Fine wine was not immune to last year's downturn. The unparalleled economic circumstances coupled with the collapse of Lehman Brothers spearheaded a massive sell-off of wine, which saw the value of some of the world's top selling Bordeaux plummet by as much as 40 per cent. However, since the downturn sparked in October 2008, the market for quality wine has enjoyed a rapid turnaround with the wine industry's leading benchmark, the Liv-Ex 100 Fine Wine index, enjoying some of the biggest rises since mid-2007.
"The performance of fine wine over the past 15 years has earned it a place alongside gold, equities, bonds and other assets in an investment portfolio," says Andrew della Casa, director of The Wine Investment Fund. "Having recovered from last year's setback, the market is on target to produce a return of 17-20 per cent for 2009."
Mr della Casa adds that aside from the downturn in 2008 which saw all major asset classes nosedive, studies show that the correlation between wine and equity returns is generally very low. "This means that including wine as part of a diversified portfolio is likely to lead to greater overall stability of returns," he says.
While the traditional markets of America and Europe are slowly recovering after being out of the market for the past 18 months, Asia has picked up the slack and is leading the demand for investment quality wines.
Simon Staples, director of sales and marketing at Berry Bros. & Rudd, Britain's oldest wine merchant, says that over the last year there has been an enormous demand for fine wine from the East, in particularly China and Hong Kong. "Not only is wine being traded for investment, but it is also being consumed, and in quite significant quantities. For investors this is good news as a lot of these wines weren't going anywhere for the last four or five years - apart from moving from investor to investor," he says.
Returns on wine investing are influenced first and foremost by demand - good vintages attract more buyers and since there is a strictly finite quantity (reducing as the wine is drunk) prices tend to rise. Given that Asian consumers are predominantly buying to drink, the demand and supply dynamic remains very much in place.
Mr Staples believes that Asia is where the future lies and says that "we have hardly touched the surface of China's potential demand. Prices have risen significantly, with the cost of Chateau Lafite Rothschild, a favourite among Asian consumers, climbing by about 30-50 per cent over the last year."
Another vintage increasingly finding favour among Asian buyers is Chateau Mouton Rothschild, a top performer over October as some buyers moved their allegiance from Chateau Lafite. Mouton prices were up around 10 per cent in a month for the best 1990s vintages.
"Even if we go through economic turmoil as we have done - if you buy the best wines from the best vintages, provided you can afford to hang on to it, fine wine is a resilient investment. It was one of the last commodities affected by the adverse economic conditions and has been one of the first to recover from the downturn," comments Mr Staples.
The problem with physical investing
While there certainly is an enticing argument to be made for physical investing, especially for those in the know who can back their individual knowledge, there are significant downfalls. Firstly, you can't just put a Chateau Lafite in your kitchen wine-rack; fine wine demands careful storage, with even temperatures and humidities, and most homes do not have the right conditions.
In addition, if you buy the wine you have to pay duty and VAT on the wine when it is imported - and of course there is the temptation to drink your investment if it is held in the cellar. Even if you can resist the temptation, merchants and auction houses will charge significant commissions for selling the wine on.
An alternative is to ask a merchant to put together a portfolio and keep the wines 'in bond' which means that duty and VAT do not need to be paid and the wine can be kept in good storage conditions. But merchants can face a conflict of interest in the choice of stock that they buy for you, the prices which they charge you for it – and subsequently the commissions they charge for selling it.
That said, an attractive tax advantage attached to investing in wine is that under UK tax rules, fine wine has generally been treated as a 'wasting asset', which means it is expected to have a life of less than 50 years and any capital gains generated do not attract capital gains tax (CGT).
What about wine funds?
If you want to buy and store wine yourself you need a great deal of expertise and the right infrastructure. But there are alternatives, such as investing in a wine fund.
The Wine Investment Fund (TWIF), set up as a limited partnership in England, requires a minimum investment of £10,000, only buys stock that is at least four years old and predominately chooses wines from the finest 40 Bordeaux chateaux. TWIF aims to generate double-digit annualised returns, and in order to achieve this, each portfolio needs to generate approximately 1.2 per cent compound growth per month to achieve the target after fees and expenses. There is a 5 per cent subscription fee and a 20 per cent performance fee at maturity.
During October, TWIF significantly outperformed the main fine wine indices with an average increase of 2.3 per cent across all its portfolios after all fees and expenses. The fund anticipated the increases in Mouton and has held some large holdings of the wine. "We expect further sharp increases in prices for this Chateau in the coming months. Stocks of the maturing wines are becoming scarcer as they are drunk," comments Mr della Casa.
While to date there have been very few pure wine investment funds, as wine becomes a viable asset class, it is expected that more funds are likely to come available. The advantage of investing in funds, such as TWIF, is that the wine is stored under the correct conditions in a UK government bonded warehouse and is insured at replacement value. "In addition, wine held in a fund can qualify as a Sipp investment - but loose bottles in your cellar will not," adds Mr della Casa.
Finally, it is important to remember that because wine itself is not a regulated asset, wine investing is not regulated. The manner in which a fund that invests in wine is sold, however, is regulated.
MORE ON WINE...
The Wine Investment Fund: http://www.wineinvestmentfund.com/