Fine Wine Investment Guide

Fine Wine Investment Guide

Investing in fine wine can deliver average returns of 12.9%
over a 10-year period – read our guide to find out how you
can start your own wine portfolio and profit from it

In association with:

Why invest in fine wine? Firstly, its addition to an investment portfolio provides diversification – which mitigates risk. It is also a tax-free asset that performs consistently while providing portfolio protection in a way that traditional financial assets fail to offer.

In this guide, you will learn about:
• how supply and demand affect returns;
• the different criteria to help determine the label’s value; and
• the risks of investing in wine

Fine wine can remain stable under difficult economic conditions and demand for it is consistently strong. As a real asset, it is also an attractive option as real assets tend to change in value independently of core financial markets.

But most importantly – as academic research has shown – fine wine has historically produced long-term average returns in the region of 13% per annum, while showing a low correlation with traditional financial assets.

A comparison between wine market performance and that of global equities shows that during periods of economic deterioration, wine has performed significantly better. At times when economies and financial markets have suffered, wine has provided recession-proof characteristics – thus highlighting the benefit of investing in a tangible asset.

Lastly, its supply-and-demand imbalance will consistently drive prices upwards.

Centuries Old Excellence

The world’s greatest vineyards are situated on the Cote d’Or in Burgundy and the most majestic of Chateaux located on the banks of the River Gironde in Bordeaux. It is within these great winemaking regions that strict guidelines and rules are in place – to control quality and limit production.

As a result, the wines that are the most prevalent on the secondary fine wine market – those that constitute the investment grade market (less than 1% of fine wine produced) – are also the wines in shortest supply.

The fundamental demand and supply imbalance that underpins this market has always seen prices for the greatest fine wines appreciate. As a vintage grows older, supply decreases and price increases – allowing for stable low-risk returns.

The fundamental demand and supply imbalance that underpins this market has always seen prices for the greatest fine wines appreciate.

Supply and Demand

International banking firm Morgan Stanley has published a report on the status of the global wine market, concluding that a worldwide shortage of wine is imminent. Demand is already exceeding supply – in 2012, the shortfall amounted to some 300 million cases.

Their statistics show that global wine consumption has been rising steadily since 1996 – except for a modest fall between 2008 and 2009, in the wake of the financial collapse – and currently stands at around 3 billion cases. By comparison, total production is estimated at 2.8 billion cases, despite global wine production reaching a seven-year high in 2013.

The Appellations d’Origine Contrôlée (AOC) – a French certification guaranteeing that a wine is produced in the region specific to its name – strictly limits the type, location and classification of wine production. This also restricts the volume available – there are no more grand cru vineyards to expand into in Bordeaux, for example.

In fact – in the 20 years to 2011, production in the great estates has been flat to down. This is a phenomenon that has been compounded by the fact that producers have become more quality-conscious.

With the best vintages historically providing the best returns – and the increasing transparency of the market with information on tastings and critic scores evermore easily accessible – it would seem that producers have recognised how essential it is to maintain and improve the excellence of their brands.

According to the Wine Institute, wine production in France – the biggest producer of fine wine – dropped by 12.52% in the years from 2009 to 2012. This means that the best wines are highly restricted in supply and face increasing demand, which has pushed their value ever higher.

Determining Value

The price of a fine wine can be affected by a number of factors well beyond the simplicity of it being heralded a good vintage from a reputable producer.

Cult Wines – one of Europe’s largest wine investment companies – considers the following criteria to be a minimum benchmark by which to judge a wine’s value and investment potential:

• Brand
• Critic Score
• Market Trends
• Drinking Window
• Scheduled Re-Scores
• Producer History
• Vintage Quality
• Vintage Production
• Historical Price Performance
• Comparative Price Analysis
• Supply (Availability On The Market)

The criteria may vary in importance, but are all vital in building up a picture of a wine’s investment merit.

By combining both quantitative and qualitative analysis, Cult Wines is able to determine where there might be an opportunity to buy an undervalued wine or one that is in line for price growth. By understanding how each of the criteria can affect a wine’s price evolution, their specialist advisors can determine which wines are best suited to a client’s personal portfolio.

 

TomGearing

Tom Gearing

Co-founder & Managing Director, Cult Wines

“Fine wine provides significant diversification benefits from mainstream
financial markets – it not only delivers strong returns under expert
guidance but is also an enjoyable tangible asset that has an exciting future.”

