30
met. Depending on the type of fund,
returns may be based on the Net Asset
Value of the Fund, but are not likely to
kick in until a fixed period has elapsed,
e.g, 5 years, to allow the value of assets
in the fund to grow and make trading of
those assets profitable. This is the way
the Wine Investment Fund worked.
An EIS company or an EIS Fund may
also levy fairly similar fees, typically
charging a subscription fee of up to 5%
of subscription proceeds, an annual
management fee of 1.5% to 2% of the
NAV and a performance fee of 15% to
20% of net profits over a prescribed
high watermark. The Fine Wine
Investment Fund, an EIS Fund and The
Wine Enterprise Investment Scheme
Ltd, an EIS company, both fall within
these criteria.
A bond purchase may also involve a
small percentage of the subscription
amount. Usually any management fees
are included in the coupon or return on
offer, which may be available annually
or after an initial period.
Therefore, in terms of costs, the high
price of buying and selling fine wine is
one of the reasons why they should be
considered a long-term investment – the
value needs to have appreciated quite
significantly before the transaction
costs are covered. Nevertheless, an
equity portfolio may have a fairly high
turnover of stock in a similar long term
holding period, perhaps incurring a
similar amount of transaction costs
overall.
Additionally, it is perhaps rational
that a certain level of fees is applied
by brokers or fund managers as logic
suggests that each piece needs to be
identified, valued and purchased either
privately or at auction, using specialist
knowledge.
MONITORING INVESTMENT
PERFORMANCE
Liv-ex and Cellar Watch (using Liv-ex
data) are online tools which allow
investors to track the value of the wines
they own fairly accurately. However,
for a specific valuation which takes into
account condition and provenance,
the most accurate method of valuing a
collection is to ask an expert to provide
a valuation service and some, such as
Aston Lovell and Cult Wines offer this at
no cost.
EXIT
The timing of the exit will depend upon a
number of factors and for those invested
in a fund structure, there may be little or
no choice for the investor, although this
is likely to not be before the expiry of a
lock in period of several years.
For those with their own portfolio,
obviously the ideal is to await market
conditions and sell when prices have
appreciated and collectors’ interest
in the vintages in your cellar is
peaking. This can be difficult for the
inexperienced to judge and taking
professional advice to assess the
market as well as the optimal sales
channels – UK or overseas, auction,
online exchange or private sale – would
certainly be prudent.
PENSIONS
Fine wine has been described as useful
for retirement planning as it can provide
an effective store of long term wealth.
That said, for the purposes of Self
Invested Pension Plans (SIPP) and Small
Self- Administered Schemes (SSAS),
fine wine directly held, is considered
as taxable property and as such, can
give rise to significant tax charges,
although, if the asset is held within a
Genuinely Diverse Commercial Vehicle
or by way of shares in a company
which has these assets, it is allowable
without a tax charge. In terms of
directly held fine wine investments,
current market participants argue these
should certainly be considered by those
looking to find better returns than
those offered by their pensions after
new legislation which came into force in
April 2015 allowing potentially unlimited
drawdowns.
HOW MUCH TO ALLOCATE
Fines wines’ largely uncorrelated
characteristics certainly give them a role
in building a diversified portfolio, but
they should not form the fundamental
basis of that portfolio.
In terms of passion assets, in August
2014, Enrique Liberman, president of
the Art Fund Association stated that,
“the benefits of diversification are so
compelling, in fact, that collectible
assets should comprise between
3% and 8% of the typical investor’s
portfolio”
24
.
Indeed, the use of the various classes
of alternative assets is on the increase,
with a study conducted by Harris
Interactive of US HNWIs in 2014,
reporting that, “HNW investors using
alternatives, on average, have more
than one-fifth of their portfolios (22%)
invested in alternatives. One quarter
of these investors (26%) see their
exposure to alternatives increasing over
the next five years by an average of 2.9
percentage points. Another 66% believe
their level of exposure will remain the
same”
70
.
Fine wine as an alternative investment
merit a small allocation depending upon
the investors’ appetite for risk, comfort
level with the information available, and
capacity for loss.
“The potentially high returns
over the medium to long
term, are the types of figures
which have made alternative
investments, especially those
focused on assets which are
constrained by a demand/
supply imbalance and
hold an inherent value so
attractive to investors, savers
and retirement planners
worldwide”
Phil Gearing, Cult Wines
“Fine wine has been described as useful for retirement planning as it can provide an effective
store of long term wealth”
