Masterworks Review: Pros, Cons, And Alternatives

Masterworks is a platform that allows you to buy and sell fractional shares of artwork.

You've probably seen the headlines of some fine artwork selling at auction fro $100 million or more? Or what about the story of some guy finding a painting at a garage sale and it ended up being worth millions?

You might be thinking to yourself - artwork commands huge prices. Maybe there is an investment opportunity here? Well, in fact there is, and individuals have been investing in artwork for 100s of years.

However, in the last few years, innovations in the investment space have now allowed individuals to invest in fine art - even ones worth millions of dollars. With Masterworks.io, you can buy a fractional ownership of artwork. 

Let's take a look at Masterworks and see if it makes sense for you.

Who Is Masterworks?

For anyone with an eye for art, owning an Andy Warhol, such as the piece 1 Colored Marilyn, would be a valuable addition to their collection. However, such famous paintings are out of reach for most art collectors. After all, the last sale on 1 Colored Marilyn went for $1.815 million.

Masterworks, a New York-based company, is changing how art is sold by making ownership of famous art accessible to smaller art collectors.

“Artwork made by some of the world's most significant artists tends to appreciate at the highest rates, but very few people can access them due to the price point. Masterworks aims to make it possible for anyone to invest in this asset class by offering the opportunity to invest in artworks at an affordable entry point,” said CEO Scott Lynn, in a press release.

Over the last several years, Masterworks has become one of the largest players in the art market, giving it remarkable opportunities and power. As of December 2023, they have $882,000,000 in assets under management, have purchased 344 art pieces, and have over 800,000 members on their platform.

How Does It Work?

By purchasing art and selling fractions of it to investors, Masterworks is able to let you invest in artwork at a much lower entry point. A lower entry point doesn’t mean lower value. The art still retains its value.

Here's a summary:

Masterworks looks at how specific art pieces have appreciated over time. It wants to buy art that has the best chance of continuing to appreciate. That is how smaller collectors will make a return. One of their key focuses is on purchasing the best works from specific artists - as the art market is highly dependent on the artist, not the work itself.

Once a piece is selected, Masterworks buys it then qualifies the art with the Securities and Exchange Commission (SEC). This securitizes the art. After the art is approved by the SEC, Masterworks.io can list it for sale on their platform. 

The platform allows investors to monitor the performance of their art over time. As it appreciates, the investor can choose to sell their shares for a profit on the secondary market or wait for an exit.

Masterworks' goal is to the beat the S&P 500. From their home page, “Since 1995, contemporary art prices have outperformed the S&P 500 returns by over 164%”.

To understand some of the motivations behind investors buying fractional shares of art, Cheryl Ellzysmith, a 29-year-old studio artist from Philadelphia, told CNN, “I saw this gap between the value of art and the ability of the average person to be able to invest in — or own — ‘blue-chip’ art. Art of this quality and caliber is almost limitless in its ability to increase in value.”

“Paintings are timeless, so investing in them comes with a lot of security. In that way, it’s similar to investing in real estate.”

Masterworks Fees

The fee structure of Masterworks is similar to that of a hedge fund. Hedge funds charge 2 and 20, which means a 2% annual management fee and 20% of any profits. Masterworks.io charges 1.5 and 20. That equates to a 1.5% annual fee and 20% of profits. 

Is that a good deal? That's a tough amount to tolerate. 20% will cut deep into any profits. But if Masterworks performs, then you may come out ahead. Plus, you're getting the benefits of Masterwork's team, legal, and professional services.

It's important to remember that you're not actually paying that 1.5% each year, given there is no liquidity in the investment. You're paying that 1.5% as accrued equity, which is paid back at the liquidation event, along with their share of the profits.

For example, let's say the artwork returns 20% on average (which is very high). That should grow your $1,000 initial investment into $6,191 over 10 years. However, a 1.5% annual management fee would lower that by $428 to $5,763.

