Why choose wine as an alternative investment?
I would say primarily as a diversification tool as it allows investors to make an allocation of capital into a tangible asset class, which isn’t directly correlated to the financial markets but more than that it offers long term capital appreciation over an optimum term of 5-10 years. From an enjoyment and passion perspective, it makes for something a little more interesting within a wider ranging investment portfolio. At a time when a lot of asset classes have been on a strong run, considering investing in wine shouldn’t be viewed as a substitution but more to compliment an overall strategy. As reported in Reuters this week so-called ‘passion investments’ are becoming increasingly popular with high net worth individuals worldwide and wine fits nicely into this category.
Fundamentally though, the underlying characteristics which drive fine wine prices higher over time, still remain and are consistent, it’s simply due to a demand supply imbalance which is exacerbated over time through consumption and increased demand due to rarity. If anything over the next 10 years, one would expect demand for fine wines to grow due to the emerging markets and supply to remain fixed, which suggests a strong long-term outlook.
Fine Wine Market – how it is faring?
I think to really understand where the fine wine market is today and where it’s headed, it’s necessary to look at the composite regions that make-up the investment grade fine wine market.
Firstly, looking at the most important and largest part of the market – Bordeaux, we have seen prices for the top-end grand cru classés suffer a downturn over the past 18-24 months. There is certainly a loss of confidence and a lack of market sentiment in the Bordeaux first growths and this has been driven by a couple of factors. Firstly the overpricing of recent ‘great vintages’ of 2009 and 2010, as well as the bubble created around the 2008 vintage, has seen prices fall significantly for some of the top brands such as Lafite. Secondly the Government austerity measures implemented in China have certainly curbed government officials’ entertainment budgets – pretty much eliminating these purchases.
Interestingly though, if you look at the Bordeaux market as a whole, the one area where we are seeing some resilience in price falls is both the middle tier wines such as Smith-Haut-Lafitte, which signifies a shift of demand towards lower priced but high quality cru classés which are perceived as offering more value to buyers. But also to older, more mature vintages of Bordeaux. These are still performing well in auction as collectors are keen to secure rarer older vintages of Bordeaux. For me this signifies that the Bordeaux market at present is being driven more by consumption buying than anything. So there is certainly a disparity within Bordeaux of older versus younger vintages of which of course there is significantly more supply.
Looking outside of Bordeaux and there has been some strong performance from an investment point of view for Burgundy, Italian and Champagne. The market has certainly widened and people are looking elsewhere than Bordeaux for top quality wines. As a result we have seen very strong trading and performance for top end Burgundy producers. Just a look at auction results this year in New York and Hong Kong, showcases the dominance Burgundy holds at present – in late 2013 we saw the world record price for a 12 bottle case of wine achieved for a DRC, Romanée-Conti 1978 – which sold for just short of 500k USD. Similarly as I mentioned, on the back of some very positive critic reviews for the 2010 vintage in Italy, both Barolos and top end Super Tuscan wines have fared very well. Prestige cuvee champagne is also another area doing well and interestingly is a segment of the wine market which is pretty much untouched by the emergence of China as wine consumption super power as they import so little. One could assume there strong growth potential for these wines as Chinese buyers become more accustomed.
What is the current appetite for fine wines in China?
It is an area I have already mentioned as it does have a considerable impact on the shape of the market due to the huge volumes of imported red wine they consume annually. But an interesting fact to look at is that despite being the world’s number one consumer of red wine, their meagre 0.5 litres per capita dwarfs in comparison to the likes of Italy at over 50 litres per head. This signifies that there is still huge potential in this market.
Looking at the top end of the market there isn’t any getting away from the fact that the cut-back on government spending following the implementation of the austerity measures has had a massive impact on the pricing of first growth Bordeaux but there is still a growing wine culture within China which seems to have the appetite and potential to be the largest buyers of grand cru classé globally.
Looking at imports Year to date, the volumes are down, but when looking at for example Burgundy, the value imported has increased which signifies for that particular region a growing trend to more expensive labels.
But the biggest shift in the past 12 months has been away from this hourglass type shape to the market, and the middle market being driven by a younger generation of wine consumers who are looking more towards e-commerce, seeing sales in wines priced £20-£75 per bottle increase significantly. Interest has certainly broadened away from the extremely Bordeaux-centric days of 2009 and 2010. I think this can be put down to increased awareness and wine buyers becoming far more knowledgeable as the market has developed.
3 key tips for investors looking at starting a wine portfolio?
1. I would recommend investing with a long term outlook of 5-10 years. All of the research and studies we have conducted show that the longer you hold wine the less volatile and more consistent the returns become, therefore an optimum hold should be focused on these levels.
2. Build a collection of wines for investment which is diversified – in order to buffer against volatility of one particular area underperforming.
3. Use an online management tool to track wine prices and keep track of how your investment is doing.
Any specific wines/regions you are particularly favouring?
I’m very excited by the prospect of buying into Barolo today – top producers such as Bruno Giacosa and Guillermo Conterno offer great value and growth potential and for people buying today it could be one of the best long term holds out there, certainly after some very positive critic reviews and acclaim for recent vintages.
Top end Burgundy continues to perform very well, so I am actually advising clients to look at maybe a tier below the likes of DRC, Leroy, Rousseau, Mugnier etc. at some more up and coming producers such as Domaine Fourrier, who might become the next Dujac. They still own fantastic premier cru and grand cru vineyards; their wines are equally impressive but much more cost effective.
Bordeaux, I think the middle tier wines – cru classé priced at £40-£100 per bottle offer good value and potential as this is certainly an area of the market that has done well despite the general downturn in prices for Bordeaux. There is of course en primeur, which if bought correctly still offers collectors a great way of buying at discount, but in the past couple of vintages this has become less obvious and easy than it was before. With the price falls experienced for first growths in the past 18-24 months, it does also hint at a good buying opportunity for those with a long term outlook as some wines are almost 50% down on previous market highs.