Investing in Wine for Profit and Pleasure

There’s little doubt that these are interesting times for wine investors and collectors. Not least because the 2009 Bordeaux en primeur campaign is the strongest for decades, due to both the outstanding quality of the wines and the increased demand for investment grade wines from Asian investors. Following the financial crisis of 2008/9 the value of fine wine portfolios are steadily rising and, whilst wine has not proved itself to be an entirely recession proof investment class, it is on a bull run when compared to more traditional investments.

For the first half of 2009, the fine wine market remained static, only cranking into life in the summer, with the Livex 100 Index gaining 10% between July and December 2009.  This paints a prettier picture than the previous year when restaurants selling stock to keep afloat and fine wine funds de-leveraging became an unusual feature of the market leading to a sharp correction in the autumn of 2008.

If you got in on the game at the end of 2008, there were some great deals to be had on a number of blue chip investment grade wines. Anyone brave enough to buy would have picked up some great fine wine parcels at very advantageous prices.

However, for new investors looking to make a move, the last few months have been a golden opportunity. But the good news is that it’s not over yet. I believe that the next six months to a year could continue to provide one of the biggest investment opportunities that we have seen in recent times – possibly since the Asian currency crisis of 1998. This is because the strong 2009 Bordeaux en primeur campaign will encourage the price of back vintages to rise and the strategic purchasing of maturing investment grade wines should ensure solid returns.

In 2010 the market is on the move again largely thanks to the growing passion for fine wine in Asia and other emerging markets. Prices have firmed up and bid-offer spreads have narrowed considerably. At the same time, the Liv-ex 100 Index has risen 18.6% this year to date, with Chateau Lafite 1982 having gained 22% over 6 months.

In the midst of the downturn fine wine prices didn’t fall anything like as far as equities -  wine was one of the last asset classes to fall and was certainly one of the first to rise, continuing to show less volatility and making it a much safer bet for investors.

I believe there are two primary reasons for this impressive performance and its perennial lack of volatility. The first is that, in good times people will buy fine wine to drink. The fact that people are pulling corks means that the supply side reduces even more, thereby pushing up prices.

Secondly, in tough and challenging economic times, money flows into wine because unlike paper assets, investors regard it as safe haven. Rather like gold, wine is a tangible commodity which has historically shown good solid returns through thick and thin. Because of this, demand remains solid and cushions the effect of reduced consumption.

The result is that, even in the severest of downturns, wine doesn’t crash in the way that stocks and shares do. Fine wine prices may plateau and even dip occasionally, but it is not very long before they come back up again.

Steady and impressive returns

What all this points to is that the fundamental economics of wine investment remain rock solid. On the supply side, the great Bordeaux chateaux (which produce over 75% of all investment grade wine) cannot increase production – by law. In fact, in recent years, they have actually cut production in order to increase quality. Then on the demand side you have new markets such as Brazil, India and, of course, Asia where increasing numbers of wealthy buyers continue to drive up prices over the medium to long term.

Arguably the biggest growth market will be China, where we have hardly scratched the surface. What’s particularly interesting about many of the tycoon collectors in Asia is that they don’t follow a western model of connoisseurship. Rather than taking years to build up a fine wine cellar, these budding aficionados simply go out and buy the very best of Lafite, Petrus and Domaine de la Romanee-Conti to create an instant collection, all of which makes the Asian market incredibly dynamic. Further encouraged by Hong Kong’s abolition of all tax and duty on wine in 2008, this tendency is certain to continue and gather pace and good news for investors.

With Hong Kong now the global hub of fine wine auctions, 2010 could see sales topping $100m in the territory, overtaking the USA for the first time. At 2010 VINEXPO, I saw the Christies Liquid Gold Chateau d’Yquem Collection go for HK$8m, many of these wines having been originally supplied by The Antique Wine Company.

