Will investment grade wine be good for your bank account?
This week I am starting a short series of articles on 'alternative investments'. My definition of 'alternative' is anything other than quoted companies, bonds and commodities.
I guess the first question that springs to mind is why bother at all with alternative investments when there are many thousand of funds and shares investing in conventional assets. The answer is diversification, and the assertion by supporters of alternative investments that they provide the potential to increase returns by exploiting their low correlation with other assets. In this article I'm going to take a look at wine -- I reckon it deserves a place in your portfolio, as well as at your dinner parties.
The economic rationale for investing in wine
First of all, let's be clear. Investing in wine is not a case of buying a few bottles of plonk and keeping them for a few years. In fact, less than 1% of the World's wine output is considered "investment grade" and serious investors don't stray much beyond the top 20 or 30 chateaux of the Bordeaux region. This is a rarefied world. Even Waitrose doesn't stock the stuff.
The 'compelling' case for fine wine is based on the fact that a good vintage can improve for well over thirty years. At the same time, stocks are limited, and shrinking (due to consumption). The theory is that if demand grows, or even remains stable, prices will inevitably increase. Demand is not only underpinned by existing drinkers but also the new rich of Asia, China and Russia -- all areas of strong demand for exclusive wines. This market is like premiership football players -- the more expensive they are the higher the demand.
Popular but insufficiently transparent
Wine collection has always been a popular hobby for the wealthy and the aristocracy, keen to obtain fine vintages and sell the surplus to fund quality drinking. In fact, Earl Spencer, brother of Diana, Princess of Wales sold about £80,000 of the family's wine cellars a few years ago. However, the problem for anyone wanting to simply invest in wine rather than drink the stuff has been the nature of the market.
Until a few years ago, this was an opaque market frequented by sometimes dodgy dealers and inefficient pricing. In addition, at this level, the quality of the product is paramount. Proving provenance and ensuring the wine had been stored in the correct conditions was not always straightforward.
An authoritative index
The Internet changed all that, enabling accurate pricing of wines and providing a level of transparency not available before. But probably the real break through was the formation in 1999 of the London International Vintners Exchange (Liv-ex).
Liv-ex is an international wine trading exchange for merchants. As part of its service, it keeps tabs on all the actual buying and selling prices of the world's most traded wines. The result? The Liv-ex 100, an index of wine prices. Bang up to date and accurate. Testimony to the increased interest in this market is the fact you can bet on the index via matchbet or trade wine futures at Intrade.
Liv-ex provides a wine portfolio monitoring tool, providing real-time prices for each wine in your collection. Bloomberg now publishes the Liv-ex index (LIVX100) on its site, in much the same way as the FTSE 100 or the Hang Seng.
How has wine performed?
Thanks to Liv-ex there is now an authoritative benchmark for wine investing. In the table below I compare the Liv-ex 100 index to the FTSE 100 excluding dividends, on an annual basis and for the eight-year period from 2001 to 2009.
| Year (to July) | Liv-ex 100 | FTSE 100 |
|---|
| 2002 | 10% | -23% |
| 2003 | -4% | -2% |
| 2004 | 1% | 6% |
| 2005 | 5% | 20% |
| 2006 | 58% | 12% |
| 2007 | 54% | 7% |
| 2008 | 6% | -15% |
| 2009 | -18% | -14% |
| 2001 - 2009 | 132% | -16% |
I think that indicates wine is worthy of consideration for a large portfolio. Especially because, as a wasting asset, it is not subject to Capital Gains Tax (CGT). But therein lies the problem: how to obtain reasonable exposure to this asset class? Currently there are two ways to invest in wine, neither is cheap and both have high minimum entry levels.
Buying direct
For reasons I have stated above it is impractical to buy at auction and store in your house, or even your cellar. Quality control will be inadequate for any future buyer.
The only viable direct route is therefore to buy from a merchant and have him store it for you until you decide to sell it. Reputable dealers include Berry Brothers and Rudd, Lay & Wheeler, Corney & Barrow, all of whom subscribe to the "Bunch" industry code of practice. The problem is that buying and selling commissions are 10% or more and the annual cost per case for storing is at least £10. Add to this the fact that a minimum realistic investment is probably £10,000 and you can see that direct wine investment doesn't come cheap.
Wine investment funds
There are several wine investment funds available. For example Davison's Vintage Wine Fund, The Wine Investment Fund and The Vinum Fine Wine Fund (interestingly available for inclusion within SIPPS). Unfortunately, minimum investment levels are £10,000 and in one case £250,000. In addition the charging structures are more akin to hedge funds than trackers. 2% per annum plus performance fees of 20% for hurdle achievement are not uncommon. Like commercial property, lock-ins and redemption periods may also apply. Oh, and unlike direct wine investment, the funds are subject to CGT.
For me, both these routes are far from ideal. Now if some enterprising fund marketeer from iShares, Lyxor or one of the other etf providers were to devise a low cost fund which tracked the Liv-ex 100 that would be a different matter. After all, if we can track hogs' bellies, soy beans and Asian property, why not fine wines?
Fancy a top up?
