35
SUMMARY
There is undoubtedly an investment
case for many alternative investments
and fine wine is no exception.
The low correlation of that market to
mainstream assets such as bonds and
equities gives fine wine significant
diversification characteristics for those
who concentrate the majority of their
investments in securities: at a time
of significant drops in the traditional
financial markets from 2008 and for
several years thereafter, the fine wine
market, particularly in 2009, 2010
and 2011, experienced a boom period,
providing returns to offset losses when
traditional financial markets crashed.
Conversely, most recently the fine wine
indeces have been on the decline and
other indeces such as FTSE 100 and
ACWI have been on the rise.
In fact, many of the “negatives” of the
fine wine market as an investment
arena - transaction costs are high, units
are not fungible, expertise is required
and valuations are difficult - are a
necessary component of the asset’s
status as an alternative and diversifier
(i.e., if you remove these barriers, it’s
no longer alternative and probably
becomes more correlated to the
mainstream).
The tendency of such non-correlated
assets to follow inflation, rather
than lose value when inflation rises,
is another general benefit of fine
wine as is the real probability, for
the right wines, of such increases
in value outstripping inflation and
providing, over the medium to long
term, impressive growth – Forbes has
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,
even taking into account the market
downturn in 2011. And for any wines
classed as wasting assets, those returns
can also be aided by favourable Capital
Gains treatment in the UK.
The restriction in supply, created by the
strict limitations on the amount of wine
considered of investment grade which
can be produced, as well as refining of
materials and methods to make better
wine, along with the consumable nature
of the asset, which matures with time,
leads to increasing rarity.
With a market still giving very
reasonable pricing on wines which are
highly likely to generate a significant
premium as they mature, such as
the 2009 Bordeaux, at a time when
the sector in general is also showing
signs of recovery, traditional western
buyers, particularly in the US, are
enthusiastically turning back to
Bordeaux. Emerging economies, such
as those in Asia, with their newly rich,
are also fuelling the increasing interest
in fine wine investing in general,
which promises to translate into price
increases.
Accessing the market has certainly
become easier in the last decade with
more information creating much more
transparency, although, investing
safely is still a challenge, given the
complexities of the product and the
nuances of the market. The last four
years have clearly demonstrated that
playing the fine wine market is not
without its risks, but that those who
use expert advice to identify good
value, acquire and divest at the right
times, diversify their collections and
understand that this is not a short term,
highly liquid investment, are likely to
learn more about the sector and more
fully profit from the potential benefits
on offer.
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