14
The right fine wine investment can
be a very defensive holding as it
has the capacity to remain stable
under difficult economic conditions.
Additionally, it has the advantage of
not necessarily following the general
trend of lagging behind the rest of the
market during economic expansion
because demand is consistently strong.
TANGIBLE ASSETS
The concept of spreading risk is clearly a
sound investment strategy and in times
of unstable stock markets, real assets
are attractive as they tend to change
in value independently of the core
financial markets. It is very unlikely that
the value of tangible assets will ever fall
to zero, except in the case of serious
damage, whereas shares can plummet
overnight and in 2008, even the security
of cash came into question as Northern
Rock, RBS and other high street
banks encountered serious issues.
INFLATION HEDGE
An “inflation hedge” is an investment
that will typically rise in value during
periods of above-average inflation,
thereby protecting the investment
from losing value in real terms.
During the recent economic
downturn, the value of cash was
further undermined by the actions of
governments and central banks whose
policy was to print money to stimulate
the economy thereby devaluing cash
and penalising savers. The erosion of
the value of cash makes tangible assets
more attractive as their monetary
worth tends to rise with inflation.
Rupert Robinson, Chief Executive of
London-based Schroders Private Bank,
sees the benefit of purchases of items
like these with HNWIs not just using
them to indulge an expensive hobby,
but increasingly using these items to
diversify a traditional portfolio; “Not only
are they tangible investments and an
inflation hedge, but they can diversify
exposure away from the movements in
traditional fixed income and equities”
6
.
There is no doubt that fine wine has
diversification benefits, but investors
should remember that prices are
broadly linked to the spending power
of the collector base, which may fall
in times of economic uncertainty.
This was demonstrated when
reduced expenditure on investments
of passion was noted in the 2009
issue of the World Wealth Report.
RETURNS
Clearly, a bottle of wine will not create
an income and its investment benefit
is as a vessel to accommodate capital
preservation and hopefully make
capital gains. As collectibles have no
positive cash flows (and in most cases
deliver negative cash flows due to
insurance and storage costs), valuing
these gains can be difficult, particularly
given their non-fungible nature.
Nevertheless, research and indices such
as Liv-ex do provide useful historical
data and an indication of trends, and
valuation services are available from
reputable brokers and dealers.
Modern portfolio theory suggests
that the less an asset moves with the
market, the smaller should be that
asset’s expected return. In recent
years, however, hobby investments
have offered the best of both worlds:
low correlations and high returns.
In the case of fine wine, in August
2014, Forbes reported that, between
1993 and 2013, a diverse portfolio of
investment grade wines would have
returned 13.62%, more than double
that of the S&P 500.
25
A word of caution
in relation to returns though – the last
four years have shown that significant
price corrections can occur, making fine
wine not suited to short term investors.
“Not only are they tangible investments and an inflation hedge, but they can diversify exposure
away from the movements in traditional fixed income and equities”
Rupert Robinson, Schroders Private Bank
PRICE INDICES,
$
TERMS
(2003-2013)
500
400
300
200
100
0
Sources: Art Price: Vintage Guitar magazine; Florien Leonhard Fine Violins; Hagi; Liv-ex; Stanley
Gibbons; Thomson Reuters; The Economist
29
*Including dividend income
**Underlying data not for publication
Q1 2003 = 100
Art
Coins
Violins
Stamps
The Economist Valuables index
Classic cars
Wine
Guitars
MSCI World
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
OBJECTS OF DESIRE
VS.
TRADITIONAL ASSETS
(2005-2013)
Source: The Coutts Index: Objects of Desire
Coutts Index
Global Equities
Global Government Bonds
200
150
100
50
2005 2006 2007 2008 2009 2010 2011 2012 2013
2005: 100, USD
