Fine Wine Investment Revisited
Last year, iNVEZZ took a look at fine wine as an investment product (Investing In Wine – Exercise Caution Ahead) which concluded that, unless you have a high level of expertise – that you know your Chateauneuf du Pape’s from your Lafite Rothschild’s as it were, you’re probably well advised to stick to drinking rather than investing in wine.
More recently, it’s been suggested that perhaps we took a dimmer view than warranted of wine as an investment class. Also, that it’s not necessary to be a Robert Parker or other guru to take a stake in wine, so long as you’re being guided by someone who does have that kind of expertise. For example, a wine investment fund. So we decided to let an operator in that market have its say and to put across the case for investing in wine.
The Wine Investment Fund (TWIF), which is registered in Bermuda but operates out of central London, launched 10 years ago, in 2003, so can fairly claim to have established a track record. It’s one of several funds which accept deposits from authorised investors (more on that topic below) and pools the money in a fund which then invests in fine wines with the objective of increasing the value of the investment over its life – in TWIF’s case, five years per tranche.
We invited TWIF to consider and respond to a number of questions and concerns we posed about investing in wine and about TWIF’s investment product in particular. The invitation was readily taken up and the responses promptly provided, authored by co-founder and playing through director Andrew della Casa. We were also provided with the information memorandum for TWIF’s most recent tranche, dubbed 2012(4), its general info sheet on fine wine investment and its forecast for 2013.
Fine Wine Investment Funds – Legal Status in UK
Before we get into our questions and TWIF’s responses, though, a few words are in order on the legal status of fine wine investment in the United Kingdom. As a preliminary observation, it can fairly be said that the UK approach to collective investment schemes (‘CIS’) generally – where individual investor funds are pooled to purchase an investment product – is nothing if not heavy-handed. Such schemes are classified as either ‘regulated’ – in which case, subject to regulatory oversight by the FSA (Financial Services Authority) and a plethora of rules, they may be marketed to all and sundry in the UK – or as ‘unregulated’ (known as a ‘UCIS’), in which case it’s illegal to market the scheme other than to defined categories of investor.In essence, to ‘sophisticated’ investors or people of high net worth. A UCIS may not promote itself to or accept investment from ordinary UK-resident ‘Joe Public’ investors.
Fine Wines In An Investment ‘Rogues’ Gallery’?
Fine wine investment funds such as TWIF are unregulated. In this respect, fine wine collective investment schemes are lumped together with those involving several other investment products, schemes for which do not qualify for ‘regulated’ status. Notable examples are ‘land banks’ and carbon credits. Indeed, these three specifically are assembled as a sort of rogues’ gallery in an FSA publication whose title – ‘Investment Scams’ – pretty much sums up the agency’s jaundiced view of collective investment schemes for such products.
In this publication, the FSA in referring to investing in wine expresses its concern ‘that some wine investments are not legitimate and are knowingly being sold as a scam – either because the quality of the wine is poor, so the wine is being mis-sold, or it does not even exist’. And it’s true – there have been a number of such scams in the UK in recent years and especially since onset of the global financial crisis in 2008.
Not All Wine Investment Should Be Tarred With Same Brush
But we can take it, we think, in the absence of evidence to the contrary that a wine investment scheme which has been around for 10 years now, and which has named and real people operating out of identified and real premises, in the heart of central London no less, is a horse of a different colour.
We invited The Wine Investment Fund to comment on this seeming regulatory discrimination against fine wine as an investment product. The response was phlegmatic – things are as they are. But in any event, advised TWIF’s della Casa, “we undertake to operate … to the highest standards in the investment management industry. This means that we act as if we were a regulated entity, irrespective of the legal status of fine wine”.
Bordeaux The Way To Go?
So, what about fine wine as an investment product? Does it deserve the hype it gets in some quarters of the investment world media? How does it stack up with other and especially ‘mainstream’ investment products, such as listed company shares? And, by the way, if one is to invest in ‘fine wines’, which of the many thousands of individual products and vintages from around the world should one be targeting?
