Decanter’s Wine Investment Guide part 2

(back to Part 1) Why invest in wine? What are the potential disadvantages of investing in wine? What is an investment wine? Which properties and regions to consider Which vintages? How much do I need to invest? Dos Don'ts En primeur vs older vintages Tricks of the Trade Where to buy? Where to sell? How do I value my cellar 10 great investment wines (and 10 not-so-good) Contacts Useful websites Glossary

What are the advantages of investing in wine?

The underlying principles of wine investment boil down to the laws of supply and demand. On the supply side, there are relatively few (perhaps only about 75 in total) investment grade labels, whose production levels remain more or less fixed. On the demand side, there are a growing number of high net worth individuals around the world seeking to own and/or drink these wines. Ergo, the only way to ease the pressure is for prices to go up. However, when there are a surplus of sellers over buyers – as occurred at the end of 2008, prices will inevitably fall.

Investment grade wine is also an improving asset. As fine wines mature they become more desirable and therefore more valuable. At the same time, as the wine ages and comes into its drinking window, it begins to be consumed making it even more rare, which in turn adds yet more upward pressure on prices.

Fine wine has seen some astonishing returns, particularly from the end of 2005 to the summer of 2008 when the Liv-ex 100 Index rose from 120 points to a high of 264 points. This came after a period of several years in which prices generally didn’t move very much.

Ultimately, it wasn’t to last forever as the market finally gave way in autumn 2008 to the wider pressures caused by falling equities and the banking crisis stocks as well as the wider effects of the credit crunch impacting on the global economy and investors assets.

Nevertheless, wine investors can take solace from the fact that their investments have performed better than most other assets and indices. In December 2008, the Liv-ex 100w as down by 12% on its position at the start of the year. In contrast, the FTSE 100 was down by 33% while the Nikkei 225 had plunged by 46.3% in the same period.

It is also worth pointing out that in the last 20 years fine wine has also outperformed a number of equity and fixed income indices including the FTSE 100. For long term investors (as opposed to shorter term speculators) a well chosen and balanced wine portfolio should provide annualised returns of around 10-12% per annum. However, some investors will have outperformed those figures over the longer term.

In fact, since 2001, when Liv-ex began its 100 Index, wine has significantly outperformed the leading equity indices in western markets with an average annual return of 16%. By comparing other pieces of research it is also possible to look at fine wine returns since 1950. Again the results are extremely positive and remarkably consistent. Since, 1950, the average gross return is 15% and is 17% if you start in 1960.

Wine remains less volatile than stocks and shares, making it a less risky investment. However, with the increasing number of wine funds and more and more private investors coming into the market, it appears that the wine market is becoming more closely correlated with the stock market than was the case two years ago. In the past, the fact that it was not highly correlated with equities, made it extremely attractive to investors looking to diversify a portfolio.

Generally, wine is also regarded as a wasting asset so doesn’t attract Capital Gains Tax. (However, as this area of tax law is complex it is best to take advice from a tax lawyer or tax accountant.) Moreover, if you keep the wine in bond, you also avoid paying VAT and Duty.

It’s also more fun than investing in pork bellies. And if the market does crash, you can at least take solace in drinking up your position.

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What are the potential disadvantages of investing in wine?

When the wine investment market isn’t moving uniformly upwards as it did from 2006 to 2008, it becomes much more of stock picker’s market, which generally requires a great deal of expertise, understanding and knowledge. In other words it’s very easy to make some expensive mistakes unless you know what you are doing. For instance, at the end of 2008, virtually every Bordeaux chateau and vintage dropped significantly in value. Some 2005s dropped by more than 25% in value in the course of two months.

Clearly, therefore wine prices can go down as well as up. Even as the market is generally moving up, particular wines will certainly move down. Equally, the converse is true. Therefore, when wine prices are generally moving down, cash rich investors will be eyeing the market with a view to picking up some great deals. Once the market has bottomed out, that is the time go back in and buy. Timing is all.

