Few investments have the pleasurable upside of fine wine – that if it doesn’t make money at least it can be drunk.
However, the market has been dogged by controversy in the past two years, with the Luxembourg-domiciled Nobles Crus fund’s difficulties shedding an unwelcome light on poor valuation practices in the market. Equally, the price of some benchmark Bordeaux wines has also been falling since hitting a peak in 2011.
The problems of the Nobles Crus fund started early this year when rivals questioned its valuation methods. It is one of the few funds not to use independent valuation group Liv-ex and some suggested it was inflating prices and therefore its net asset value (Nav). The subsequent rush to sell out also revealed the illiquidity of the fund and the Luxembourg regulator was forced to suspend redemptions.
Nobles Crus’ difficulties coincided with a slide in the price of some Bordeaux wine, which is the largest market and most widely traded by fine wine investors. Between 2003 and 2011, prices of the most sought-after wines rose by more than 250 per cent as it became a store of value, but prices have fallen back subsequently as the slowdown in China has removed some of the wealthy Chinese buyers that had previously supported the market.
The problems with Nobles Crus and a number of other wine funds prompted the then-FSA to say that these types of ‘esoteric’ investment should only be promoted to those investors with an annual income of more than £100,000, assets of £250,000 or more or “extensive investment experience and knowledge”. As such, wine remains a niche asset.
Nevertheless, with many of its problems behind it, wine can still be a diversifying option in a portfolio. Matthew Tipping, fine wine sales manager at Berry Brothers & Rudd, says that there are a lot of variables in the price of wine and wine prices will have different drivers to share prices. “There is its provenance as a starting point,” he says. “Then as wine gets older and more is drunk, the price tends to rise.”
There are also signs that performance may be improving. The rise and fall of prices pre- and post-2011 was confined to top-end Bordeaux and the rest of the market has proved more stable. Andrew della Casa, director of the Wine Investment fund, says the market is currently well below trend and yet the supply and demand fundamentals remain favourable.
In general, investors have two main options when investing in fine wine – to invest through a fund or holding direct. Mr Tipping says that in both cases it is worth seeking out an established player, who will use industry best practice for valuations (usually valuing independently through Liv-ex) and storage. Although most of the weaker players, who were drawn in by the high prices in the run-up to 2011, have now left the market, it is still an area that can attract chancers.
Mr Della Casa points out that investing in a fund has advantages. The open-ended Wine Investment fund has run for 10 years. It invests in just 35 Bordeaux chateau (out of 10,000) and is looking for the highest return for the lowest risk. The team, which has an investment rather than wine background, manages areas such as liquidity risk and will sell wines that have moved to higher valuations.
The group also offers EIS structures, which can help with capital gains tax (CGT) and inheritance tax planning. Mr Della Casa says: “Wine is among the lowest risk asset classes. Volatility on an ongoing basis is lower than asset classes such as shares or commodities. Our fund has given an average return of 10 per cent per year for 10 years.”
That said, Mr Tipping believes there may be CGT advantages to holding direct over a fund. Wine is considered a ‘wasting asset’ for CGT purposes and is exempt, whereas profits made on a fund may still be liable. Berry Brothers & Rudd only offers direct holdings in wines and offers a cellar plan, starting at £250 per month.
There are also alternative direct offerings now available. The website WineOwners.com acts as a platform for wine buyers and wine sellers to trade. For individuals, it operates as a standard equity or bond platform might, providing information on wine, current pricing and reviews.
Nick Martin, founder, says: “Some have seen they can make money out of wine, others may be buying some to drink.”
He says that Bordeaux is still the most readily traded wine, with the greatest liquidity, but Burgundy has done well recently because of its relative scarcity and there are other small producers in Piedmont that have also got a very strong following.
Wine will never be a core holding, but as a diversifying asset, it has good credentials. And if investors buy direct and it doesn’t work out, it can always be served with next year’s Christmas lunch.
Cherry Reynard is a freelance journalist
