Fine wine could be the best stock option of your life

5 years ago - Published in Alternative investments

Now given where the traditional financial markets are trading right now – from the FTSE 100 to the S&P 500 as well as gold – it would seem appropriate to consider alternative asset classes – if only for protection. Besides fine wine investment, one could include art and luxury cars in the mix.

History shows the Romans brought the first vines to France in around 500 BC and planted in Bordeaux around 50 BC. While the drinking and worshipping of wine dates back longer than written history itself and is said to have emerged with civilization itself from the East, investing in wine is a more recent phenomenon – but not entirely new.

That said, only recently have IFAs (Independent Financial Advisors) been comfortable to include wine in their standard selection and investment choices. Returns for some fine wines produced in very limited quantities over the past few years have been pretty stellar – driven by an interest in exotic assets generally. But if one wanted play the investment-grade wine market, the typical entry level is around the £10,000 (c.$12,700) mark.

Just over a decade ago in March 2006, Latour and Lafite Bordeaux reds from 2000 were fetching the highest auction prices in London since the landmark 1982 vintage, while the 2000 Margaux, Haut-Brion and Cheval Blanc were the most expensive at the point in time since 1990.

More recently in October 2014, 114 bottles of Romanée-Conti Burgundy went under the hammer at Sotheby’s in Hong Kong for £1,035,000 (c.$ 1.314,450) – equivalent to around £9,800 (c.$12,500) a bottle. At the time it was the most expensive lot of wine ever sold. Technically the highest price ever paid for a bottle of wine was $500,000 for a Screaming Eagle Cabernet 1992. However, the price paid was for charitable purposes.

Today about fifteen Chateaux are regarded as the best for investment purposes, with each producing around 10 vintages said to be worth buying. Pundits out there suggest that potential investors should purchase the Bordeaux Grand Cru Classés, which account for the largest part (c.75%) of the investment-grade market for fine wine.

Over many decades, first-growth Bordeaux wines such as Château Lafite Rothschild, Haut-Brion, Mouton Rothschild, Margaux and Latour have generated pretty sound investments returns. Added to that leading Burgundies, Rhones and wines from the Champagne region have performed nicely too.

Among the factors contributing to fine wine’s strong recent performance and advantages to investing in the sector, the following points can be considered:

  • Finite supply of fine Wine: Like all luxury goods, fine wine is produced by a chateau or domain in finite quantities in specific regions, which prevents supply from fluctuating significantly from year to year. The quantity then diminishes over time as the wine is consumed, which in turn leads to limitations on availability and prices can subsequently rise.
  • Growing Demand in Emerging Markets: Burgeoning wealth in emerging markets, especially in China, South East Asia and parts of Africa, has driven the market for fine wine higher and will continue to do so in the coming years.
  • Weakened Pound: With sterling sinking following the Brexit decision and on-going political uncertainty, fine wine, which is priced in pounds, has become more affordable than ever for foreign buyers.
    Tangible Asset: Wine is a physical product rather than just a certificate. If the worst happens then the wine can always be drunk.
  • Potential Returns: If the correct wines are bought at the right time and at a good price the decent returns can be made. As a rule of thumb, 8% to 12% compound.

Given the robust defensive qualities of fine wine versus equities, a recent new report has indicated that 66% of financial advisors believe that certain investors should “consider diversifying” their portfolio by investing through fine wine, citing its “low correlation” to traditional asset classes (75%) and strengthening demand from China and other emerging markets, with limited supply (57%) as key reasons for increasing exposure.

In its recent report, ‘Fine Wine versus Global Equities’, analysts at London-headquartered Cult Wines, with offices in Hong Kong and Singapore and over £95 million (c.$108 million) of assets under management, also showed that during periods of economic deterioration fine wine compares favourably to the performance of global equities.

Indeed, over a 10-year period from December 2008 to December 2017 the Liv-ex Fine Wine 1000, an index tracking the prices of 1,000 wines from top wine-producing regions around the world, experienced less than a third of the volatility of the MSCI World Index, providing investors with greater consistency and more stable returns.

Over this December 2008 to December 2017 period analyzed, the volatility of the Fine Wine 1000 was significantly lower than the MSCI World Index – at 4.997% versus 16.28% – and the MSCI Emerging Market index. The result showed that the LIV 1000 has a 3-year standard deviation as a low as 4.9%, while the MSCI Emerging Market index has a 10-year standard deviation of 22.28%.

According to the research from Cult Wines, nearly 7 in 10 (69%) of advisers expect their peers will become increasingly familiar with the role that fine wine can play in an investment portfolio. However, what will be key to boosting awareness – cited by 82% of advisers – is “greater availability” of credible performance data comparing fine wine to traditional asset classes.

While fine wine has long boasted a reputation as a defensive asset, Cult Wines’ study demonstrates the extent to which wine can retain its “diversification benefits” even amid broader economic deterioration. This analysis shows that fine wine remains a viable alternative asset class because of its distinct defensive qualities.

Tom Gearing, Managing Director of Cult Wines, said: “With global equity markets potentially facing the end of a record bull market, financial advisers are increasingly recognizing fine wine’s ability to help investors avoid downside risk. Our report shows how fine wine can act as a defensive asset class in times of economic crisis but also benefit from periods of economic growth.”