There are no dividend payments that accrue from wine investment. Moreover, there are the costs of storage and selling which have to be factored in. Both eat into profitability.

Typically, a broker will work on a 10% margin when you come to sell your wine. If you are selling at auction, there are also consignor fees to consider. These generally begin at a maximum of 10% depending on the quantity and quality of wine on offer.

The higher the value of the wine, the lower the fee. The storage costs of keeping your wine under bond with a professional storage company or merchant also vary but usually cost around £7-10/case per annum. If you have smaller parcels of wine to sell or even mixed cases, you might want to consider selling on www.bidforwine.com which has very attractive commission rates for buyers and sellers.

Some wines may not turn out to as good as initially predicted . Once in bottle, wines are frequently re-rated. A negative re-assessment by Parker whereby a wine drops from 98 points to 94 may well result in a fall in value. Others though may experience the opposite effect in being up-rated. This invariably has a windfall effect of increasing the value quickly and, at times, dramatically.

Your merchant may go bankrupt, in which case you may end up losing your entire investment. A number of fine wine merchants, investment funds and wine investment companies have recently failed because of incompetence or fraud, taking investors cash with them. In 2006, Mayfair Cellars and Uvine went under owing millions of pounds to customers. In 2007, the Cellaret also went the same way.

You should also bear in mind that the wine investment market is largely unregulated, so there is very little protection if things do go wrong. Moreover, anyone can set up a drinks investment business in the UK without having to satisfy the financial authorities that they are running a legitimate business and that they are competent to give drinks investment advice.

Therefore only deal with reputable, long established merchants or companies offering wine investment advice or services. For extra security, you should also consider storing your wine within your own account at an independent bonded warehouse.

Beware of a growing incidence of fake wines circulating in the global market. For obvious reasons, collectors should take the utmost care when buying trophy wines for investment. Most recently collectors like Bill Koch in the US have prosecuted cases through the New York courts over allegedly fake wines. Similarly in 2008, 106 bottles of counterfeit wines were pulled from an Acker Merrall & Condit Sale in new York. Provenance is all and wines with perfect provenance can command a significant premium.

Over the last fifteen years, there have also been no shortage of ‘mis-selling’ scandals in which a number of dodgy wine investment companies have fleeced naïve investors of millions of pounds. Some of these investment companies have been closed down by the DTI, but others are still operating. This is another reason why you should only buy investment grade wine from reputable merchants or proven investment specialists.

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What is an investment wine?

To be regarded as a good investment, a wine requires all or most of the following attributes:

It must be an instantly recognised label or brand with a long track record of quality and high to very high prices

It must come from a good or great vintage and be highly rated by leading wine critics on both sides of the Atlantic

It must have strong, consistent global demand for previous vintages of similar quality. It must show consistent upward price movement beyond a minimum set return

It must have the ability to age and improve over a long period of time.

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Which properties and regions to consider

Bordeaux

Bordeaux represents 90% of the wine investment market and should take the lion’s share in any portfolio. Here, the top Left Bank Classified Growths represent some of the bluest of Blue Chip wines. So look for First Growth clarets like Latour, Lafite, Margaux and Haut Brion. The Super Seconds (a select number of Second Growths) are also a good source of investment potential. So too are some (but by no means all) 3rd, 4th and 5th growth chateaux such as Lynch-Bages. On the Right Bank, the most sought after names include Cheval Blanc, Petrus, Le Pin and Ausone. Chateau d’Yquem can also provide solid returns from certain vintages.

Burgundy

Beyond Bordeaux, a select number of Burgundies qualify as investments. Here the names to look out for include Domaine de la Romanee-Conti, Coche-Dury, Comtes Lafon and De Vogue. However, the secondary market for Burgundy is much less developed and therefore much smaller.

Rhone

The same is true of the Rhone Valley, where wines like Guigal’s single vineyard Cote Roties can sometimes (though not always) provide handsome returns. Generally though, the Rhone remains undervalued as a region and has yet to really establish its investment credentials.

