Hoarding the Bordeaux: fine wine becomes fine investing

Australian Financial Review, September 4 2010

It is the very vision of wealth: a cellar of vintage Bordeaux, gathering not only dust but value. Fine wines – very fine wines – are about prestige, status, maybe once in a while even enjoyment, but they are also about investment.

Especially lately. Fine wines have been one of the best performing asset classes in the world this year. In the 12 months to June 2010, the Liv-ex Fine Wine 100 Index was up 40.91%; it has returned 201.43% since the start of 2004.

So should we all be buying wine, not to drink it, but to support our superannuation? Even the pros don’t think that’s quite the right way. “To most – quite rightly – wine is not about investment, it is about pleasure and, personally, I sit in the pleasure camp,” says James Miles, director of Liv-ex. “Nevertheless, investment and speculation in wine have always played an important role.” Besides, it’s not as if wine investment is new: wine production goes back 6,500 years, and Bordeaux alone has been producing it for 2,000. “In a historical context, the wine market makes mainstream investment markets, like equities and bonds, look positively nouveau,” Miles says.

It’s probably no surprise to learn that hoarding Jacob’s Creek in a cupboard for a few decades is not going to make you rich. The term ‘fine wine’ is actually quite specific: it refers to a wine that must have the potential to both improve in the bottle and appreciate in value, and to be actively sought after in the secondary market. “To satisfy this requirement, a wine must have a long track record, often centuries rather than decades, and have received strong critical acclaim,” says Miles. Few meet the grade: Miles says that most professionally managed investment portfolios have almost all of their value, between 80 and 90%, invested in just eight brands (see box).

While somewhat tight in supply, Liv-ex reckons the fine wine market is worth US$3 billion annually and has trebled since 2004. Once the preserve of northern Europe, from a buyer perspective it is a worldwide industry now, with particular growth in emerging economies like China (where Château Lafite Rothschild is considered the pinnacle of wine investment) and Russia. Some of this market is handled through auction, although probably only about one tenth, according to Miles; he says the vast majority is conducted through merchants.

Liv-ex itself is the London International Vintners Exchange, founded in 1999 to create a market and exchange for fine wines. Among other things, it has built indices reflecting the market price for fine wines; Liv-Ex’s membership includes most of the world’s major trade buyers and sellers, including the powerful merchants who dominate the industry worldwide.

“The economic case for investing in wine is compelling,” Miles says. “Supply is static: increasingly quality-conscious producers have even cut production in recent years. Moreover, fine wine cannot be replenished. Every time a bottle of Lafite-Rothschild 1982 is opened, there is one less for the world to enjoy.” Rising demand from places like China and Hong Kong – thought to have accounted for as much as half of demand last year – add to the investment case.

One can also argue that it is strongly diversified from other mainstream asset classes, and perhaps oddly, it looks less volatile then stocks or even high-yield bonds. Miles says one of the indices – the Liv-ex Fine Wine Investables Index, which tracks the price of notable Bordeaux wines – has achieved a compound annual 13% return since 1988, which beats equities, gold and property.

But it’s not quite that simple. “Investors should never lose sight of the fact that somebody has to drink the wine if current prices are to be justified or increase,” Miles says. Additionally, there is a practical problem that doesn’t apply with most other investments: every trade in the market requires the bottle to be physically delivered to the buyer. That bottle then has to cellared, and cellared properly, perhaps for decades, generating no income the whole time it’s there. (In Europe the norm is to keep the wine in what’s called a bonded warehouse, usually offered by the merchant.) There’s no dividend from a Château Latour until you sell it again, assuming you haven’t succumbed to temptation and drunk the thing in the meantime.

Merchant costs are high, too, and can add 10-15% to costs for individual buyers, which is what happens when volumes are low and liquidity is therefore thin. Miles suggests one answer would be a central depository of ownership, much like equities; that would allow title to be traded electronically so that fine wine could be left wherever it is to age and mature in peace.

Until that comes, wine investment is going to remain cumbersome and impractical, though potentially rewarding; the AFR approached three major private banks in Australia and none said they were yet experiencing much demand from Australian clients. Still, 13% a year for 22 years? We’ll drink to that.

BOX: The world’s top wines

Almost all wine portfolio investment takes place in just eight wines, all of them from the Bordeaux region.

Five of them are the elite Bordeaux drops known as First Growth, or Premier Cru. These are Château Latour, Château Lafite Rothschild, Château Margaux, Château Haut-Brion and Mouton Rothschild. Four of these have held the peerless Premier Cru accolade since 1855; Mouton Rothschild made the grade in 1973. Most of the Premier Cru varieties are grown in the Medoc region.

The three others are Cheval Blanc, Petrus and Ausone. Château Cheval-Blanc is another Bordeaux wine, this time from the Saint-Émilion region. Château Ausone hails from the same region. These two are considered the elite of another wine classification, called Premiers Grands Crus Classés A. Finally, Petrus grows in a vineyard in Pomerol – also Bordeaux.

Beyond these heavyweight names, just a few other wines tend to turn up in professional portfolios, including other Bordeaux vineyards and a few from Champagne, Burgundy, the Rhône and Italy. While portfolios may be reasonably diversified by year and brand, they’re certainly not by geography: the vast majority of bottles that are bought for investment come from within a few miles of one another.

And just how much are you looking at? This end of the wine market isn’t cheap. Recent trades on the UK exchange include a dozen Latour 2003 for £8,900; 12 Lafite Rothschild 2003 for £11,500; and half a dozen Petrus 2002 for £4,500.

As for Australia, it does have an investment market: Langton’s, for example, released its first classification of Australian wine back in 1991 in order to bring order to the purchase of local wines for investment, and launched its own fine wine index in 2002, tracking the performance of 28 top Australian wines. This index, too, has outperformed most shares over that period, and Australian wines have started to attract some serious wine investors. Australian classic names like Penfolds Grange are very famous here, and certainly among Australia’s most collectable wines, but the global fine wine investment industry is very much a local European, and chiefly French, affair.

BOX: Building a portfolio: the golden rules

Investors in Europe, where the bulk of wine investment takes place, advise a few key steps when building a wine portfolio.

1. Start with a good wholesale wine merchant – most buyers don’t go through the more dramatic and glamorous auction route but with a trusted merchant who knows the investment market well and can offer good advice.
2. It is commonplace for merchants to offer free storage for the duration of the investment, in bonded warehouses.
3. It’s also important that you are allowed to visit the warehouse during your ownership of the wine – avoid those that don’t allow this.
4. Although diversification makes sense in any portfolio, the vast majority of fine wine investors stick within the Bordeaux names, and are advised not to venture much further unless they have considerable expertise in the other grapes. Almost all investment is in Bordeaux wines, which means liquidity, reliable price guidance, a solid market and the potential for growth.
5. Investors are encouraged to have an exit strategy. Some advise selling after about five years, and certainly don’t see any point in holding for anything less than a year as the market is unlikely to have appreciated much during that time.