Investing In Liquid Assets
Those looking for a bold investment with a strong finish should consider liquidating some of their traditional assets and whetting that appetite with fine wine.
With the real estate boom over and the stock market volatile of late, prices of investment-grade wine have been surging over the past two years, largely under the radar.
“Outside of the insiders, most of the world is not aware that a bull market in wine is going on,” said James Miles, founder of the London International Vintners Exchange (Liv-ex), an electronic exchange with about 150 merchants and professional traders in the global fine wine market.
Prices of fine wine were up about 50% in 2006, outperforming most traditional asset classes for the same period, including oil, gold and the Dow Jones Industrial Average, according to the Liv-ex 100, a weighted index of top quality wines. Considered the “blue chips” of the market, the index contains some of the most-traded wines from the French regions of Bordeaux, Burgundy, Champagne and the Rhone as well as those of Italy from 1982 to 2003.
Even the Bordeaux futures market is hitting record highs. The 2005 Bordeauxs, for instance, are being hailed as one of the best vintages ever. The wines won't be delivered for another year or longer, but prices are already at record levels.
The worldwide auction market for rare and collectible wines hit a record $240.53 million in 2006, a 45% increase over 2005. A Sotheby's auction last year set a new world record for the most expensive lot of wine -- 600 bottles of Château Mouton-Rothschild 1982 sold for $1.05 million.
Market and investment experts attribute the price boom to increased demand amid a recent surge of new wealth, especially in Asia and Russia, with new billionaires looking to establish status through alternative investments, especially fine wine.
Wine is an easily accessible luxury good for the newly wealthy, because it has a relatively low price-point for entry compared to things like yachts, cars, jets and art, says Ileana Van Der Linde, a principal in the wealth management practice of consulting firm Capgemini. Shelling out a mere $1,000 for a case of quality wine can get you into the club.
More American investors are also diversifying their portfolios by adding wine. Fine wine produces comparable returns to equities and bonds over the long term with less volatility, because the market is largely unaffected by economic issues like higher interest rates, Miles said.
To be sure, there have been bad years. Prices fell about 20% between the end of 1997 and early 2000, partly because business collectors in Asia dumped their holdings after the collapse of the Thai Baht hammered currencies and stocks in the region.
Structural changes, such as increased selling and trading through the Internet and the creation of professional wine investment funds, have also helped attract new money to the market. Investors who can afford a minimum investment of between $20,000 and $200,000 can leave it to professionals at a handful of funds, such as the Vintage Wine Fund with assets of around $35 million, Wine Investment Project, Orange Wine Fund listed on Euronext, UK-based Wine Investment Fund, and Fine Wine Fund, also UK-based, which is structured like a hedge fund. Each charges an annual management fee, as much as 2%, and takes a cut of the profits, typically 15%.
“Fine wine used to be a very small niche market and was hard to get into, but the Internet has made it possible for more people to educate themselves and get involved,” said Jerome Zech, CEO of leading online auction site WineBid.com, which raked in about $22.5 million in sales in 2006, up 13% from 2005.
“It’s gotten more transparent,” said Miles of Liv-ex. “The effect has been more confidence in investing in fine wine because you can make quantitative evaluations of what returns are available.”
And those returns were blockbuster in 2006 (the market’s best year in the past decade, which had been largely flat). Prices for the most sought-after vintages rose as much as 90%. A 12-bottle case of Château Lafite Rothschild 1998, for instance, surged about 88% to about $5,000.
U.S. wine auctions, including those at Christie’s and Sotheby’s, exceeded $167 million in 2006, more than quadruple the total brought in at U.K. auctions. In addition, the U.S. will become the largest wine-consuming country in the world by 2010, ahead of Italy and France, guzzling nearly 3.8 billion bottles of wine a year, according to the International Wine and Spirit Record, a December 2006 study commissioned by VINEXPO.
Insiders expect this intoxication for fine wine to continue, calling this the “golden age” for the industry.
“The market has been democratized,” said Serena Sutcliffe, head of Sotheby’s international wine department, which posted $37.38 million in worldwide auction sales in 2006. “You’re seeing more young people with normal salaries get interested in buying wine, upwards of $600 a case.”
As with any booming market, fine wine has attracted speculative buyers looking to make fast money. But market players warn would-be investors they should know what they’re getting into.
Handle With Care
There are risks, as well. Storage and selling costs can eat into profit. Wine can spoil and bottles can break. Finally, not all fine wine appreciates. In addition, recent investigations of wine fraud have surfaced, shedding light on a counterfeiting problem at the highest end of the market. About 5% of rare vintages sold privately or at auctions is fake, wine experts say.
“I can’t say I necessarily agree with it as an investment strategy,” said Patrick Bickford, a wine connousieur and accounts specialist for wine importer and distributor Winebow. “If you have the discretionary funds and you can buy wine on speculation and hope it increases value-wise, then do it. But if [the wine’s] already been scored and there’s been a value established for it and you’re waiting for it to increase, it’s a dicier proposition.”
That’s because a wine’s value relies heavily on scores received from critics, which in the end, are still subjective measurements. “It’s easier to predict where real estate values are going to go than wine,” said Bickford, who owns 400 bottles, the most expensive one valued at about $800.
And as prices continue to soar, is there the danger of a bubble bursting, a la the housing market? Miles of Liv-Ex says it's unlikely.
“Wealth creation is not reflected in prices yet, transparency in the market is still in its infancy, and there are two or three funds that will have positive flows into the market this year,” he said. “I expect we’ll continue to beat equities for the next couple of years.”
And unlike companies that can go bust, fine wine won't leave you empty handed. So should prices plunge, all may not be lost. As you drown yourself in sorrow, you can also drink it.