Why Invest in Wine?
Fine wine is a finite product. Demand is outstripping supply. A château can only produce a finite quantity each year which then diminishes over time as the wine is consumed. This in turn leads to limitations on availability and prices can subsequently rise. The fine wine market is growing. It’s worth c£500 million a year in the UK and a sizeable part of that goes straight into the cellar.
The Inland Revenue considers fine wines to be a “wasting asset” as they are perishable. A wasting asset is an asset that’s useful life is not likely to exceed 50 years. As most wines reach their peak of maturity around 25 years it is difficult to argue that they have a useful life over 50 years. Of course this varies from vintage to vintage. The wine maker at Chateau Palmer once told me that he had the privilege of tasting a 1947 Château Palmer. The owner of the cellar he was visiting then gave him another glass to try and asked what year he thought that was. Younger, he thought ..maybe a 1950? It was 1928!
The wine must be held by a private individual, who is not a wine dealer or trader. Fine wines benefit from an exemption from Tax, both Capital Gains and Income Tax. However rules apply. However as John Stimpfig has pointed out in “A Cautionary Tale” (Decanter) the Inland Revenue may require evidence that your wine was bought to drink rather than sell. You need to clarify any concerns with your Independent Financial Advisor. Fortunately Inheritance Tax is only paid on the value of the original purchase price provided you have proof of the original cost.
www.wine-searcher.com also notes that the global demand for fine wine, which is produced in very small quantities, has increased enormously over the last 2 decades. Wine can, and often has, out performed the FSTE 100 and the Dow Jones, offering significant returns without the volatility of the stock market. However during the current period of economic instability wines have also been affected by dropping in value around the 20% mark. Unlike the FTSE which has dropped considerably more (over 40% at the time of writing this article).
What sort of wines should I invest in?
The inexperienced speculator should try to buy the best wines from the greatest vintages – the demand is high. Historically the best performers for wine investments are the top 30 châteaux in Bordeaux. Outside of this, other rather exceptional wines can be found. An example of this is La Fleur Morange. A garage wine (small production) - like Le Pin which produces only 500 cases a year - La Fleur Morange produces fewer cases at 350. Wine experts such as Robert Parker and more recently Jancis Robinson have written glowing reviews of this wine. Should the producer keep up his efforts Le Pin and La Fleur Morange could have even much more in common. When you hear that Mr Paul Getty visited this small unique Chateau as he had heard how good the wine is then you know the producer is making good wine with worldwide appeal.
The wines of Burgundy have also accrued good value in the past. I would suggest you steer clear of cult Australian and Californian wines as they are highly speculative and have no proven track record. The fact remains that the French still produce the best wines in the world, as is acknowledged by many wine gurus – including Parker.
Prices may fluctuate suddenly, usually due to the effect of a complimentary write up from a wine critic such as Parker. His 100-point system of scoring wines has a huge influence on the fine wine market. It is a sore point that one critic’s opinion has such sway over the market but as it is a fact it must be taken into account. Parker enjoys big, bold heavy wines and his UK counterpart Jancis Robinson prefers the more elegant style. This is shown in a comparison of their ratings. Parker rated Talbot 2005 as 88/90 out of 100 and Robinson 17.5 out of 20. Similarly Parker rated Pavie 2005 98 and Robinson 14.5. This demonstrates there can be a difference in their palates as well as opinion.
Why Invest in Bordeaux?
Bordeaux produces some of the best wine in the world and still remains the only wine in the world with a wine classification system which dates back to 1855 and remains in its entirety today. Their experience in wine making goes back many centuries with their traditional methods of wine making being handed down from generation to generation. Their wines can be more complex than most and we have been enjoying it since Henry II married Eleanor of Aquitaine, bringing claret (or Clairet as it was known then and still remains in production) with her as her dowry.
There has been tremendous interest and speculation in the Bordeaux 2005 vintage which has inflated its prices. The 2005 vintage is one that comes once in a lifetime and although the price is now falling due to the credit crunch it is a vintage that is well worth investing in. You can check good vintages in books by leading wine critics or online. Other such recent vintages that should be considered are 1990,1995,1996,1998 and 2000. Vintages including the disputed 2006 and 2007 vintage have produced some great investing opportunities but you have to know your wines to speculate here!
Despite the current economic downturn wine continues to be a good investment when compared to stocks and shares but – like everything else – wine is affected by the fiscal crisis. Of course wine prices will fluctuate but they remain less volatile than stocks. Wine first and foremost is much more liquid an asset (sorry about the pun) — if you need to sell it, you can. Wines are easily movable, and are a hard to source commodity which can hold their price better than any other investment. In the current climate my advice would be that it is a good time to pick up bargains but to sit on the 2005 vintage if you can and wait for the price to come back round again but seek advice before you buy!
