When looking to invest, an increasing number of individuals are looking beyond the traditional asset classes of equities, bonds and property. Devoting a small proportion of your portfolio to more niche assets can have diversification benefits and an investment in art is a good example.

Those who choose to invest in this area are likely to be enticed as much by the potential for financial gain, as by the pleasure of owning a work of art. However those who are considering making such an investment should also be aware of the potential difficulties.

Due to the manner in which many works of art change hands via private transactions, it is difficult to provide an accurate measurement of the size of the art market. JP Morgan argue that the ‘Mei Moses World All Art Index’ can be of some assistance in this regard.

This index is calculated annually and is based upon the resale values of pieces of art that have been sold multiple times at auction. It shows that the sector has a good track record in terms of the returns provided to investors.

Furthermore, statistics compiled by JP Morgan reveal that over the past 15 years the art sector has outperformed the equity and fixed income asset classes. This can largely be attributed to the manner in which the sector recovered fairly rapidly from the 2008 recession. The sector also seems less volatile than others, and is not characterised by frequent fluctuations in values.

Taken at face value, the evidence seems to suggest that art could perform a viable part of somebody’s investment portfolio. However, the sector still represents a risk to potential investors.

The first thing to be aware of is that art is an extremely illiquid investment.

Those who commit capital should therefore do so in the knowledge that it may not be easily realisable at short notice. Similar to equities, art represents an investment for the long term.

This idea is reinforced by Mohammad Kamal Syed, of Coutts, the private bank. He has been quoted in the Financial Times as saying: “Art collections are built over time and are not recommended for investors interested in quick returns.”

Potential investors should be prepared to hold on to their purchased asset for a period of five years at the very least.

It is also worth being aware of the disparity that exists between different types of art. The previously mentioned ‘Mei Moses All Art Index’ offers a broad indicator across all the different genres, and fell by just over three per cent last year.

Taken in isolation though, some types of art demonstrated better performance than others – last year 19th century paintings made a gain of approximately six per cent, for example. As with any asset class choosing the right investment is therefore crucial.

Given the high prices of some pieces of art, it should come as little surprise that high net worth individuals feature prominently in this market.

The economic emergence of China has played a particularly important role in recent years.

This is largely due to the manner in which Chinese investors have sought to repatriate many of their country’s traditional artworks from Western owners.

In spite of this it is still possible for those without the large sums required to participate in auctions at Christie’s and Sotheby’s, to make such an investment. Even those looking to purchase more affordable pieces of art should remember though that the price of an investment in art is likely to be more than what you pay for the painting!

Insurance is one area to consider. Whilst home insurance may suffice in some instances, those with larger or more valuable collections may need to approach a specialist insurer. The costs of storage should also be considered as it is very important to keep pieces of art in a temperature controlled environment.

The other major pitfall is the possibility of spending a large sum of money on a piece which turns out not to be the genuine article. For those without the requisite knowledge it may also be worth consulting an expert in such matters.

* Trevor Law is a director with Merito Financial Services, chartered financial planners, based in Solihull.

* E-mail: tilaw@meritofs.com