Champagne

A number of prestige cuvee Champagnes are also worth considering for investment purposes including Krug, Crystal and Dom Perignon. In recent years, Champagne has proved a very profitable investment even compared to red Bordeaux. At auction, great prestige cuvees continue to command very high prices.

Italy, Port, the New World – and the Bordeaux cults

Outside of France, investors need to be much more wary. Port is no longer regarded as a good investment bet. Some Super Tuscan wines like Sassicaia can on occasion perform well, as can a handful of Spanish wines. Some Californian and Australian wines have also appeared on investors’ radars, particularly in local markets. However, these generally more modern and less well established wines are more prone to the vagaries of fashion. New and Old World ‘Cult’ wines from California, Australia and Bordeaux ‘garagistes’ are not the darlings of the market that they once were and are best avoided in the current climate.

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Which vintages?

Generally, the received wisdom when it comes to wine investment is to stick to the very great ‘trophy wines’ from Bordeaux (ie First Growths and top Pomerols and St Emilions) from the best vintages. The best Bordeaux investment vintages include:

1959, 1961, 1982, 1986, 1989, 1990 1996, 2000, 2005

However, there are always exceptions. As mentioned before, ‘small cap’ stocks like Chateau Lynch Bages can perform surprisingly well for investors, but only from great vintages. Similarly, great trophy wines can offer excellent value in good or under-rated vintages. Poor vintages should be given a wide berth by investors.

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How much do I need to invest?

You can invest as little as £500 in a case of wine. But a minimum investment of £10,000 will enable you to create a more balanced portfolio so that you can at least spread your risk across a few Chateaux and vintages. Wine should only be a small part of your total investment portfolio. Moreover, you should not invest more than you can afford to lose.

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Do’s

DO Develop a good relationship with your merchant or specialist wine investment company. Not only will you get better advice, you are more likely to get preferential treatment regarding highly sought after wines – particularly if you have bought good quantities of wine from them in the past. Most serious collectors/investors will also develop relationships with several merchants.

DO compare prices. The spread between merchants’ prices for the same wine can still vary enormously despite greater transparency because of the internet. To quickly compare prices visit, www.winesearcher.com. Another good place for competitive, real-time prices is the Vintage Wine Fund’s www.vwftrading.com. In addition, serious investors and collectors who require more current, historical and analytical price and market information would be well advised to subscribe to one of liv-ex.com’s products at www.liv-ex.com For historical auction prices, log onto the Decanter Fine Wine Tracker at www.decanter.com.

DO check the provenance and condition of the wine before you buy it.

DO make sure that your wine is stored in perfect conditions so that it will mature properly and predictably. For longer term maturation, wine requires the correct temperature and humidity together with a lack of light and vibration.

DO try to buy amounts of three to five cases per chateaux. Larger quantities are always more interesting to Trade Buyers.

DO keep the wine in bond with a reputable professional storage company or wine merchant. Make sure that your wine is kept separate from merchants stock and is clearly identified as your own. Make sure that your wine is insured to its full market value.

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Don’ts

If you are investing for the medium to long term, DON’T bank on quick returns. You may be lucky (or clever) in that some wines will go up rapidly in value. Generally, wine prices don’t go up in a linear fashion but tend to experience fairly short periods of upward activity. Timing is therefore everything when it comes to buying and selling fine wine. If you are speculating in wine over the short term, you may see some exceptional returns on your investment in the current bull run. But such speculation will always be a much more risky and volatile endeavour compared to a longer term investment strategy.

DON’T believe all the hype surrounding wine investment. Sections of the press have had a field day describing meteoric price rises of wines like 82 Le Pin which rose from £350 a case to £30,000. Such wines are not only very difficult to acquire, they are also extremely unrepresentative of the market as a whole.

DON’T buy wine which you happen to like, hoping it will go up in value. Stick to the tried and tested investment wines. Personal taste is irrelevant and has no place in investment decisions.

