The Fine Wine Investment Industry Is Maturing Nicely But Has Peak Vintage Already Passed?

Published On: April 22, 2019Categories: Alternative Investments10.3 min read

Fine wine investment is classified as an alternative investment class or a hobby investment. The difference really boils down to semantics but one thing that is not up for debate is that most of the recognised fine wine indices have significantly outperformed equities equivalents over the past decade and a half.

It’s been the best period in history for fine wine investment. The industry has matured as an investment class thanks to a combination of technology making it more transparent, measurable and democratic and growing demand and interest in fine wines from around the world. The supply of wines and vintages considered as collectible or ‘fine’ has remained relatively constant but demand has increased with the number of well-off collectors and drinkers in emerging economies such as China and India.

That has resulted in soaring prices for the most established categories of ‘fine wine’ – particularly Bordeaux. And a trickle-down effect that has seen buyers priced out of the most expensive fine wines exploring alternatives, such as Burgundies, other secondary French regions and the top Italian estates.

Over the past 15 years, data from wine trading platform and index compiler Liv-ex shows the prices of the world’s top 1000 crus has risen by a massive 264%. Over the same period, despite the fact that the last ten years has coincided with the longest equities bull run in history, the S&P 500 has gained 144%. That’s almost half the returns from fine wine. And the UK’s benchmark FTSE 100 index has gained just 61%.

Let’s take a closer look at the factors behind the giddy rise of fine wine as an asset class, it’s strengths and weaknesses as an investment and what the chances are of the next decade or so in fine wine investment repeating the trick.

Is Fine Wine Really An ‘Investment’?

There’s no reason why fine wine can’t be considered an investment. Yes, it is produced for drinking and not to be held indefinitely as a collectible. But the fact that sooner or later a bottle of even the finest Bordeaux must be poured into glasses and drunk if its quality is not to begin to decline, ultimately going bad, is what plays into the dynamics of a bottle’s value.

It’s well known that the best wines, those tannin-rich vintages classed as ‘fine’, improve with age when stored in a specialist wine cellar with controlled conditions. But their value doesn’t keep increasing with age forever, or linearly. At some point the quality of a fine wine ‘peaks’. In the case of a Burgundy that is usually at between 15 and 30 years. For Bordeaux it can be longer. The best Bordeaux vintages can still taste superb after 100 years if stored in optimal conditions. But in saying that they will also have passed what would be considered their ‘peak’ maturity –

“the point when the wine has the maximum amount of complexity, most pleasing mouthfeel and softening of tannins and has not yet started to decay. When this point will occur is not yet predictable and can vary from bottle to bottle”.

The last sentence is crucial. There is no exact science to knowing when a particular fine wine will peak. The only way to know is after the fact. When someone has drunk a bottle and reached the conclusion it’s perhaps no longer quite as good as other bottles opened in recent history.

Fine wine resale values usually reach a certain level several years after the vintage has been bottled, when the variety of wine reaches ‘maturity’. That might be 3-5 years, 5-8 years or 8-12 years depending on the kind of wine, with the ‘best’ wines usually maturing later. After that point values become more unpredictable. If a particular vintage garners rave reviews at maturity its value could spike. Or could also drop if it doesn’t quite meet expectations.

It is not unusual for a fine wine vintage’s value to stagnate for many years and then to suddenly surge because someone with an influential voice in the industry has opened a bottle and reported it to be delicious. Overall international demand for fine wines and demand for particular wines also ebbs and flows, influencing prices.

Bottles peak at a certain maturity, after which their value will start to decline as demand drops in favour of other vintages. But fine wines are also a finite commodity so the more bottles of a vintage have already been drunk the lower the supply becomes for future buyers, again driving up prices. So supply and demand dynamics influence fine wine prices like traditional investments. And like traditional investments there are optimal moments to buy and sell that can be difficult to time.

