Wine investing is seen as a diversifying element in a portfolio, with returns that are relatively uncorrelated to traditional investment markets.
But with volatility at unprecedented levels in the past five years it is no surprise wine markets have felt some of the upheaval.
This was clearly demonstrated in the second half of 2011 when the Liv-ex 100 Fine Wine index, which represents the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market, fell by 21.5 per cent.
Meanwhile the demand for Bordeaux First Growths, the most heavily traded commodities in the fine wine market and 68 per cent of the Liv-ex 100, resulted in rapid price movements in the past five years with individual wines such as the 2002 Lafite Rothschild seeing its price increase by
408 per cent in the five years to December 2011.
However volatility in the second half of 2011 means on a year-on-year basis the vintage fell by 9.6 per cent to December 2011, according to data from Liv-ex.
Chris Smith, analyst at The Wine Investment Fund (Twif), admits fine wine as an asset class had a difficult year in 2011, but over the medium to long term it has performed better, with the Liv-ex 100 returning 38 per cent over three years and 66 per cent over five years.
He adds: “In most circumstances movements in wine prices are essentially uncorrelated with those of equities. However, in times of extreme stress in the financial system wine can become caught up in the ‘dash for cash’. So in the past 25 years wine prices have seen only three significant falls: in 1998, after the Asian crisis; in 2008, at the height of the credit crisis; and last year, when concerns emerged about the possible collapse of the eurozone.
“This resilience means that the volatility of wine prices is low: Twif’s calculations show that historical volatility is approximately 50 per cent less than that of the FTSE, half that of gold and less than half that of oil.”
Richard Brierley, head of fine wine at Vanquish Wine, agrees the daily and weekly volatility in major financial markets does not get reflected in the day-to-day wine trading because the latter is not as reactive and not as liquid.
“But the drop-off in values that we’ve seen and the general downturn, especially in the eurozone, has pushed down the pricing that people are willing to pay for certain wines. What that has done essentially is take the speculators out of the market, and those that were investing and speculating on Chinese demand, Asian demand, and the fact that wine was being consumed and diminished in supply and demand was growing.
“It is healthy in the sense that it is a rebalancing, it’s a readjustment, and it takes us back to the fundamentals of how good is the wine, how good is the vintage, is it ready to consume now, is it being consumed, and what is the supply like left in the marketplace.”
To take advantage of the asset class there is the option of direct investing, including through a managed portfolio of a basket of wines, or through specialist investment funds.
Mr Smith says: “It remains possible to invest in wine by owning cases directly, but this usually involves suffering the margins (on both the buy and sell sides) charged by merchants, and makes diversification – and hence risk management – more difficult.
“Instead, investors – whether they are connoisseurs or simply like the risk/return profile of wine – are increasingly looking at funds, which are more likely to be incentivised to buy and sell at the best possible prices. Funds can also pool money across investors to provide diversification, and use their professional expertise to select the wines with the best prospects of future growth. While there are fees involved with funds, these are transparent and can often work out less than the more hidden transaction costs associated with direct investment.”
Mr Brierley agrees investing through a fund offers the benefits of being part of a larger group and so reduces personal exposure, but there are concerns about what market it is being sold into when the fund has to meet redemptions.
“The benefits of having one’s own managed portfolio could be that you own the underlying assets, and you have a bit more control.”
However he admits storage is a key issue, which has a “small cost associated with that it’s probably about £1 a bottle per year at the moment, so about £12 a case per year, and that excludes insurance”.
“The other costs that have to be considered are duty and VAT. Ideally one should not pay those costs if one is investing in wine for the medium term. These days that’s 20 per cent of the value so if you paid that you would have to wait for the market to move significantly to get it back.
“Wine investing is one of those things that people consider to be very easy, and it can be – no question. But the best results come from getting advice and talking candidly with someone who is in the market on a daily basis.”
Nyree Stewart is deputy features editor at Investment Adviser
