How to invest in wine

  • Wednesday 21 July 2010

On these pages you will find everything you need to know about investing in wine: the top ten investment brands, top ten traded wines, the best Bordeaux vintages to invest in, the best Lafite vintages, other investment wines, which merchants to contact and much more...

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For wine investors, the last eighteen months have seen a strong and sustained market recovery from the last quarter of 2008 when the Liv-ex 100 Index dropped by 25% - its largest ever fall since its inception in 2001. Some wines, particularly the 2005s plummeted even further in the financial turmoil which took place after the collapse of Lehman Bros.

Now though, at the time of writing (July 2010), the market has bounced back with a vengeance and is moving full steam ahead, particularly since the beginning of this year.

The recovery began tentatively at the beginning of 2009 with small but incremental growth as the market bottomed out and canny, cash rich investors went back into the market to pick up blue chip wines at very advantageous prices. But given the uncertainty of the wider economy, the recovery still took several months to really gain traction and momentum, beginning in earnest towards the end of 2009.

Moreover, much of the gains by the Liv-ex 100 Index last year were largely underpinned by Chateau Lafite which completed an astonishing year of asset price growth. According to Liv-ex’s Claret Chip Index, it ended the year up a staggering 40%.

More recently though, the rest of the First Growths have followed Lafite’s lead and the market has moved ahead in leaps and bounds since the start of the year. Since January, the Index is up a quarter and is up over 40% on this time last year. In May, it moved up 4.4% sailing past its previous market peak back in June 2008 and now stands at a shade under 305.

So why has the market performed so well compared to equities’ much patchier record? One answer is the massive and growing Asian market which has played a pivotal role in providing strong demand for the world’s finest wines over the last few years, particularly Chateau Lafite.

One leading fine wine fund manager reported that ‘demand from China has more than substituted fro demand from Europe and the US which temporarily receded at the end of 2008.

Thanks to the abolition of all taxes on wine in 2008 by the Hong Kong government, there has been a mass exodus of wine to the former UK colony which has become a conduit for fine wine in the region. Thanks to its powerhouse economies, particularly China, and its growing number of billionaires with a thirst for the world’s finest and rarest wines, demand here seems set to continue and increase for the foreseeable future.

Fuelling this astonishing growth in sales are several UK merchants who have set up shop in Hong Kong in order to service the region. Almost all have recorded burgeoning sales, including Bordeaux Index where half its sales have gone through its Hong Kong office.

Last year, Sotheby’s reported that nearly 60% of all wine sold by value in its New York, London and Hong Kong salerooms ultimately found its way to Asian buyers. Moreover, Hong Kong has also seen some astonishing auction totals. In May, the New York merchants/auctioneers Acker Merrall & Condit hammered down the contents of the US collector Eric Greenburg’s cellar for $19.5m making it the largest sale ever held in Asia and the second largest total of all time. Now many believe that Hong Kong has overtaken New York as the epicentre of the auction business.

So, to a large extent, Asia effectively underwrote the fine wine market for much of 2009. But since the beginning of 2010, the recovery has been more widespread as the traditional markets of Europe and the US have also come back into play. As global demand has hotted up, so too have prices.

There have been other factors which have contributed to the recent spurt in prices. One is a shortage of stock, especially in Europe. Another has been the weakness of the pound against the dollar for most of the last eighteen months. So, given that most Asian currencies are pegged to the dollar, buying wine in the UK has been extremely attractive to Far Eastern collectors and investors.

Most recently, in June, the Chinese decided to end the two year peg of the remnimbi to the US dollar, which has led to a strengthening of its currency. For Chinese wine buyers, this makes buying wine in the UK even more attractive.

In addition, many of the newer buyers are buying to drink rather than purely invest, which is also having profound impact on supply, demand and ultimately pricing. ‘What is happening in Asia is almost all about consumption,’ says Will Beck, a fund manager with Wine Asset Managers. So the compound annual effect may well be far reaching and gives credence to the view that new markets are changing the demand profile of the industry for good.’

