This is the first in a series of articles on fine wine as an investment from experts The Wine Investment Fund. Future features will look in more depth at particular aspects of this fascinating market.
There is nothing new about fine wine as an investment. Ever since wine was first bottled under the ‘brand’ of the château that produced it (Haut Brion in the 1660s, referred to by King Charles II as ‘Hobriono’ and Samuel Pepys as “Ho Bryan”), connoisseurs have sought out the finest names and been prepared to pay escalating prices for them.
The following 350 years saw slowly increasing sophistication. The first wine auction took place at Christie’s in 1766. However, it is only in the last ten years that the market has reached a level of maturity which has made it a genuine ‘asset class’. Today, the fine wine landscape includes properly constituted investment funds, a 24/7 online stock exchange and a wealth of data and analysis.
Unique characteristics of Fine Wine
The truly unique characteristic of a specific fine wine as an asset is that its supply tends naturally to diminish over time as the wine is drunk, thereby pushing up the price. However, fine wine also has several other features which make it attractive as an investment:
- While supply tends to fall, demand tends to rise, for two reasons. First, growing global wealth: in recent decades consumers from the USA, Japan, Russia, China and other economies have all entered the market for fine wine. Second, as a fine wine matures it improves in quality and therefore becomes more sought-after.
- It is a physical asset. Like gold, it acts as a hedge against uncertainty and its value cannot be eroded by inflation. This is particularly interesting when global markets are insecure: for example, in the financial crisis of 2008 and, more recently, following the UK’s vote to leave the EU (discussed further below).
- It has lower volatility (i.e. lower risk) than equities, gold and oil.
- In most market conditions, fine wine has a low correlation with the returns from other asset classes, meaning that a holding within an investment portfolio provides diversification, reducing overall risk. The correlation between the longest reliable wine index, the Liv-ex Investables, and the FTSE 100 is just 4% – and this data goes back to 1988.
- Despite this low volatility and low correlation, fine wine has shown relatively strong returns. The annualised return of the Liv-ex Investables, is 10.5% since inception in 1988. Over the same period the comparable figure for the FTSE 100 is 4.6% and for gold 3.8%.
How to access the market
While the above features suggest that fine wine can be an attractive asset, it can be intimidating to access. It has sometimes hit the headlines for the wrong reasons, with not all market participants being reputable. Therefore, any entity, fund or merchant, to whom you entrust your investment must be thoroughly researched. It should have a physical (not virtual or serviced) office; above all, avoid cold callers or unsolicited mail. It should take physical possession of all wines purchased in a UK Government authorised bonded warehouse, fully insured at replacement value. All costs, including the buying and selling of wine, and of redeeming and managing the holdings, should be clear and transparent at the beginning of the process and you should receive regular, independent valuations.
Even using reputable dealers, the unwary investor can often face very high transaction costs. Many merchants will take a commission of at least 15% (and sometimes more) on any sale, while auctions will take an even higher cut. There is, then, a risk that an investor does not benefit fully from any market uplift and suffers disproportionately from a downturn. This can be mitigated by ensuring that the interests of the fund manager or investment advisor are aligned with those of the investor: for example, via a transparent fee structure which has lower entry, management and exit costs but compensates with an element of performance-related reward.
The market today
Where is the market today, and what we might expect for the future? There are, of course, no crystal balls, and market timing is not as critical to fine wine returns as it is in some markets. However, the current position is intriguing.
Following the bull market of 2009-2011 (caused largely by the emergence of China as a major fine wine consuming nation), the next four years saw a long and deep correction. However, prices stabilised in 2015, and the first half of 2016 has seen the beginnings of an upturn: the Liv-ex Investables index was up 9% in the first six months of the year. However, as the graph below shows, prices are still well below their long-term trend level.
Moreover wine has reacted well to the result of the UK’s vote to leave the EU. Fine wine is predominantly a sterling-denominated market, and the fall in sterling of 10%+ against all major currencies has made it substantially cheaper for buyers based overseas. That, and its defensive nature as a physical asset in times of uncertainty, caused a surge in demand. As a result, prices have risen some 8% since the referendum.
A legitimate asset class for investors
Fine wine has matured into a legitimate asset class. Though it remains an ‘alternative’, wine has many of the features of a mainstream asset including a well-developed exchange and investors of all sizes from large institutions to private individuals.
Wine has a number of promising characteristics as an asset, and the historical data shows that these have borne fruit in reality: returns have been high relative to, for example, equities, gold and oil, with minimal correlation, while volatility has been lower than for these assets. Put together with the current attractive valuations, there appear to be strong arguments for adding a small proportion of fine wine to an investment portfolio.