Taking this latter question first, TWIF’s seemingly unwavering stance is to invest only in ‘Bordeaux cru classe’ – wines from select chateaux in this venerable wine-producing region of south-western France, and then only from amongst mature – more than four years old – vintages with established demand. We asked TWIF if there were not risks in having all eggs in the Bordeaux basket, especially given the poor performance of the 2011 Bordeaux vintage at the most recent London wine auctions and the continuing ascendancy of New World wines – six of the 13 prestige award winners at the inaugural Decanter magazine Asian wine awards came from Australia, including the Bordeaux category itself.
Bordeaux V. The New World
In della Casa’s words, “Bordeaux has a unique balance of two factors”. The first, he advises, is that the rigid controls over what may be classed as Bordeaux ensure “a limited supply” of (we infer) any given release, “which then falls as the wines are consumed, tending to push prices up over time”. Whilst Bordeaux is not alone in this respect – take Champagne and Burgundy for example – della Casa points to a second factor which marks out Bordeaux as a special case: “…sufficient production for there to be deep and liquid secondary markets”. It is the absence of these factors, in TWIF’s view, which counts against Australian or other New World wines as investment products. della Casa stresses that this “is not an observation on the relative quality of [New World wines]” which, as he notes,“have been winning … competitions for many years, beginning with the famous ‘Judgement of Paris’ in 1976”.
The 2011 Bordeaux Nose-Dive
But isn’t this Bordeaux production capacity something of a two-edged sword, we’ve wondered. Might not the word ‘glut’ find its way into the Bordeaux vocabulary and indeed wasn’t abundance of supply a principal factor in the poor prices achieved for the 2011 vintage at the London wine auctions? We put that sort of thinking to TWIF for comment.
The response was that 2011 – and 2012 for that matter – were and will be seen in future to have been a special case: “…the only time in recorded history when there have been two consecutive years of price falls”. In 2011, the Liv-ex 100 index – which tracks pricing in the 100 most traded wines, mostly Bordeaux – fell some 15 percent, to be followed by a further nine percent in 2012. As for the reasons for that phenomenon, TWIF in its 2013 forecast document ascribes several.
Fine Wine – First And Foremost A Consumable
First up, continuing global recession, particularly in the ‘traditional’ European and North American markets but also in what TWIF describes as ‘the most important market for fine wines’ – Asia. Again in 2012, as in the preceding years since the global financial crisis of 2008, fine wine consumption – the driver for pricing – was down in the key markets of Japan, Hong Kong and mainland China, with gloomy economic conditions not helped by a depreciation of the yen and renminbi against sterling, rendering Bordeaux and other fine wines offered out of UK warehouses more expensive than hitherto.
Pausing here, it may be noted that a picture is here painted of a consumable product as much at the mercy of prevailing economic conditions in a given market as any other luxury good – such as electrical appliances, high-end fashion clothing and automobiles. When belts tighten, the consumption of such luxury consumables declines across the board, albeit that the rich may keep getting richer. And investment in fine wine is underpinned by its consumption, sooner or later but inevitably. A fine wine kept beyond its optimal ‘drinking age’ will rapidly and irreversibly decline in value.
Importance of En Primeur
A second reason given by TWIF for last year’s dismal performance of Bordeaux wines was the insipid market response to the 2011 en primeur vintage – its offering in bulk for future delivery. Whilst TWIF is at pains to point out that it does not itself invest in en primeur, because of volatility in future pricing of what is initially a largely unknown quantity, it acknowledges the impact which the annual release of Bordeaux wines en primeur can have on the wider market. A good reception can set up that year for future demand-side buoyancy but the converse is also true.
As TWIF puts it, “[w]ith the 2011 releases the downside influence of a poor ‘campaign’ was clearly seen. The châteaux set high prices for what was a not particularly good vintage, which dissuaded many drinkers from buying”. A compounding factor was that “many investors who did not follow TWIF’s advice (to avoid en primeurs) in previous years were sitting on losses on their 2009s and 2010s and were not inclined to repeat their mistakes”.
