The Fine Art Fund has just reached the end of the designated investment period, and as such, appropriate cash holdings will now be distributed back to the Investors. The Fund will no longer purchase artworks, but seek to divest all holdings over the next 6-9 years. Given the luxury of this extended time-frame, we are in a very strong position to wait until all areas of the market have stabilised, in order to maximise intended returns. Sales since last year have been strong for the Fund, with only a few minor Contemporary works failing to perform well above cost. Exceptional results were achieved for some holdings in the Impressionist and Modern art sector and overall, using the mean auction house valuations, The Fine Art Fund has outperformed both equities and bonds over the past four years[1] . An equal investment in The Fund was, at 30th June 2009, 23% stronger than The Dow Jones and 35% higher than the S&P 500[2].

The Fine Art Fund II has a further three years in which to make acquisitions. We will carefully review works; continue astute purchases across all sectors; and most important, will continue with extremely thorough due diligence. In addition, the Fund will strategically divest its holdings over approximately the next ten years. It is also holding cash and has undrawn commitments, which now stand at approximately 53% of the total fund. This places Fund II in an extremely advantageous position for opportunistic purchases. In comparison with other areas of investment, we are pleased to be able to say that, The Fine Art Fund II has also outperformed both equities and bonds over the past two and a half years[3]. An equal investment in The Fund was, at 30th June 2009, 27% higher than The Dow Jones and 37% stronger than the S&P 500[4]. These comparisons show The Fine Art Funds as effective vehicles for wealth preservation and diversification, and we are still confident of our ability to meet our long-term targeted returns.

Regarding The Chinese Fine Art Fund, the majority of invested funds are in antiquities, which are continuing to sell extremely well, as reflected during Asia week in New York the first week of September. As well, the Fund has taken a position in a Contemporary artist who is internationally supported and just completed a new major show in a London Gallery. Prices in this sector are also currently stabilizing. With continued thorough due diligence, the Fund would like to pursue other purchases of this nature, and add to the portfolio of artworks.

We recently completed our first valuations for The Middle Eastern Fine Art Fund and are pleased to announce that the Fund’s portfolio has been valued above cost. This is an excellent result for us in this young market, and we strongly believe that we will continue to see a positive performance in the coming months and years. As a reminder, this fund will be having its final close in the start of 2010.

The Fine Art Fund Group remains the only art investment group of its kind with a successful track record. On every asset sold across the different funds, the average annualised return is 30.15%. The highest IRR for an asset sold is 546%, while only one asset has been sold to date for a small loss, which equated to 0.00092% of the total assets under management. We are pleased that our conservatism, lack of leverage, significant cash holdings, art diversification and focus on quality has meant that the Fund’s assets have held up very well against other asset classes.

New Products, New Opportunities

In response to the current and likely ongoing financial crisis, the Group will be launching The Fine Art Fund III, a fund that will focus on acquiring art at distressed prices. The Fine Art Fund III will have the same strategy as the original fund, but will be a shorter, five-year, closed-ended fund. With a target size of $100m and a minimum investment of $250,000, this Fund is scheduled for launch in late 2009, and initial close in early 2010.

The Group also recently launched the Managed Art Portfolio Service (MAPS), under Fine Art Investment and Research (FAIR), the Group’s Art Advisory arm. This product’s objective is to offer a superior client service, providing personalised advice on art investment and art collecting, giving value for money and access to the Group’s specialised art experts and art market intelligence, with the aim of building a sophisticated, tailor-made art collection. MAPS will benefit clients, whether collecting for pleasure, as an investment, or as a combination of both.

The Fine Art Fund Group is ideally placed in this market, and always open to any opportunities that may surface in the months to come. We continue to track the art market internationally on a daily basis, and are ready to take advantage of any ‘distressed’ artworks and collections that might come to the market, but as always, are only going to purchase works of the best provenance, condition and quality.

Art Market Correction

A shift in the art market has occurred in the latter half of 2008 and the first half of 2009. During this period, we saw two of the most sensational auctions ever: the sale of Damien Hirst’s works at Sotheby’s London September 2008, the day after banking giant Lehman Brothers crashed, and six months later in February 2009, in full midst of the financial crisis, Christie’s Paris achieved their most successful sale ever: the single owner sale of works belonging to the late Yves Saint Laurent and his partner Pierre Bergé.

These individual sales notwithstanding, both auction houses saw major falls in trading over the period. Auction sales fell 52% at Christie’s, and 67% at Sotheby’s, compared with figures during the same six month period one year previously. Both auction houses have dramatically downsized. The remainder of 2009 finds both firms conservative in outlook with regard to the volume of sales presented, quality of artworks for sale and above all, in their estimation of values. It remains to be seen how FRIEZE art fair in London and FIAC art fair in Paris, later on this month, will set the tone for Contemporary Art for the Fall ’09 season. The fairs will be followed by two weeks of Impressionist & Modern art auctions in New York in November. Strong confidence from the fairs, interest, and good material could mean impressive sale results, but many are predicting a ‘double dip’ in the market this fall.