Allied to this is the re-emergence of several wine funds. After a difficult period in 2008-2009 when they were dealing with severe outflows caused by major redemptions, the funds have now clearly turned a corner and are firmly back in the market buying wine on behalf of their investors. This too has added yet more pressure on prices.

‘We are seeing a lot of demand from both private and corporate investors,’ says Willaim Grey of the Wine Investment Fund. ‘It’s certainly much greater than this time last year with a lot of interest coming from UK investors large and small who are looking for ‘real assets’ to spread risk. But what is most encouraging is that demand is increasingly global and has been for some time.’

However, arguably the biggest impact on the latest round of price increases has been the summer’s extraordinary en primeur campaign. Once it became clear that the Bordelais had produced an exceptional vintage in 2009, the rumour mill went into full swing that prices would reach record levels.

Aided and abetted by a strengthening global economy and an unprecedented set of high scores by all the major critics (Parker, Robinson. Suckling and Spurrier), many were predicting that the price of Lafite in particular could reach the level of 1000 euros by the end of the campaign.

This inevitably made the back vintages look exceptionally good value. So a number of fine wine traders and fund managers piled into the market to pull off a series of speculative relative value trades in advance of the campaign. As a result, the most fancied and under-valued vintages such as 1996 and 2000 began to move sharply upwards. In February, the 96 Latour was trading at £4,800. By the end of May it was £6,600. Even more marked was demand for Lafite 2000. Over the same period of time, it went from £14-15,000 to over £18,000 per dozen.

As expected, the 2009s have now been sold at record release prices with wines like Lafite, Latour and Le Pin trading on the secondary market at well over £1,000 a bottle. Despite (or perhaps because of that), many of these wines have been bought for investment purposes.

Ironically though, it remains to be seen whether these wines will prove to be sound investments. According to recent research by Liv-ex and the Wine Investment Fund, the returns from en primeur are mixed to say the least. One reason for this is because the chateaux have increasingly tended to release their wines at full market value over the last decade. As a result, many investment experts will continue to scour the back vintages where they see much better value for more mature wines.

What is clear from this latest and most expensive en primeur campaign is that Asia and China in particular have not dominated the campaign in the way that many people predicted. At Bordeaux Index, en primeur sales accounted for no more than 10% of the vintage. The lion’s share of sales (60%) went to the UK private market with the remaining 30% going to European or UK traders and investment groups. ‘So the widely anticipated rush in demand from the Far East has thus far failed to materialise,’ said MD Gary Boom.

At Farr Vintners, where the company reported a total of 30,000 cases sold en primeur totalling £53m worth of wine, the picture was slightly different. Tellingly, the split in sales was 60:40 (UK:Asia) by value. In volume terms it was 85% to 15% as Far East customers bought the top trophy wines – First Growths and Super Seconds. According to Browett, there was virtually no interest from the USA in the campaign.

This suggests that the wine investment market is not about to broaden beyond the usual suspects in the immediate future. Instead, it will remain focused on a narrow core of established Bordeaux chateaux right at the apex of its quality pyramid.

Where does the market go from here? Some including Bordeaux Index’s Gary Boom remain optimistic about further price rises for the next few months at least. Others think that prices may track sideways now that the en primeur campaign is done and dusted.

Of course, much depends on the global economy. But so far, concerns over a double dip recession, austerity measures in a number of European economies and volatility in the bond and equity markets have had little or no impact on fine wine prices to date.

Over the longer term, fund managers see no reason whatsoever why prices will not continue to climb relentlessly upwards, though not a quite the clip that prices have risen since the beginning of 2010. They point to the market’s healthy rally post the 2008 crash and the fact wine has outperformed many other financial asset classes along the way.

Moreover, according to Will Beck of Wine Asset Managers, this ability to make up lost ground in the wake of price falls is nothing new. ‘Event-driven wine price corrections have occurred four times in the last fifty years. But each one has always been followed by a decade of strong returns averaging 15-23%. I believe that it will be no different this time around.’.

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