Then, depending on how the painting is sold, you could have auction fees - which range from 10 to 25%. We will assume 13% of our calculations (which is $749). However, in discussions with Masterworks, given their volume, they say the average commission so far is around 5%.

Then you pay your 20% of the profits ($803), which lowers it to $4,211. So, even with all of these costs, you're still seeing a roughly 15.5% compound annual return over 10 years - amazing. But, that's a very rosy scenario.

You can do similar math with an investment fee calculator to calculate the drag of fees on your investment.

To date, Masterworks is averaging a 29% net return from its first six exits. Past performance doesn't guarantee future results. 

However, the math doesn't look as great if you start getting anything less than a 20% annual return. Let's assume it goes down to a 10% per year annual return. That means your original $1,000 grows to $2,594.

Assuming this piece sells at auction, you'd pay 13% commission (or $337), leaving you with $2,257.

Then, you'd pay Masterworks their 20% commission on the profit (or $251), leaving you with $2,006.

So, over 10 years, your investment grew $1,006, giving you a roughly 7.5% compound annual return after fees. A little below the stock market historical average.

You also have to consider another key variable here: If the painting sells at auction or private party. Private party sale costs will be much lower than going to auction.

Since 2000, the Artprice100 index shows a return of over 450%, while the S&P 500 is less than 200%. What’s important to understand is that 450% is the return of an index. Meaning, you had to own many different types of paintings to get that return. It also doesn’t factor in fees like 1 and 20. If you are only buying fractional shares in a handful of pieces, what are the odds you have chosen all the right pieces that will return 450% over the 18 years? It’s anyone’s guess.

And note, the Artprice100 index essentially identifies the 100 top-performing artists at auction over the previous five years who satisfy a key liquidity criterion (at least ten works of comparable quality sold each year). The weight of each artist is proportional to his/her annual auction turnover over the relevant period.

Masterworks also recently had its first exit, a Banksy artwork, which produced a 32% net annualized return. In this case, the $20.00 minimum investment, which was held for 1 year, would have given you $26.67. 

Secondary Market

Masterworks has built out a secondary market for investors of it's shares to be able to buy and sell. If you own a fractional share, you can list it in the marketplace. As a buyer, you can also look at the listings and make an offer.

Furthermore, you can see historical data from what's sold in the secondary market as well.

This is a great feature if you're looking to gain some liquidity from your fractional ownership before the exit of a painting. 

Masterworks Alternatives

Masterworks doesn't have any direct competitors in the artwork space. However, there are other companies that are doing similar in the collectable space.

For example, Collectable is a company that has a similar business model to Masterworks. You pool together an investment with others, and you purchase a Collectable. They focus on investing in sports memorabilia and comic books.

Rally is another company that focuses on investing in rare assets. You can find things like rare cars, sports memorabilia, and more listed on their platform.

Why Should You Trust Us?

I have been writing and covering investment products and services since 2009, and I'm extremely familiar with a variety of alternative investment products, from venture capital, angel investing, real estate, and more. 

I have been following Masterworks since it first launched, and we wrote our first review of the platform in 2019. Since then, we have updated the review as they have launched new features, and had their first sales. I've also had conversations with their team and CEO about what they're doing and offering.

Combine that with the fact that our editorial team has years more combined experience looking at investment products and services, you can be certain you're reading unbiased information. 

Who Is This For And Final Thoughts

Masterworks is an interesting platform. The ability to invest in fine art is attractive, and may be interesting to some investors looking to diversify into alternative investments.

However, the fees are very high compared to stocks and ETFs (but on par with other illiquid investments like real estate and private equity), and there is no guarantee on appreciation. While the short-term history looks good on paper, there are a lot of unknowns in the future.

We aren’t questioning the fact that it would be nice to own a Picasso or Warhol. But until Masterworks’ platform is completely proven over time, we caution against investing funds that you can't afford to lose - especially during the 3 to 10 year timeframe that Masterworks intends to hold the art for.