Is wine investing corked?

Since the onset of the banking crisis, and the subsequent debasement of many western currencies, there has certainly been an increased appetite for investments in physical assets, but many investors still remain wary about the market in fine wine. This is understandable given that the market is largely unregulated*, and there are limited avenues open to investors seeking redress from investment schemes that have either been mismanaged, or have been marketed using wholly unrealistic rates of return. And until relatively recently there was limited transparency in terms of pricing.

Avoid cold callers like the plague

Naturally, whenever we've written about wine investment in the past, we've impressed upon readers the need to exercise the utmost discretion when investing in such a niche market. After all, the market has attracted its fair share of rogue operators down through the years - so avoid cold callers like the plague. And there are numerous examples of businesses that floundered simply because of an imperfect understanding of the wine investment market - or perhaps even because they believed their own publicity.

Noble rot

Last February, the founders of Nobles Crus, a Luxembourg-registered wine fund, were under the cosh in the UK financial press over the unusual methodology behind the way its high-performing wine portfolio was being valued. The fund's client base was deemed large enough to create an internal secondary market, but changes to European law prompted a number of its institutional investors to sell their holdings in the fund, and a subsequent liquidity problem resulted in it being suspended from paying out redemptions or accepting new funds by the Luxembourg Commission de Surveillance du Secteur Financier.

Dwindling alternatives - the DIY option

Given that UK investors have lost upwards of £100m since 2008 due to the collapse of dozens of managed wine investment vehicles, we remain highly sceptical about the claims of many managers of wine funds. And we're not alone. In June, the UK Financial Conduct Authority (FCA) banned the promotion of wine funds and other alternative investments to the bulk of retail investors in the UK, while from 31 December fund managers running unit trusts will not be allowed to invest in wine funds and other alternative investments. And while we're certainly not suggesting that every wine investment scheme out there is badly administered, or is misleading with regard to expected rates of return, we believe that the bulk of retail investors would be best served by adopting a DIY approach to wine investment.

So, bearing in mind our general caveat, the fact remains that thousands of individuals in the UK and a surprisingly diverse range of organisations regularly profit through investments in this centuries-old industry. Indeed, the provenance of the trade is borne out by the fact that a number of Oxbridge colleges and many of the City of London's ancient Livery Companies augment their coffers through canny management of their cellars, while Berry Bros & Rudd - probably the UK's most famous fine wine merchants - has been plying its trade since the end of the 17th century.

So you can certainly start building your collection safe in the knowledge that you're entering a mature investment market, but therein lies the rub. The relative scarcity of the very best wines, coupled with the fact that vineyards and wholesalers have established relationships with long-term industry buyers, means that you will probably struggle to get hold of First (Premier Crus) or Second (Deuxièmes Crus) Growth vintages. This means it might take time, along with several purchase orders, before you start to receive preferential treatment from a trusted merchant, but there are dozens of accessible investment-grade wines from Bordeaux and Burgundy, together with a smaller number of iconic wines from other regions in France and beyond. You don’t need to gain access to leading châteaux such as Margaux or Latour to make a worthwhile investment.

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Liquidity in the UK

In terms of aggregate value, the UK is actually one of the three largest import destinations for Bordeaux wines, along with Hong Kong and China, but just how big is the domestic market? Well, in the next three years the retail value of the UK wine market is expected to reach over £9.1bn. Estimates vary, but of that figure perhaps £1.2bn is related to the fine wine market, with only around 15-20 per cent of the wines within that category deemed 'investment grade'. While it's certainly not a huge market, liquidity isn't really that much of an issue as long as you confine your investments to wines that have established a strong secondary market.

Nick Martin, founder of electronic trading platform wineowners.com, told us that "with the advent of self-serve exchanges and greater market transparency, top sought-after wines are reasonably liquid. If priced to market level an investor can expect to typically cash out within one to four weeks". That redemption period broadly ties in with the view expressed by James Sowden from AP Fine Wines, who added that "with all markets, there is a bid-offer spread. In fine wine this is usually controlled by the merchants, so the spread can be massive - 20 per cent or more - as they want to buy low and sell high, to the detriment of the investor".

The problem linked to bid-offer spreads partially explains why, historically at least, private investors found it difficult to access accurate pricing models that serve the industry. Although the application of digitalised technology has certainly improved matters on this front, investors still need to tread carefully. Our experts told us that they employ Wine-Searcher.com as their primary source because it has the broadest, most homogenous source of fine wine prices - sourcing lists from up to 25,000 merchants worldwide and updating every 30 hours.