DON’T buy wine en primeur from a new merchant. If the merchant goes bankrupt you could be left high and dry with no wine to show for it.

DON’T try to sell split or opened cases. The desirability and value will plummet unless it has the full dozen in perfect condition in its original wooden case.

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En primeur vs older vintages

In the past, en primeur prices for First Growths were astonishingly good value as wines often rose quickly in value on the secondary market. The 1982 Latour, for example, came out at around £250 a case, and is now trading at around £9,000.

But in the last 10 years windfall profits for investors buying en primeur have all but disappeared as chateaux have priced their wines at full market value – and pocketed the proceeds themselves.

What that means is that while en primeur may still be the cheapest way to buy particular, highly sought-after wines, those wines don’t necessarily make the best investment, especially as prices for vintages like 2005 are likely to plateau in the short to medium term.

As a result, wine investment professionals are increasingly looking at older wines for more profitable investment opportunities. Many regard the back vintages such as some 1986s, 1900s and 1996s as better value than more recent ones. This is simply because the wines are relatively (and sometimes actually) cheaper than their sibling counterparts. Moreover, with greater bottle age, they are going to be drunk earlier. This in turn will reduce supply and simultaneously fuel higher prices. Any such price anomalies as these present good investment opportunities.

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Tricks of the Trade

CONSIDER buying a few large format wines en primeur as these big bottles are relatively rare and often command a significant early re-sale premium over standard bottle sizes. However, you should only buy trophy wines from great vintages. If you are buying Yquem as an investment only buy halves. Do not buy large format Yquem. Half bottles of Yquem trade at a premium because they are more popular, because and are consumed more often. Conversely, large format bottles are consumed much less frequently so tend to hang around in people’s cellars. Generally though, Sauternes is not regarded as a blue chip investment in comparison to the demand for top class claret.

READ around the subject as much as you can. Apart from reading decanter.com and Decanter, key critics to follow include Jancis Robinson, Steven Spurrier and, of course, Robert Parker in his Wine Advocate. For a more academic approach to wine investment buy Mahesh Kumar’s book called ‘Wine Investment for Portfolio Diversification’, published by The Wine Appreciation Guild. More recently published in 2008 is ‘Investing in Liquid Assets – uncorking profits in today’s global markets’ by David Sokilin and Alexandra Bruce. The book is published by Simon & Schuster and costs £17.99. For statistical information on how the wine market is moving check out livex.com’s various wine investment indices and market updates. For auction prices, check out Decanter’s Bordeaux Index.

PAY ATTENTION TO PARKER! The importance of Parker points cannot be stressed enough. According to recent research there is still a strong correlation between a highly rated Parker wine and its subsequent return on investment. In the last year, 99-100 point wines have generated twice the performance of 92-93 pointers. On average wines with less than 94 points have underperformed in comparison.

GO FOR A SMALL NUMBER OF HIGH VALUE ITEMS – rather than having lots of cases of more modest wines amounting to the same value. Not only do the top 100 point trophy wines tend to generate more profits, the storage costs of having a large number of cases will eat into your profitability.

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Where to buy?

At Auction You will get very good wine advice from the leading Auction houses specialist wine departments – but they are not investment specialists. Until the end of 2008, the Auction market has been incredibly strong and something of a seller’s paradise with a slew of record prices, particularly in the US and more recently Asia. Now though, prices are coming back to earth and some bargains are undoubtedly there for the taking. Nonetheless, very good prices can still be achieved at auction for great trophy wines with perfect provenance. Remember to factor in the buyer’s premium which can be as much as 15% in the UK. (Currently, the auction market is an excellent place to buy more modest good quality wines for drinking.)

From a Merchant or Broker Remember that brokers and merchants tend to know more about wine than they do about personal wealth management: they are not qualified financial advisors. Nevertheless, some do offer a range of investment services including portfolio management services, cellar plans and advice on investment. Naturally some are better at this than others. So do shop around. Generally though merchants are in business to sell wines from a list and so have a vested interest in whatever wines and advice they are supplying.

