One of the most popular, most talked about and most successful alternative investments has been fine wine. But is it a genuine opportunity for retail consumers or just the preserve of a few knowledgeable specialists?
Wine Investment
One of the reasons investors are so attracted to wine as an asset are the impressively high returns. Over the last ten years the Liv-Ex Fine Wine 100 index has enjoyed a 14.1 per cent compound annual growth rate. Last year, fine wines returned an impressive 40.5% and fine wine is continuing its strong start to 2011, with prices up 3.7% in February. The Wine Investment Fund (TWIF) predicts that the Liv-ex index will finish 2011 at around 407, a rise of 21% compared with its 2010 year-end level.
What drives this strong performance? Well, as with other alternative investments assets such as gold and farmland, wine is a tangible, physical asset and therefore supply is naturally limited. Only certain geographical locations can produce the fine wines that interest investors and great vintages only come along every so often. The wine improves in quality as it ages and in addition, supply actually decreases as more of the wine is opened and drunk. This creates what Andrew della Cassa, the founding director of the Wine Investment Fund describes as “a perfect inverse supply curve”.
On the demand side, a growing taste for wine in the Far East has been consistently supporting the price of wine. Fine wine has a tremendous “snob value” amongst the newly rich middle classes there and wealthy Chinese have been enthusiastic buyers of wine from the top vineyards. This demand does not look like slackening any time soon as the fashion for wine catches on and the economies in the Far East continue to grow.
As well as the strong performance, there are other key benefits to investing in fine wine. As with all of the alternative investments we have highlighted in this column, wine is not correlated with more commonly held assets such as stocks, cash, fixed income and property. This makes it a powerful tool for diversifying a portfolio and reducing the risk an investor faces by being overexposed to one particular sector or market. As a directly held investment there is no counterparty risk, and as a tangible asset wine will not see its value eroded by inflation or weakening currencies – two problems that cash and other paper assets face at the moment.
Reasons for Caution
So with such compelling performance on top of the benefits of alternative investments, why aren’t more people investing in wine?
The first issue is how to get exposure to wine as an asset class, and it’s worth sounding a note of caution here. Wine is a specialist area that requires a high level of knowledge and the unwary can be caught out by unscrupulous business practices and outright fraud. Without expert knowledge it is very difficult to distinguish between genuine fine wines and fakes, and there have been many recent stories in the press of counterfeit wine scams.
In addition, only particular wines bought at the right price represent good investments. Only specific wines from certain chateaus and vintages will increase in value over time: the wine should be from a limited production; be produced under strict regulations; be from a recognised system of classification; and have a complexity of taste and longevity that improves its quality with age. Basically, you need to ensure you are investing in something that will still be in demand in years to come. To put this into context: only 0.1 per cent of total worldwide wine production each year is of investment quality. Wine is an unregulated market and many unprincipled investment houses will have few qualms about selling the wrong wines at the wrong prices.
The second issue is storage. The atmospheric pressure, temperature and overall condition of its storage all impact the quality and value of the wine. If you take possession of your wine, you must be able to store it properly or arrange to have it stored expertly on your behalf.
The third issue is realising a return on your investment. A lot of great wines sit on lengthy price plateaux during periods of maturation. Often, this has to do with whether or not the wines are being drunk, reassessed and written about in the specialist press. If your wine is not being debated and discussed in this way, you could be trapped in that price plateau for a long time with no income to soften the blow.
And as with any asset: “past performance is no guarantee of future performance, the value of investments may fall as well as rise and you may not get back the amount originally invested”. Wine is no exception to this disclaimer – and the price of wine is dependent upon demand for the product. A quick look at the chart above shows a steep fall in 2008 when the crisis elsewhere in the global economy made investors wary of spending on luxuries: so while wine is not directly correlated to other markets, it can be impacted by a recession and a related decline in spending. The usual caution must be exercised before investing.
Finally, fine wine is classified as a tangible, moveable asset and therefore it is not SIPP accepted – or more correctly, it can be held in a SIPP, but will not qualify for the tax benefits, closing down one source of funds for investment.
Conclusions
So is it worth investing? The simplest way to get around these pitfalls is to avoid a direct purchase and invest in a specialist wine fund instead. The Wine Investment Fund is one of the best marketed and most well-known but as an unregulated collective investment scheme it is only suitable for certain categories of investors; the Vinum Fine Wine Fund, ARCH Fine Wine Fund, and the Curzon Fine Wine Geared Growth fund are listed on the Channel Islands Stock Exchange (CISX); the Vintage Wine Fund is possibly the oldest and largest (€115m); and the newest must be Wine Investors, which launched on AIM in January 2011. But even though these are listed funds, investors still need to be aware that they are investing for the long term in a high risk asset – this is not like buying Marks and Spencer shares.