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What to buy - and from where

The best-performing investment wines have historically been produced in the Bordeaux region of France. Production is underpinned by a classification system (Les Grands Crus classés en 1855) that established the five First Growth estates: Lafite-Rothschild; Mouton-Rothschild; Latour; Margaux; and Haut-Brion. Château d'Yquem has also been classified as Premier Cru Supérieur, but solely for Sauternes, a French dessert wine. As mentioned, it's somewhat unlikely that you will be able to gain immediate access to the limited output from these high-end châteaux, so you will probably look to establish your cellar with Second and Third (Troisièmes Crus) Growth wines.

While Bordeaux remains the epicentre of the fine wine market, there are other regional wines from Burgundy and the Rhône Valley that are highly sought after, and have demonstrated excellent rates of return. The relative scarcity of some top-grade wines from Burgundy and overwhelming global demand for wines by Domaine de la Romanée-Conti, Rousseau, Roumier, de Vogüé, to name but a small number of highly rated estates, have made top Burgundy a consistently good bet.

There are numerous merchants that will be able to advise you with regard to your collection, but always bear in mind that they're in the business of buying and selling, which means their commercial interests won't always dovetail with yours. A point to remember is that just because a wine is highly rated by connoisseurs doesn't automatically make it suitable from an investment perspective. So, in the first instance, you would probably be best served by contacting a long-established operator such as Berry Bros & Rudd, which offers specialist advice on purchase and storage, together with comprehensive pricing lists. In addition, a number of merchants with direct relationships with growers may offer a wine futures, or En Primeur, service, enabling investors to buy new vintages before they are bottled and released onto the market. On completion of barrel maturation and bottling, the wines are shipped to the UK and stored in a bonded warehouse under your name. As with the market in equities, there are a number of publications to help you along the way, such as Decanter and Wine Spectator, or perhaps the Wine Advocate.

Our discussions with industry insiders have convinced us that if you are contemplating adding fine wine to your investment portfolio there are a number of basic points that you need to take on board.

■ Do not buy too cheaply - otherwise storage charges (usually ranging from £8-£20 a year per case) will eat away at your profits. A realistic outlay would be £10,000 upwards, with a starting rate of £5,000. Investors need to factor in any costs associated with storage and commission when calculating net returns.

■ Never buy mixed or partially full cases, and ensure that your wine is delivered in its original wooden case, as this helps to confirm its provenance. In addition, check with the operators of the bonded warehouse that their insurance covers the full market value of the wine.

■ VAT and import duties are not payable while the wine remains in bond. When you eventually come to sell your wine, the proceeds will not generally be subject to capital gains tax (CGT), because HM Revenue classifies wine as a wasting chattel - an asset whose predictable life, from the point of view of the person acquiring it, does not exceed 50 years. However, HM Revenue also says that "whilst this definition would clearly apply to cheap table wine which may turn to vinegar within a relatively short period, even in unopened bottles, our view is that it would certainly not apply to port and other fortified wines which are generally recognised to have a very long storage life. If a particular bottle of wine is not a wasting asset, then any gain accruing on its disposal may nevertheless be exempt where the disposal proceeds for that single bottle do not exceed £6,000."

■ Investors should avoid what are sometimes termed 'cult wines'. Take expert advice on formulating a conservative buying strategy - and stick to it. There are innumerable examples of wines that have escalated in value wildly following a glowing review from critics - most notably, Robert Parker - only for prices to crash once the initial ballyhoo has worn off.

Some useful points on physical storage

■ Store your wine under your name within a reputable bonded warehouse. It's not advisable to hold the wine in a sub account in your name or an umbrella account. Merchants such as Berry Bros & Rudd will be able to arrange this for you, but failing that you could contact industry bodies such as the Wine Investment Association.

■ Ensuring the quality of your storage facilities is also vitally important given that fine wine needs to be stored within specific ranges for both temperature and humidity. Many established wine merchants have developed their own facilities.

An online option for investors

For retail investors looking for a viable trading platform, an online service called wineowners.com is worth a visit. Platform founder Nick Martin says: "the fine wine market has lagged far behind other many other sectors in the availability of online self-service and portfolio management tools". Moreover, most existing online sites serve the interest of the trade, rather than individual investors.

Wine Owners puts buyers and sellers together via a two-way trading exchange, allowing sellers to pick the price at which they wish to offer their wines, as well as enabling bidders for wine to set the price at which they are prepared to buy. In addition, the site provides information on wines and wine prices, with price charting tools to actively self-manage your trades. Members can see critical reviews and scores for a given wine - and check out producer information including data on how much is actually produced each year. What's more, as it is commission based there are no upfront financial obligations.