Specialist Wine investment Companies Be very careful when dealing with specialist wine investment organisations. There are a few reputable companies who have been operating for over a decade and have a proven track record. But many others should be treated with caution. Do not agree to paying any up front commission fee. Some companies charge as much as much as 25% and are best avoided.

Do not deal with anyone who uses cold calling or strong arm sales tactics. Do not deal with anyone who operates via a PO Box. Be wary of anyone whose prices are too low or too high. Do check that the company is not one of the dodgy investment companies named and shamed on www.investdrinks.org website. Ask around to make sure that the company you are thinking about dealing with is well-known and above board.

Wine Investment Funds There are now several extremely successful and reputable wine investment funds around the world. The advantage of these professionally managed funds is that they tend to be run by ex City investment professionals who are literate in fine wine as well as high finance. Given the complexity of wine investment, it may make sense for some people to hand over the buying and selling decisions to these professional fund managers. Investors can also take advantage of these ‘unit trust’ funds to spread their risk more effectively. Successful funds have also been set up in such a way that investors avoid paying CGT on any gains accrued from selling the fund’s units. Finally, a number of these funds have some FSA regulation.

Of course, investors do pay a variety of fees for the privilege of having their liquid assets managed on their behalf. Do check out what these are and what is the minimum subscription. Moreover, not every wine investment fund has provided gold-plated returns for its investors. In 2005, the AWM fund, an off-shore mutual wine fund run out of Geneva went into liquidation. In the same year, an Australian fund, Heritage Fine Wines also collapsed. Most recently, following the collapes of Uvine, the Amphora Fine Wine Fund has also been closed and its stocks liquidated. In which case, do as much research as you can before putting your money into a wine investment fund.

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Where to Sell?

At Auction If you have a large collection of great wines, a good auction house will negotiate down from its standard seller’s fee of 10% commission. Even in the current market conditions, the saleroom is still one of the best places to sell a stellar collection of trophy wines.

To a Merchant or Broker Generally, a merchant or broker will charge a commission of 10%. Some companies also offer an ‘Auction Hammer Price.’

Online Online Private Collectors and investors can also sell (and buy) wines through www.bidforwine.com

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How do I value my cellar?

You could ask your merchant to value it. If the wines are in good condition and stored under bond, you should be able to get a figure quickly over the phone. For more substantial and complicated collections cellared at home, a private valuation may be required. Another way would simply be to take the lowest prices on winesearcher.com and deduct 10% as the broker’s margin to leave you with a net value. A third way would be to subscribe to an on-line subscription-based product from liv-ex.com called ‘Cellar Watch’. This allows investors to value their cellar using the most up-to-date prices.

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How to invest in wine without buying a bottle

Since 2008, it has been possible for investors to speculate on changes in fine wine prices without having to take delivery of any wine, let alone pay storage charges or worry about provenance. ODL Markets, part of trading house ODL Securities, is offering investors the chance to place spread bets on the future value of the Liv-Ex 100 Index. Participants bet a fixed amount per point of the index that it will go up – or down – on a quarterly basis. All gains are tax-free.

More recently, Intrade Ltd have created the world’s first publicly traded futures contracts written on the fine wine market. Intrade will list on its prediction market platform cash settlement futures contracts based on Liv-ex’s proprietary Liv-ex 100 Index. Significantly, this move will also this give merchants, funds and investors an opportunity to hedge their exposure to the underlying market.