Flight Of Institutional Sentiment
And finally, TWIF points to an apparent loss of appetite during 2012 for investing in wine from institutional investors: “The final important factor on the market in 2012 was the level of activity from large institutional stockholders, and the fact that the vast majority of this activity was on the sell side.”
We put to TWIF the question whether such a bail-out – by buyers of fine wines purely for investment purposes, as opposed to consumption – might not also be expected going forward, as other investment products, or indeed cash, present as more attractive. Andrew della Casa thinks not: “In the longer term we believe the economic climate is very favourable for wine as an asset class. The key point is that wine is a physical asset which is immune to inflation and its value cannot be eroded by the actions of governments.”
We’re not entirely sure about that proposition but we take della Casa’s point that last year’s slump in Bordeaux prices was primarily set round the en primeur activity in the first half of the year, culminating in auctions in May and June, and that the latter half of 2012 saw prices starting to firm. The trend has continued at least into the early days of 2013, with the Liv-ex Fine Wine 100 index recording a 2.82 percent gain for January.
Prognosis for 2013 – ‘Cautious Bullishness’
Concerning this year in its entirety, TWIF is what might be described as ‘cautiously bullish’. It believes that the consecutive slumps of 2011 and 2012 are an historical aberration, going against a longer-term trend which has seen the value of fine wine out-perform equities over a respectable time period. As put by della Casa: “Using the longest available time series, the Liv-ex Investables index, fine wine prices have risen by 12.0% per annum since 1988; the equivalent figure for the FTSE 100 being 4.9%.”
And that, believes TWIF, is a direction more likely than not to continue through 2013. Indeed, “TWIF’s central forecast for the change in wine prices in 2013, as measured by the main index, the Liv-ex 100, is +14%.” A further slump is seen as highly unlikely – the fund rates at only 14 percent the chance of a decline in prices and ascribes only “a very remote chance (1%)” to such a fall being below five percent.
Risks Plainly Remain
Of course, neither TWIF nor any other recognised player in the fine wine investment world has a crystal ball. Risks plainly remain and indeed their information memorandum is replete with them – no less than three full pages of the 30-page document are devoted to a description of the risks attendant on investing in wine and on an investment via a mutual fund in general terms and via the TWIF product in particular.
And it’s a case of ‘all care and no responsibility’, in the sense that – absent fraud or gross negligence – investors formally absolve TWIF and its management from liability for any losses incurred in investing in the fund. There is of course nothing unusual in this per se – listed company shareholders are similarly positioned – but, as noted early in the piece, fine wine as an investment product has attracted its fair share of shysters.
Mostly though, such scams typically promote direct investment in physical wine – which oftentimes doesn’t exist – and are parlayed via aggressive cold calling to gullible punters sucked in by glib promises of high returns but who, when all’s said and done, ought to know better. This is the stuff of the FSA’s ‘Investment Scam’ advice and, doubtless, will be the focus of the just-announced initiative between The Met’s NFIB – National Fraud Investigation Bureau – and the newly-formed Wine Investment Association.
It’s a world apart though from investing in wine via established and visible investment funds, with track records and credentials. As noted, the investment is not risk-free and The Wine Investment Fund for one makes no bones about it. It’s also of course – at least not until a change in the law and the FSA’s negative stance – not an investment option available to ordinary British investors.
Would We Do It? Invest In Fine Wine?
Be that as it may, the responses provided by TWIF to our questions go some way towards recalibrating our earlier reservations about fine wine investment. Would we put hard-earned cash into a wine investment fund rather than pony up quite a few pounds now and again to enjoy a first growth Bordeaux just coming into its prime? Not if the portfolio selection was our call – that would be rather more a gamble than an investment. But with trustworthy, level-headed expertise in our corner, and sharing our risk? Perhaps.