MONEY COMMENT
An Investment You Can Drink

By David Kuo (TMFDragon)
October 1, 2004

Here's a factoid to bore your friends and family with over dinner: a bottle of 1990 Cheval Blanc that cost £200 in 2002 now sells for £242 – an annualised return of 9%. By way of comparison, the FTSE during that period fell 12%.

Certainly over the last couple of years, certain fine wines have outperformed shares, prompting some pundits to suggest that putting your money into wine may be better than investing in the stock market.

In fact, if you had invested in a bottle of 1961 Chateau Latour at the "en primeur" or before-bottling stage, you could have achieved a return of over 15% per year on your investment! (A £1.50 bottle of 1961 Chateau Latour fetched £280 at auction 35 years later.)

The reasons why wine can be a good investment are manifold, though perhaps the main explanation is that production is limited. For example, the top thirty chateaux in Bordeaux only produce half a million cases of wine in any one year. Consequently, if the wine is good, the economics of strong demand in the face of limited supply will keep prices of those wines high.

The same may not be said of wines from other regions, though. As a result, wine experts will often advise investing in blue-chip plonk only. Furthermore, the market for these wines tends to be much more active, which creates greater liquidity (sorry!), so prices more closely reflect underlying demand.

Of course, it helps if you know something about the wines in which you plan to invest. Unfortunately, developing a "nose" for wine is not something you can achieve overnight. Furthermore, it can be advantageous if you like to drink the stuff too, which is no good for me, because I don't!

What's more, newbie wine investors often forget to take storage and insurance costs into account. So, unless you have a dedicated cellar with proper temperature-monitoring equipment, you'll need to pay for special warehousing. Obviously, this will trim your overall returns.

Additionally, just how long you should keep the wine is another area to ponder carefully. Good wines will normally take time to mature, though, at some stage, they will reach their peak and then start to deteriorate. If you are looking at wine from an investment perspective, knowing which wines will keep, and for how long, are both important.

Clearly, investing in wine is not that straightforward, and it is also worth pointing out that scams are not unheard of in the wine industry, too. In my view, unless you are happy to drink your investment at maturity, investing in shares of wine merchants may be a much better alternative. In February this year, shares in Allied Domecq (LSE: ALLD) were 431p - today they are up 9% at 471p!

David owns shares in Allied Domecq.