Buy One Get one Free

Like many of our international customers, almost all of our Asian clients are generally buying to drink as well as speculate. Buying more immature blue chip wines than you will require for your own consumption means you can trade an excess of mature wines for a handsome return and then re-invest in younger wines for profit and pleasure. The net result is that you can not only make money but also drink the greatest wines in the world at zero cost. Immensely more fun than trading esoteric financial derivatives or commodities like pork bellies, wine trading is quite an intoxicating concept which many wealthy collectors appear to like!

Fine wine tends to inspire passion: people love to own it, consume it, share it and voice their opinions about it; it’s rarely just about making money.

Which wines to buy?

Our advice is to stick to wines that you will personally want to keep and drink but are also of such premium quality that they will provide a healthy return on investment.

Nevertheless, there are certain investment parameters which you must stick to if you want to generate healthy returns. Bordeaux should represent a minimum of 75% of your portfolio/collection and investors and collectors should focus on its iconic 'trophy wines'. These include the First Growths, such as Lafite, Latour, Margaux and Haut-Brion as well as a number of ‘Super Seconds,’ such as Palmer, Leoville-Las-Cases and Leoville-Barton.  Merlot lovers should concentrate on chateaux, such as Petrus from Pomerol and Cheval Blanc and Ausone from St Emilion.

These particular chateaux tick all the boxes because they possess the requisite characteristics for investment grade status: history, track record, global demand, quality, longevity and consistent upward price movement.

Vintage is also vital. You should restrict your purchasing to the best vintages which, in Bordeaux, over the last fifty years would include: 1959, 1961, 1982, 1986, 1989, 1990, 1996, 2000, 2005 and 2009. I would recommend a good mix of vintages including a number of great older wines. 59 Latour or 61 Palmer are so rare and in such demand, they will continue to be as precious and sought after as the crown jewels.

And if you combine a top Chateau with a top vintage then the investment potential can be huge. On The Antique Wine Company blog at www.antique-wine.com/blog, in “Massive Lafite shipments to China rock global wine business,” I recently reported that three years ago we were selling Chateau Lafite 1982 for £10k per case. We now sell this for £40k and, as Chateau Lafite’s winemaker Charles Chevalier explains, there are two reasons for its success – firstly, they make the best wine in Bordeaux and, secondly, Lafite is easy to pronounce in Mandarin. The first of those two points would be acclaimed by most winemakers commenting upon their own wine, but perhaps the second has more merit than one might think.

Stick to the classics

In the past, more speculative investors have been tempted to follow short-lived trends by picking a number of up and coming ‘garagiste’ chateaux, which were favoured by the American Uber-critic, Robert Parker. However, in hindsight, as we predicted, many of these wines such as Valandraud haven’t gone the distance. In the last few years, they simply haven’t kept pace with the powerhouse brands like Latour and Lafite, which of course have the added advantages of global recognition and two centuries of tradition behind them.

Beyond Bordeaux, a mere handful of exquisite Burgundies qualify but the market for great Burgundy is much less liquid than claret, largely because the wines are produced in thimble-like quantities. However, look out for Domaine Romanee-Conti, Coche-Dury, Comtes Lafon, De Vogue and Armand Rousseau.

Elsewhere, the Rhone Valley also offers potential, Guigal’s trio of single vineyard Cote Roties (La Landonne, La Mouline and La Turque) can deliver some stellar returns. However, we would regard New World wines as a passion purchase, rather than financial investments. Few, if any, have the track record and credentials of the greatest French wines.

Time Frame

Investors should be looking to reap the maximum returns over a period of 10-15 years and avoid day trading with wine because the frictional costs are so high. Often the cost differential between buyer and seller is 15% or more so you need to keep the wine for a certain period to overcome that initial threshold. Returns can be interesting over a shorter (5-8 years) period by identifying and investing in wines which are a few years in advance of their optimum maturity.

My view is that a well managed portfolio should certainly provide returns of 15% per annum – and possibly even more. That should provide some very tidy profits and some very pleasurable drinking.

Stephen Williams
Managing Director,
The Antique Wine Company