Some people like paintings and antiques, for others it’s vintage cars and stamps. But if you, like the author Ernest Hemingway, believe that “wine is one of the most civilised things in the world…and offers a greater range for enjoyment and appreciation than, possibly, any other purely sensory thing”, you might perhaps want to think about taking a look at this alternative asset class.
But there’s a big difference between enjoying, sharing and learning about wine and actually trading the stuff with a view to making a penny or two. That’s why fine wine investing has largely been the preserve of wealthy individuals and professionals. However, the internet is making fine wine trading increasingly accessible to ordinary folk. Online exchanges linking up buyers and sellers and interactive portfolio management tools have made it easier to keep track of your holdings and simplified the buying and selling process. So, with equity markets looking increasingly toppy and interest rates on savings still miserly, it might be worth diversifying your portfolio with a splash or two of Premier Cru.
Use technology to cultivate returns
One of the biggest obstacles to investing in wine is finding the time to do so. Research isn’t as widely available as with shares, pricing is fuzzy and the buying and selling process can be horribly complicated. However, that’s changing, largely thanks to the internet, but also wine lover and technology geek Nick Martin, who was so frustrated at the complexity of it all that he decided he could do better.
“I found it hard to keep the record of my wines up to date, while the process of self-valuation and evaluation was hopelessly time-consuming,” he explains. “It frustrated me that the status quo commonly meant waiting months before receiving payment for wines sold on my behalf. As a consumer you couldn't store wine in a professional bond (wine warehouse) of choice and trade directly into the secondary wine market. Collectors had to go through the traditional channels such as auction houses and brokers.”
Twenty months later, in July 2013, he launched Wineowners.com, an online trading exchange and portfolio management tool all wrapped up into one. It is slowly opening up the secondary, peer-to-peer wine market to consumers like you and I and is, if you like, becoming the Hargreaves Lansdown of the wine trading world, as it builds up its client base. Unlike some other exchanges, Wine Owners lets you sell any wine you own, provided it is housed in an accredited storage facility. Subscribers can also keep an inventory of their entire collections – including plonk they’ve got in their own home – on their online portfolios. That’s helpful seeing as consumers commonly lose track of exactly what they own and where it’s stored. The website also offers a wealth of research, pricing and other tools an amateur might find helpful, as well as background checks on traders.
Pricing
Like any other asset class, wine portfolio management requires pricing, charting, reviews and scores (the equivalent of analyst reports), drinking dates, producer profiles - everything that self-directed investors take for granted in mainstream investments. While much of this is increasingly available online, pricing can be tricky. Brokers such as Berry Brothers will price your wine for you and there’s also a huge amount of data on Wine-Searcher.com. However, bid-offer spreads can be huge, as the market is controlled by merchants, who naturally want to buy low and sell high. Wine Owners also offers pricing information and uses a built-in algorithm that analyses all the raw data and takes into account factors such as vintage, availability, and outliers.
Sour grapes
Remember, fine wine is a high-risk asset class and, unlike equities, the market is unregulated, so as an investor, you have no recourse to compensation. When buying fine wine to lay down, you’ll want to go through a reputable broker, such as Berry Brothers or Wine Owners and only purchase wine stored in bonded warehouses. After your offer is accepted, you should inspect the condition and provenance of the wine and ask for a report from the warehouse or other third party. If you’re not happy with it, you don’t have to go through with it. As a buyer, you should reserve the right to withdraw if the goods don’t match the description.
Plump returns and Bordeaux blues
Long-term returns from fine wine can be very good indeed and volatility is not necessarily materially worse than in equity markets. Comparing the performance of the FTSE 100 to the Wine Owners 150 benchmark index (below) shows that top wines have performed well over the past eight years, assuming a diversified range of holdings. The prices for the very best wines have risen by an average of over 10 per cent a year over the past 25 years and Bordeaux and Burgundy in particular have served up pretty juicy returns.
More recently, however, prices have been rather volatile. Fine wine enjoyed a bumper period between 2005 and 2007, but took a hit in 2008 and then in 2011, when a Bordeaux bubble that inflated on the back of Chinese demand peaked and burst. Some of those vintages bought at the top of the market around 2011 have lost a considerable proportion of their value, in some cases more than 50 per cent, and are very unlikely to regain former highs. For instance, in 2011 a bottle of 2008 first growth Château Lafite was selling for a £14,000. Today, it is valued at roughly £5,000.
That left a lot of investors out of pocket and has resulted in a greater interest in diversification. Many investors are now reappraising the role of red Bordeaux, particularly the First Growths, in their portfolios, and are looking at the fine wines of Burgundy, Rhône, Italy, Champagne and even the New World.
“Whereas before 2010/11 top red Bordeaux might have accounted for 90 to 95 per cent and more of all wine investments, these days diversification is seen by many as much more important as a hedge against volatility,” explains Mr Martin. “Like equities, the wine market is no longer one market. True, it is still dominated by Bordeaux, but think of wine like you would think of sectors in equity markets. Bordeaux might have been a dog performer of late, but Burgundy, Northern Italian and some Californian wine varieties have done very well and that speaks to the importance of diversification.”
New investment strategy
Along with diversification, the Bordeaux bubble led to a wider interest in rebalancing portfolios through the secondary wine market to recoup losses. Typically, you would buy a first release – en primeur -and wait for it to go up in value. But, if you bought the latest vintage today and sat on it for four years, it probably won’t earn you a good return, reckons Mr Martin. Instead, you might be better off finding value in back vintages in the secondary market. Similarly, if you bought Bordeaux at the peak of the market, it’s unlikely to ever get back to those highs, so it might be sensible to adopt a more active approach, selling out where money is not working hard and looking at areas offering better near-term and medium-term growth.
Top tips from Nick Martin:
Diversify. Just as with any investment class, spread your risks. A portfolio’s core will include Bordeaux given it accounts for such a large part of the fine wine market, along with components that may include Burgundy, Italy, Rhone, and California. Personal preferences or interests should quite rightly influence your portfolio. So for example if you are familiar with, and like, top Californians you might choose to buy Harlan, Phelps, Opus One etc.
Buy the best you can afford. Wines are stored in bonded warehouses, where they can be kept for years or decades without requiring tax and duty to be paid. It’s worth considering that, when buying wine for investment, storage charges of around £10-£12/ case per annum can disproportionately eat into the profits of lowest priced fine wine. You probably want to start with £4,000 to £5,000 and go from there. Perhaps £500 a case and 10 cases of well diversified wine.
Buy In Bond. London is the centre for fine wine trading. It’s a market that is truly global, and buyers span Asia, The Americas, Europe and parts of Africa. Storing fine wine in bond means not paying VAT and duty (capital gains tax) because it is classified as ‘wasting chattel’ by HMRC. That makes it much more attractive to a global audience. It also tells the buyer that the wine has been professionally stored its whole life, in a temperature-controlled warehouse, which helps establish good provenance – which is key to its value. The exception is older wines that nonetheless should have traceability of history.
Beware of cold-callers. Don’t buy wine from cold-callers. Typically these calls come from ‘wine investment companies’ who cold-call consumers with the promise of extravagant returns. In a regulated market many entities such as these would be open to accusation of mis-selling.
Look for value. Wine that has been very well rated but compared with peers in the same category look cheaper and better priced can offer value. Just like with shares, mispricing and intrinsic quality - in this case in the form of reviews – can lead to good returns. If you know a producer with a good reputation and you can get a decent allocation, that may also be worthwhile.
Timescale. An investment in wine should always be seen as a long-term proposition. Consider a minimum timeframe of five to 10 years.