Investment-Grade Wines

Investment-grade wines come from regions all over the world, but those that can be deemed ‘fine wine’ are subject to strict controls. Regulations vary from country to country, but are generally enshrined in law – with some classifications dating back more than 100 years.

It’s no surprise – given its illustrious winemaking history – that France has the lion’s share, with the global market composition for investment-grade wines as shown in the chart above.

What are the Risks of Investing in Wine?

Any investment carries a degree of risk, so robust due diligence is always needed to understand the full scope of any investment scenario. Risks involved in wine investment include:

01.

Unregulated market

Unfortunately, there does exist a number of unscrupulous wine
merchants that won’t always have your best investment interests at heart.
Only buy from established merchants and deal with reputable investment
houses to ensure you get the expertise you need.

02.

Short-term trends

There are numerous examples of short-term trends yielding impressive
gains within the fine wine market, but an investment should be viewed
as a mid- to long-term one, with a period of at least five years.

03.

Liquidity

Or more specifically, illiquidity. While Coutts sees value in passion assets as part of a
more diversified portfolio, it recognises that “they are illiquid, have especially high unit costs and
are distinct in terms of their performance … y
ou cannot pay your bills using a tenth of a Matisse”.

As such – a capital markets portfolio made up of traditional assets such as equities and
bonds will add liquidity, accessibility and diversification.

04.

Misjudged valuations

Critics argue that – as a result of the limited historical risk and return data –
passion assets are subjectively valued, making their valuation very
difficult and sometimes impossible until the point of sale.

However – while an accurate valuation by a layperson is very unlikely –
experienced wine investors are greatly assisted by online tools such
as Liv-ex and other websites that are significantly more informative
than those relating to other passion assets such as cars.

Regular valuation is important because it helps to identify the right
opportunities to sell, what represents good value in buying and the
potential for growth when buying. 
Again, the right expertise is essential.

05.

Counterfeits

In an effort to defeat the counterfeit trade, a number of the most desirable wine
brands have taken 
measures such as introducing the Prooftag system – a technology on
all bottles, which enables them to be traced and validated upon request. This has been
adopted by some 
producers, including all the wines of Château Lafite-Rothschild
(beginning with the 
2009 vintage).

Other useful tools to combat counterfeiting include websites such as Wineauthentication.com –
a website created by collector Russell Frye – that 
provides the latest authenticity news and
information, including a section on the most recent counterfeits reported.

Nonetheless, using the services of a reputable company greatly reduces this associated risk.
The Wine Spectator recommends Cult Wines as one of these companies. In 2016, The Spears 500
included Cult Wines 
Managing Director Tom Gearing as one of the industry’s trusted advisors.

What is Liv-ex?

Liv-ex (London International Vintners Exchange) is the best-known wine trading platform in the world, providing real-time and historic data as well as 35,000 price updates daily. It’s the go-to service for wine investment and reference, channelling more than GBP28 million worth of bids and offers every day.

The exchange has 440 global members, of which Cult Wines is one.

Liv-ex is known within the industry to provide the most reliable pricing data for valuation purposes. Cult Wines uses its valuation services to provide independent accurate daily updated prices across all its clients’ portfolios.

Cult Wines Performance

As a company that specialises in advising on and managing wine investment portfolios, Cult Wines prides itself on producing market-leading returns within the industry.

The following reflects real data from Cult Wines’s own client portfolios – tracking average performance across all portfolios since January 2010 – as well as more recent performance statistics and specific regional/strategy numbers.

chart

The data above is calculated from October 2009 and includes all clients’ positions by wine and vintage, individually entering the index rebased to 100 in the month of purchase and revalued monthly using the Liv-ex Benchmark Market Price.

Therefore, the average performance of all Cult Wines clients’ holdings is represented as an index. The Cult Wines Index has outperformed the Liv-ex 100 in five of the six years that Cult Wines Data has been recorded in this way.

Over the last six years, the Cult Wines Index has achieved an average annual growth of 10.59% compared to 3.43% of the Liv-ex 100.

SPEAK TO CULT WINES

Find out more about investing in fine wine, let us introduce you to the experts at Cult Wines. Fill in your details and we will contact you as soon as possible.

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