The Case for Fine Wine Investment – Part 1 of 2

Case for Fine Wine Investment

 

A collection of fine wines can be classified both as a safe haven and a secure asset to store, preserve and grow wealth. Wine today is not just an object of enjoyment, but is considered an alternative asset class unto itself.

Fine Wines – Ripe for Investment

Many of the world’s greatest vineyards are situated on the Cote d’Or in Burgundy and the banks of the River Gironde in Bordeaux, according to industry specialist, Cult Wines. Wines most prevalent on the secondary fine wine market, those that constitute the investment grade market (less than 1% of fine wine produced), are also the wines in shortest supply.

Consider the longevity of the great wines from places such as Bordeaux, many over 50 years old, combined with the fact that they mature and improve in the bottle with age while also becoming increasingly rare as they are consumed.

Aarash Ghatineh, head of Cult Wine’s Private Client Sales, recommends that an ideal wine portfolio should adopt the following composition:

  • Bordeaux 65%
  • Burgundy 20%
  • Italian 10%
  • 5% (Champagne/New World).

Bordeaux dominates this spread due to benefits it offers in terms of liquidity. A decade ago, it is perhaps fair to say that Bordeaux would have had a ‘bigger piece of the cake’. Bordeaux’s steady decline from its broad-based peak in June 2011 has led investors to reappraise the total exposure to Bordeaux for their wine holdings.

New York based wine seller, Morrell, indicates that while the Grand Cru wines of Bordeaux and Burgundy have long dominated the scene, wines from other regions of France have gained traction, including the Rhone Valley. Italian wines can be good investments such as the Super Tuscans, Brunellos, Barolos and the Barbarescos of Piedmont. The USA is considered the New World’s dominant force in investment wines most coming prominently from California’s Napa Valley and Sonoma County, which are rivalled only by Australia.

Price Factors

The criteria that affect a wine’s value go well beyond the basics of being a good vintage from a historically well-known producer.  The best approach by which to judge a wine’s value is to combine both quantitative and qualitative analysis in seeking out opportunities of when and where to buy an undervalued wine or to spot wine which is in line for price growth.

In addition to the brand and the history of the producer, the quality and the score given by wine critics are crucial. Consider the vintage production and its supply and availability on the market. One should follow the historical price performance including any comparative price analysis.

It is important to follow market trends and demographics affecting the wine’s demand. One needs to consider the drinking window of a wine – that is – what time period represents its ideal consumption. Scheduled re-scores are also worth following. There is a plethora of statistical data available on the market as it becomes ever more mature.

The bottle’s fill level can communicate a great deal about the condition of a wine’s contents. A lower fill level means more air in the bottle, and an accelerated ageing process. The term for lost (or unfilled) volume is ‘ullage’.  Low fill levels can indicate a natural evaporation through the cork, poor bottling controls, faulty or deteriorating corks, etc.  While a gradual process of oxygenation can add complexity and finesse, fill levels lower than expected for a wine’s age can lead to a reduction in the wine’s market value.

Growth Drivers and Expected Return

The luxury aspect of fine wine has opened doors to a new breed of wine collectors over the past 5-6 years. Due to increasing wealth and a proliferation of high-net worth individuals in Asia Pacific, specifically mainland China and Hong Kong, a new demand for fine wine has further exacerbated the already existing supply/demand imbalance both underpinning this market and placing greater pressure on prices. This imbalance is expected to continue over the next decade according to industry experts.

Consider results for Sotheby’s global wine auctions for 2014:

LOCATION TOTAL SALES 2014
Hong Kong£17.5M
London£9.3M
New York£12.8M
Total£39.6M

Meanwhile, Christie’s international sales for wine totalled over £33.4 million for 2014. Beyond the top two are a number of mid-tier and smaller auction houses, some whose sole focus is wines and spirits, making the total global wine sales at auction over £100 million.

The pinnacle of all Bordeaux investment wines is the ‘First Growths,’ famous for their reliability and excellence year after year. These wines provide stable returns in the region of 10-15% per annum according to Cult Wines.

The very best wines are highly restricted in supply and therefore the supply; thus their supply curve is almost perfectly inelastic. Additionally, demand is constantly rising and this will continue to be a key factor that places further strain on price.

In fact, Silicon Valley Bank, which services the wine industry, indicates that sales growth finished strong in 2014 and they are predicting a breakout year of growth in fine wine category in the 14%-18% ranges this year.

In the longer term, global demand for wines is forecast to expand 1.1% p.a. between 2015 and 2019, according to a September report, Global Wine Market to 2019, with China, Japan, Spain, Turkey and the US considered the highest potential markets in the coming years.

About the Author:

Shelley Goldberg is a frequent writer, speaker and panellist who possesses a deep knowledge of commodity investments, portfolio and hedge fund management, along with expertise in physical and financial trading, hedging and asset allocation.