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Contacts:

Albany Vintners: Tel: 0845 330 8858. www.albanyvintners.com

L’Assemblage: Tel: +44 (0)1243 537775. www.lassemblage.co.uk

John Armit Wines: Tel: +44 (0)207 908 0660. www.armit.co.uk

Berry Bros & Rudd: Tel +44 (0)870 900 4300 www.bbr.com

Bibendum: +44 (0)207 449 4120. www.bibendum-wine.co.uk

Bordeaux Index: +44 (0) 207 253 2110 www.bordeauxindex.com

Bordeaux Wine Investments: +44 (0)1732 779343. www.bordeaux-wine-investments.com

Corney & Barrow: +44 (0)207 265 2400. www.corneyandbarrow.com

Farr Vintners: +44 (0)207 821 2000. www.farr-vintners.com

Fine & Rare Wines: +44 (0)208 960 1995. www.frw.co.uk

Genesis Wines: Tel: +44 (0)20 7963 9060 www.genesiswines.com

Justerini & Brooks: Tel: +44 (0)20 7484 6400 www.justerinis.com

Lay & Wheeler: Tel: +44 0()1473 313233. www.laywheeler.com

Robert Rolls: Tel: +44 (0)20 3215 0011

Seckford Wines: Tel: +44 (0)1394 44 66 22. www.seckfordwines.co.uk

Tanners Wines: Tel: +44 (0) 1743 234500. www.tanners-wines.co.uk

Wilkinson Vintners: Tel: +44 (0)20 7616 0404

Wine Investment Companies

Magnum Fine Wines: Tel: +44 (0) 207 839 5732. www.magnum.co.uk

Premier Cru Fine Wine Investment: Tel: 44 (0) 20 8905 4495 www.premiercru.com

Auction HousesBonhams London: Tel: +44 (0)207 629 6602: www.bonhams.com

Christie’s London: Tel: +44 (0)20 7839 9060. www.christies.com

Sotheby’s London: Tel: +44 (0)207 293 6423 www.sothebys.com

J Straker Chadwick: Tel +44 (0)1873 852624. www.strakerchadwick.co.uk

Wine Funds

The Vintage Wine Fund: Tel +44 (0)20 7553 4314. www.vintagewinefund.com

The Fine Wine Fund: Tel +44 (0)207 937 0090. www.thefinewinefund.com

The Wine Investment Fund: Tel +44 (0) 20 7478 0901. www.wineinvestmentfund.com

Lunzer Wine Investments Limited: Tel +44 (0)20 7228 7882 www.lunzerwineinvestments.com

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Useful websites

www.vwftrading.com

www.investdrinks.org

www.winesearcher.com

www.decanter.com

www.liv-ex.com

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Glossary

Investment grade wine: A true blue chip wine which is widely regarded as possessing sound investment credentials.

Improving asset: Fine wine is an asset that improves over time – until of course it becomes undrinkable loses its value.

Wasting asset: For the revenue, wine is regarded as a wasting asset where it has a predictable life not exceeding 50 years. If, so it is generally exempt from Tax.

Liv-Ex. On-line international stock exchange for the trading of fine wines by member merchants.

Bond, in bond: Wine held ‘offshore’ in a bonded or tax warehouse so that duty and any local taxes are not applicable.

Fake wines, wine frauds: Counterfeit wines created with the express intention of defrauding buyers.

Mis-selling: Criminal or negligent selling of goods or services.

Trophy wines: The rarest, most expensive and bluest of blue chip wines. Usually First Growths or equivalent.

Garage wines: Modern micro-chateaux such as Valandraud and La Mondotte.

Small cap stocks: In wine, these are less expensive labels which can occasionally provide good returns.

Auction hammer price: Some merchants and brokers will offer ‘an auction hammer price’ to vendors. This is roughly what the wine would fetch at auction.

Provenance: Proof of authenticity and ownership history. Not to be confused with a wine’s condition.

First growth: Translation from the French term ‘Premier Cru’ officially designated in the Medoc classification of 1855 – including Latour, Lafite, Haut-Brion and Margaux. Mouton Rothschild was elevated to First Growth Status in 1973 by official decree. It also encompasses other great classified Chateaux in St Emilion and unclassified properties such as Pomerol’s Chateau Petrus.

Second growths: Translation of the French term Deuxieme Cru, officially designated in the Medoc Classification of 1855. Second Growths include Leoville-Barton and Cos d’Estournel.

Super seconds: The top performing Second Growths.

En primeur: French term for wine which is sold as futures before it is bottled. .

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