Comment: The maturing of wine as an asset class
Peter Lunzer, Director and Wine Adviser, The Wine Investment Fund, says that investing in wine can work when properly managed with regard to risk and return.
There are three important concepts that serious investors must grasp when it comes to investing in fine wine.
First, that wine as an investment really does work if properly managed with due regard to risk and return; second, that there are certain fine wines that genuinely represent investment grade stock; and third, that fine wine investing has developed into a low risk addition to any portfolio allocation. Increasingly, both institutional and private investors, having researched the market, are treating fine wine as a 'must have' investment.
My aim in this article is to address the first of these concepts.
There is a romantic and traditional notion about wine investment that you can buy two cases of young wine so that, after a period of maturation, you drink one case and sell the other to finance the purchase of another two cases. This self perpetuating policy may have allowed some wine enthusiasts to drink 'for free'.
Their fallback position, frequently quoted, is that if values do not rise as expected, then you can always drink the whole stock. Not much of a serious investment policy!
Recently, global interest in fine wine has been rising steadily in both the traditional markets of Europe and North America, which underpin the market for fine wines, and the emerging markets for fine wine of Russia, India and China.
Prices of 'blue chip' wines will increase dramatically because these wines are in increasing demand whilst their volume is finite: from their harvest date and their bottling, the quantity of these wines can only decrease, sometimes at remarkable rates, especially when the wine is mature enough to be consumed.
For many years I have known from direct experience advising on which wines to buy, that owning the physical stock of these 'blue chip' wines will produce great returns.
But for investment purposes this is not enough. The main issues remain 'what to buy?', 'where to store the wine?' and most importantly 'how much to pay?'. It seems that most wine investors to date have settled for so called 'investment advice' from wine merchants. Such merchants offer to place investors' funds into wine stocks - which the merchant already owns - meaning the investor pays the merchant's margin included in the merchant's price. Whilst I believe that most of the advice so given is based on following widely accepted investment grade stock, the key to successful investing is the purchase price. This will determine the time it takes to make a decent return.
Wine is perhaps the only asset class represented by a perfect inverse supply curve - the further you are from the harvest date and the bottling of a wine, the less stock of that wine is available as more and more bottles are consumed
Many great wines sit on lengthy price plateaux during their period of maturation. The influencing factors are often based on whether or not the wines are being written about in the world press.
For example, the now all bottled 2003 Bordeaux are currently being shipped to clients and are being reassessed by the critics. The effect is an increase in sales activity of the 2003 vintage and an increase in the price of those wines that are being reported as being of greater quality than was first considered during their en-primeur (ie pre bottling) stage. From an investment point of view, why tie-up your capital during a price plateaux?
Then there is the en-primeur issue. Competing in the press for column inches is the story of the 2005 Bordeaux en-primeur campaign. The Chateau have all cashed in on the significant hype and raised their prices by as much as 80% on previous vintages.
The whole story, however, is that in addition to raising prices, the Chateaux are severely restricting the volume offered in their opening Tranche. This creates a further escalation in price as buyers scramble for the few available cases. The rest of the harvest is sitting in reserve and in theory will be released at a new high price once a new market level has been reached.
But what if you fight for and manage to acquire these wines at such a high price only to find that the next (2006) harvest produces an equal quality vintage? Securing stock of such great wines early in their life has historically produced great returns. But the time scale is the real issue and in the investment world investors are always conscious of annual rates of return on their capital.
A price plateau for immature wines is almost a certainty - and probably now made more so by the huge prices being asked for the top wines today. The question is how long will the plateau last and should you own un-remunerating stock during this period?
Investors have rarely been offered wine portfolios managed by truly independent fund managers and there have been very few pure wine investment funds. As wine matures as a viable asset class, more funds may become available. These will be split between low risk funds - investing in predominantly blue chip Bordeaux Cru Classé from the best vintages, and high risk funds - incorporating new world wines and wines that are performing well in tastings and thus potentially creating a following.
Since 20th March 2006, the Liv-ex 100 Index (Live-ex is the international fine wine exchange) has been quoted on Bloomberg, alongside the indexes of the world's main investment markets. This is a clear indication that whatever our individual feelings about wine as an asset class, the financial markets are, for the first time ever, being provided with performance data that will bring fine wine into the public domain as a viable and sustainable vehicle for capital growth.
Background note: The Wine Investment Fund collects Subscriptions periodically, with the current 2006(3) Tranche open for subscriptions until 31 July 2006. Subscriptions are invested in wines primarily from the Bordeaux wine region of France and are held for approximately 5 years before being sold and the proceeds returned to Subscribers.
Each Tranche's wines are held separately, with the wine stored securely in a UK government bonded warehouse, covered by full replacement value insurance. The Wine Investment Fund's Directors are Rodney Birrell, Andrew della Casa and Peter Lunzer, who is the fund's Wine Adviser.
The fund's objective is to double Subscribers' money every 5 years. As at 30 June 2006, the performance of the Fund's portfolios of its existing Tranches are: 48% (since August 2003), 51% (since August 2004), 25% (since August 2005) and 6% (since December 2005).
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