New markets have opened up in Asia and many high-end wines are finding homes in places like Hong Kong, which recently eliminated its 40% duty on wine and is aiming to grow into a global wine auction hub rivalling London and New York. Similarly, Macau, China's gambling haven, has also abolished its wine tax. However don't forget that these new markets – although potentially vast – are also embryonic and can also been affected by global financial crisis.
David Elswood, the international head of Christie’s wine department has said:
“The big advantage for fine wine, as for other art, is that it is a tangible commodity-based asset and a far safer haven for investors than paper stocks and shares. I would recommend buying gold, fine art and of course, the finest and rarest wines, if the stock market looks a bit risky.”
John Kapon, Acker's president and auction director has said that he believes wine is still a good investment and one of the best 'liquid assets' in the current climate:
'Wine has always held its value. In my 10 years of business it has only gone one way and that is up. Given that fact, I think it is always going to hold its own and it's just a question of buying from the right producers and the right vintages. At least if you have a great wine collection you won't wake up the following day and find out it is worthless and if worse comes to the worst you can always drink it.”
Carson Chan, managing director of auction house Bonhams Asia has commented on the fact that in some cases financial turmoil can boost the market.
“What happens in the financial world can actually fuel the wine collecting market. If putting it [cash] in a bank account is not safe any more, why not buy a couple of cases of wine . . People who need cash are looking to sell, often at a reduced price. At times like that, the more serious and capable collectors are searching for additions to their collection. If you have cash, financial crashes are always a good time to buy.”
With the increased interest in wine investment a number of Wine Funds have come into being over the past few years. I would add a word of warning should you be thinking of investing in such a product. Their perceived strength can be their weakness. A few do not offer an objective valuation – all valuations must be acceptable to the wine industry. These valuations should be at arms length and thoroughly independent. One such source is Live-ex (www.liv-ex.com) which is the leading exchange for fine wine. Founded in 1999, Liv-ex runs an internet and phone based information, trading and settlement platform for fine wine merchants. You should be wary of Wine Funds that do not publish their figures on a regular basis and ones that over value their wines. A wine fund should represent a broad portfolio, not placing all its eggs in one basket and it should be well balanced. Charges of some wine funds also can be rather high and restrictive which can eat heavily into your gains such as a 20% performance fees.
This 20% performance fee is taken annually. Once the valuation of the wine has gone beyond a set point i.e. bank base rate, libor rate (the inter bank transfer lending rate) etc at a year end the fund managers will take 20% of the gain made. Should the valuation not be on a sound footing then the fund managers could be receiving a greater proportion of the true value leaving the investor with less. . Also take into account that in addition to a performance fee there is also likely to be an annual management charge plus an initial set up charge in the first year. These charges can be in access of 5% against your initial investment and continue throughout the life of the fund at a slightly lower rate.
I agree that Fund managers should be rewarded for their efforts but a more equitable way to reward them would be by way of an exit bonus i.e. when the fund closes and the wine is sold. That way fund managers receive a bonus on actual value rather than a perceived value - bearing in mind that this current credit crunch has been blamed in most part to financial products being sold with little or no value e.g. the sub prime markets etc. Many bonuses were paid out on these products where risks were shuffled around and at each turn bonuses were paid.
Therefore, should you be enticed by a Wine Fund product I recommend you select a fund that is valued by a recognised independent body, has a fixed closing date and bonuses only paid out on the exit valuation. Whichever product you choose look at the small print carefully and take independent advice wherever possible!
Should you be considering buying your own wine to invest in here are a few tips.
I have put together a guide to buying Bordeaux as an investment. For further information check out these sites: www.decanter.com, www.wine-searcher.com, Jim Budd’s www.investdrinks.org, www.jancisrobinson.com and www.wine&spirits.com.
1. Buy en primeur and focus on the top wines for the best vintages. En primeur refers to buying wine after it is made, but before it is bottled. Cask samples of wines are made available for tasting to wine journalists and large wholesale buyers in the Spring following the vintage. Brokers and Merchants sell on the wine to their customers. Wine is generally bottled and shipped around 2 years later. In good vintages wine futures can offer the investor the greatest return; the initial release prices are usually the lowest at which the wines will ever be sold. However, when buying wine futures it is strongly recommended that you only deal with reputable and established retailers and importers. No storage charges have to be paid for a couple of years, until the wines are shipped to your cellar.
2. However buying en primeur wines poses its own risks. Such wines are unfinished and there is the risk they can go wrong as they mature or during bottling, storage or shipment.
3. Buy your wine in unmixed, sealed wooden cases. An important part of your wine’s provenance is its original wooden case.
