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August 18, 2022

Fine wine – a relaxing option for investors’ portfolios?

  Compiled by myLIFE team myWEALTH January 21, 2022 31

Wine has been an important source of solace for many during the pandemic, but it could also have had a soothing effect on your investment portfolio. It has proved a stable and reliable asset amid the volatile financial markets since February 2020.

While demand from restaurants has dropped, many wine buyers have reported growing interest from private investors during the pandemic. Not only did they have more time on their hands to research different options, but wine also offered a certain comfort factor. If the investment didn’t work out, at least they could drink it – something a share portfolio cannot offer.

As a result, wine has proved to be a ballast for portfolios. The main benchmark for wine investment, the Liv-ex Fine Wine 100 index, which reflects price changes for 100 of the most sought-after fine wines on the secondary market, dropped by just 1.1% while equity markets plummeted in February and March 2020.

This is not an anomaly. Wine has historically offered good diversification characteristics against equity and bond markets. It has also proved a solid investment over the long-term; the Liv-ex Fine Wine 100 index is up 31.1% over the five years to the end of June 2021, and the Liv-ex Fine Wine 1000 is up 42.2%. While this doesn’t beat a standard stock market index fund, it is notable for its consistency.

Wine investment tends to focus on the great vineyards of Bordeaux, Burgundy and some parts of northern Italy, where bottles can cost thousands of euros. For investors that picked the right region, the returns have been even higher: Bordeaux has been lacklustre in recent years, outpaced by Burgundy (up 88.9%), Champagne (up 60.1%) and Italy (up 49.6%).

Pricing is driven by demand, but also supply considerations, weather conditions and the overall health of the global economy.

The power of influencers

Wine prices are influenced by a variety of factors. In recent years, demand from emerging market purchasers, especially China, has been important, but pricing is also driven by supply considerations, weather conditions and the overall health of the global economy.

Influential reviewers also make a difference. By far the most powerful critic is Robert Parker Jr, whose Wine Advocate newsletter has around 50,000 subscribers. While he has handed over the reviews for other regions, he continues to provide scores for Bordeaux and Rhone wines.

The Parker 100 point scale that he devised has a measurable effect on wine pricing. James Suckling, Neal Martin, Tim Atkin and Jancis Robinson are other leading figures whose opinions can move prices.

Benefits and drawbacks of direct investment

The main advantage of making direct investments in wine is clear – it can be drunk – but there are significant drawbacks, too. The entry point for a novice investor can be very high, with prices of up to €6,320 for just a single bottle of the Bordeaux 1990 Le Pin Pomerol.

Investors will need to accept the risk that one or more bottles could be corked, and it needs to be stored properly to retain its value. They should also take into account the state of the secondary market; it is not like a stock market investment where there will almost always be a ready buyer.

It needs to be stored properly to retain its value.

Wine brokers can help, but investors need to build a relationship over time. Brokers can help with storage (at a price) and can help investors navigate the secondary market if they need to sell. Some wine brokers have set up platforms that facilitate easier buying and selling of wine. However, it is better to do the research first, or risk paying a high price.

There are also crowdfunding platforms that seek to match investors and entrepreneurs, including vintners, who are looking to attract financing. The entry point tends to be lower and investors will often be repaid in wine delivered straight to their door over a number of years. It is unlikely to make your fortune, but it can be an interesting option.

Buying en primeur is another option to buy wine at a lower starting price. Investors buy the wine when it is young and take the risk on whether it will turn out to be a great and highly sought-after vintage. En primeur wine is usually cheaper than the future price of the wine on the open market, and certain vineyards may only sell wine this way.

The importance of liquidity

Investors can also invest through a wine fund, which can offer a liquid and inexpensive method to invest in rising wine prices, as well as offering better diversification. Fund investors may be able to look at wine markets more objectively than wine experts; rather than looking at the brilliance of the wine, they will be judging its liquidity, the ultimate market and current price.

However, investment structures can be complex; an investor may not be entitled to the wine held by the fund if the investment goes wrong. Nobles Crus, a wine fund domiciled in Luxembourg, was suspended in 2013 after media reports suggested its valuations were inflated.

This prompted a surge in redemption requests that highlighted the restricted liquidity of its stocks. The controversy focused attention on the valuation methodologies used by fund managers, and these have been more cautious since.

Fine wine has delivered solid returns for investors in recent years and may have appeal as a diversifying asset at a time when equity and bond markets have proved volatile. However, it’s not enough to have a good appreciation of wine; to be successful, investors will need an understanding of wine markets as well.

Wine investment tends to focus on the great vineyards of Bordeaux, Burgundy and some parts of northern Italy, where bottles can fetch thousands of euros.