are only data of public auctions limited in time and details The best way is to construct the Hungarian art index based on averages How to create an art index?

5. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. For the time period 1998-2008 based on the database Mr. Golovics’s mukincs.com, 15. 650 transactions have been used to calculate trimester averages To make the index a typical and liquid average of the performance of the Hungarian art painting market a liquidity filter has been set up: The index has been calculated from the list and hammer prices of paintings created by those 111 artists, whose pictures have been successfully auctioned minimum once in every year in the sample Data used to create the Hungarian art index

6. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. To minimize composition effect in the index, and also to give a conservative valuation, the following formula has been created to valuate the particular artists: The index is then calculated as the non-weighted average of the artist-values. This way we can follow the price developments of a painting portfolio standing from average paintings created by the observed artists The composition of the Hungarian art index

7. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. The price development of the Hungarian Art Index

8. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. The price development of the Art index can be compared with other investments A rational investor will invest parallel in asset classes to gain a diversified portfolio, which mitigates the risks he is posed to The performance of an asset class is therefore not only to be analyzed in absolute relation but also as part of a portfolio in relative terms The Hungarian Art Index is compared with the following asset classes based on the time period 1998-2008: Livex Fine Wine Investables Index (representing fine wine market) BUX-Index (representing Hungarian equity market) Gold 3-month Hungarian Treasury Bill (representing „risk free rate”) Analyzing the optimal portfolio decision of an investor

9. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. Price developments of the asset classes

10. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. Performance of the investor’s asset classes The gained return is only one side of the performance The risks the investor is posed to should also be taken into consideration when making investment decisions The most widely used formula to handle this question is the Sharpe-ratio: Based on the Sharpe-ratio if an investor wants to invest separately into one of the analyzed asset classes, the Art index is the best choice, followed by gold, BUX Index and Liv-ex Index

11. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. Correlation matrix to capture the connections Weak connection between BUX and Art Index, a Liv-ex is independent from the Equity market, Gold moves weakly against Equities Optimal portfolio From the two-element portfolios the BUX+Art has the highest Sharpe-ratio, but gratitude to the beneficial effects of diversification, the Sharpe-ratio of the four-element optimal portfolio is even higher by 34% Diversification analysis: Investing parallel

12. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. Graphical representation how the optimal two- and four- element portfolios are defined Dark-blue triangle signs the Art index, the brown one the BUX Index, the yellow one Gold, while light green the Livex Index Diversification analysis: Investing parallel 2.

13. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. The results prove that a long-term investor should take into account alternative asset classes, among them art when making investment decisions Optimal investment ratios were calculated based on the assumption, that the distribution of yields will approximately be valid for the investment time horizon, so the optimal ratios depend on our expectations In the interpretation of the optimal ratios it should be considered, that alternative investment classes have higher transaction costs compared to traditional investments, and their markets are less liquid, that is why one should invest via lower rates into them in real life The analysis discussed well-diversified portfolios of the asset classes themselves alone. If someone is considering to buy one particular artpiece, he should be aware that this investments is riskier than the 111-element art-portfolio that has been used in the analysis The last mentioned problem of size and divisibility in the case of alternative investment is likely to be solved via the newly formed alternative investment fund, although their legal regulation is still initial, which can bear legal risks to the investor Conclusion

14. The views expressed in this presentation are those of the author and do not necessarily represent official positions of the MNB. Thank you for your attention! Lajos GOLOVICS golovics@mukincs.com David RÁCZ raczburg@mail.datanet.hu