4. Make sure that you know the provenance of your wine. A wine that can be traced holds a completely different value to one that does not
5. Check the wine scores and rating systems to make sure you are buying wines that will sell on. The following are useful scoring systems:
Robert Parker’s www.thewineadvocate.com
Wine Spectator Magazine
Michael Broadbent from “The Great Vintage Book”,
Allen Meadows at www.burghand.com
Jancis Robinson’s Purple Pages at www.jancisrobinson.com
Stephen Tazer at www.internationalwinecellar.com
James Halliday at www.winepros.com
6. When it comes to choosing a merchant, remember you are going to be paying for wines 2 years before they are delivered. So go for established reputable companies with a proven track record. Drinks investments are often not covered by the financial regulators. In the UK for example anyone can set up a drinks investment business without having to satisfy the financial authorities that they are operating a legitimate business and are competent to offer drinks investment advice. Do not respond to cold calls or unsolicited approaches, and check the accounts that have been filed with Companies House at www.companieshouse.gov.uk. Check that the company is not one of the suspect drinks investment companies listed on Jim Budd’s www.investdrinks.org website. You should also be aware that if you have purchased your wine en primeur and your merchant goes bust before you take delivery of your wine, you may well be classed as an unsecured creditor as the receiver can't isolate and identify the wine you ordered because it is still in barrel.
7. If purchasing in Europe, buy and store wines “under bond” so that duty and taxes do not become payable.
8. Pay by credit card as you have a better chance of getting your money back in the event of things going wrong
9. Store correctly in a professionally temperature controlled cellar. It’s best to store your wine with an independent company or with your merchant – the charge is normally around £8 to £20 per case, per year. In this way your wine is stored under bond, delaying the payment of duty and VAT. If you store it yourself there is a risk it could be harder to sell as there is no guarantee that it has been stored correctly. Storage companies such as Octavian or LCB have proper systems for labelling customers cases with full traceability and code numbers but always ask what the policy is for labelling customer’s cases and ask if you could visit the warehouse to see your wine. If you put your wine in the garage after purchase you will do more harm to the wine than anything else due to the fluctuating temperatures. Proper storage is a “must”.
10. Check that the wine is insured at the current market value, not the purchase price. Insurers usually only cover the actual damage, not diminution in value. If your house burns down and all the bottles are destroyed then you will be paid in full. But if your cellar floods and the labels are ruined but the bottles intact, you will get next to nothing on a normal household policy. Most people are blissfully unaware that a standard policy won’t cover that sort of damage. It’s important to know that you can insure for loss of value due to something like water damage.
11. Costs. Take into account the 10-20% fee that most merchants take for selling in the wine. Moving a single case of wine typically costs £10 per case and there is a discount for multiple cases. You might be expected to pay this when it is delivered and when it is sold. Professional wine valuations and the premium for insurance purposes are also a cost you need to include. www.winesearcher.com offers a valuation service at $750.00.
12. When it comes to selling your wine remember that most experts agree wine investment is viable for 10 years or longer. Unless the wine that you bought is spectacularly rare there is no point trying to sell it on until it is ready to drink. And the longer you wait the more likely it is that other stocks of the same wine will have been exhausted making yours even more valuable. Always sell through a wine broker or auction house. Auction houses charge a seller’s commission of up to 18% of the value of the hammer price and wine brokers operate on similar or higher margins. Obviously a world wide economic slow down or anxiety about the future will affect the market for fine wine, just as it will for other investments.
13. Be aware of Counterfeit Wines when buying bottled stock. It is estimated that counterfeits comprise 5% of all wine on the market. Recent scandals include the law suit brought against Hardy Rodenstock by Bill Koch resulting in the book “The Billionaire's Vinegar” by Benjamin Wallace. Check your wine’s provenance – wines that have been traded many times or where there is vagueness about the ownership trail are clearly more open to fraud. At the other end of the market there are wines that have been cellared at the Château since bottling and rightly command a premium.
14. Look out for fraud and dubious practices – a wine investment company might offer wine at an inflated price so use www.winesearcher.com to check prices. Sometimes companies sell wine they don’t own. Typically this is an en primeur sale giving the perpetrator 18-24 months before the fraud is uncovered. There is a dubious practice of borrowing from customer reserves – e.g. a broker receives an urgent request for a case of Mouton Rothschild, is unable to supply it immediately but knows he has a case in customer reserves and knows he can get a replacement. The provenance of the 2 cases is unlikely to be the same. If the original was purchased en primeur and has never moved and the second has travelled round the world, the second case will be worth considerably less.
I have drawn your attention to possible pitfalls but the reality is that buying through the right company at the right time can be very rewarding. Remember, do not buy a wine unless you would love to drink it!