2010-06-07 09:31

The eventual Mei Moses Index, which is now run by their New York-based company, Beautiful Asset Advisors, showed that art in the 50 year period to 2005, returned 10.5 per cent per annum, outperforming the 6 per cent in bonds and gold's 5 per cent and almost matching the S&P's 10. 9 percent return.

The index is used by major insurance companies such as Axa to assess the insurance value of people's art.

Mei said it was more difficult to compile an index for art than for stocks, which are traded continuously.

"Art is not like stocks. People buy a painting and keep it for 30 years, unlike a stock such as IBM or Unilever that is traded every day. You have to piece all the data together and come up with a common trend that actually captures market movements," he said.

He said it was difficult for someone who buys one work of art, for example, to match the performance of the index.

"Art has the problem of being indivisible. The more you buy, the more your performance is likely to match the index," he said. Mei, who lived 21 years in the United States before returning to China five years ago, said there was often more to valuations of art than many perceive, with many psychological factors at play.

He pointed to high profile record auction prices such as the recent $106.4 million paid for a Picasso at a Christie's sale in New York. It was believed to have been bought by a Chinese. He said people who dole out that sort of money are paying not just for the painting but for the pleasure derived from owning it.

"These are what I term high dividend yield paintings. You really get a lot of boasting rights if you overpay a little bit. This psychological benefit actually lowers the capital gain. Certainly, if you were buying just for investment you would buy something less expensive," he said. Mei said if you looked at the data of art transactions you could actually see patterns that proved such behavior.

"Paying prices such as these is almost like spending your next 10 years' salary but in capital gains terms. You have had your capital gain now," he said.

He insisted such vanity behavior was not singular to art but could be seen in the purchasing activity of other assets.

"It is not unique to art and it is not unique to physical assets either. During the dot-com boom any company that had a dot-com name had this prestige attached," he said.

Mei is something of a world expert on asset valuation generally and his work takes him into many other spheres, not just art. He has a particular focus on property and is director of the Real Estate Center at Cheung Kong as well as being a professor of finance.

Being able to read the booming Chinese property market would no doubt earn him more fame - in China, at least - than he has with the Mei Moses index. Prices have risen by up to 40 percent in some major cities this year.

"I think property prices will stay high and continue to go higher," he said. He said China property prices were not some asset price bubble about to spectacularly burst, as some commentators predict.

"The huge price increases in the major cities in China have powerful economic factors behind them. They are mostly a monetary phenomenon and not a property market bubble," he said.

"They have been mostly driven by huge increases in the money supply which creates liquidity in the market. Property market development takes time and the supply cannot catch up with the demand so the prices sky rocket."

Mei acknowledged the problem with this was that houses and apartments - particularly in major cities such as Beijing, Shanghai and Shenzhen - risked becoming unaffordable for those on average incomes.