The reality is fine wine has become an investment class. A recent article in The Economist magazine quotes Simon Staples, head of sales at traditional London wine merchant Berry Bros & Rudd as estimating that around 85% of online fine wine buyers are motivated by investment goals rather than consumption. At the end of the line of ownership, someone has to want to buy the wine to drink it and any investment case across previous owners is ultimately based on what that final owner will be willing to pay. But the overall market for fine wine is now one dominated by investors buying wine in the hope of selling it on for a profit further down the line rather than drinkers. Practically speaking, fine wine certainly is now an investment.

Technology’s Role In The Fine Wine Market Maturing Into An Alternative Investment Class

As a tangible and consumable product, wine is not a market that many would immediately associate with the digital economy. But the reality is that the emergence of the digital economy has had a huge influence on the wine market and particularly that for fine wines.

Until relatively recently, the merits of particular fines wines were assigned by a very narrow group of critics. One critic in particular held huge sway over the market – Robert Parker. The demand for crus, and their values, would leap or plummet based upon his assessment. While Mr Parker’s nose for a quality fine wine was renowned and respected, the opinion of a single individual holding such sway over an industry, with most of the rest divided among another small group of high profile critics, held the industry back as an investment. The highly concentrated subjectivity made fine wine very risky as an investment.

The internet has democratised opinion on the quality of individual crus with ratings now much more of an industry-wide consensus. That’s added a much needed transparency that has given investors greater confidence.

Digital wine trading platforms have also seen greater consistency and transparency injected into the industry. Any buyer of a particular bottle or case can see the prices the same wine has been traded at over the years. The infrastructure behind these platforms is similar to that of other traded commodities in financial markets with instant quotes, indices and settlement services incorporated.

That’s created a virtuous cycle, bringing more money into the fine wine sector, driving up prices of the classic fine wine regions broadening the appeal of other regions. If a wine vintage is of particularly high quality, there is now much more chance that will be recognised and translate into higher market value than at any time in the past.

Burgundy prices have approximately doubled since 2015 as investors have been priced out of Bordeaux. For fine wine investors, spotting where the ripple effect will spread to next is a potentially lucrative opportunity.

The Strengths and Weaknesses of Fine Wine As An Investment

Like any investment class, fine wine has its pluses and minuses. For some investors the balance between those will convince them fine wine is worth the risk and others will reach the conclusion it’s not for them.

In favour of fine wine is the positive market trend. The market’s infrastructure and associated transparency and convenience is developing and demand increasing and broadening as a result. There is of course an open question around how long that trend will remain in place but the fundamentals do seem solid. There is limited supply of the kind of wines recognised as ‘fine’ and growing global prosperity and access to information is increasing the demand for it.

Fine wines have delivered market-beating returns over a sustained period of time and buying and selling has never been easier. New online exchanges mean pure investors with no intention of drinking their bottles can acquire fine wines online and leave them in specialist storage before reselling them on, hopefully at a profit, in future years.

Portfolio diversification is another argument for fine wine as an alternative investment class. Wine is not entirely immune to global macroeconomic factors and the Liv-ex 100 fine wine benchmark did drop 15% in 2008 during the midst of the financial crisis. But fine wines do show as little correlation to financial markets as can be reasonably expected.

When financial slumps hit, historically fine wine has been among the last major asset classes to drop in value, by relatively less than equities and have been among the first things to recover.

Well diversified investment portfolios have been shown to produce better risk-adjusted long term returns than those that are concentrated in one or two asset classes.

If worst comes to worse you can always drink it. There’s no obvious reason why the bottom might fall out of the market for fine wines. But in the worst case scenario, unlike stock in a company that goes belly up and becomes completely worthless, at least drinking a bottle of fine wine that somehow lost most of its value would still be a wonderful way to soothe the pain!

There are of course downsides to fine wine as an investment. First of all, while wine exchanges have made the market much more liquid in recent years, making it easy to buy and sell, a case of fine wine is far less liquid than traditional investments. If you want to sell a case of fine wine quickly, a buyer being available and ready to buy it at or very close to the most recent sale of the same wine at the click of a button is not guaranteed. It will depend upon market conditions at the time.

Price trends for individual fine wines can be unpredictable, which connects into the investment class’s less than ideal liquidity. The best fine wines, those that have ‘peak’ maturity cycles of up to 50 years and can give the best returns, are particularly hard to time as investments. Asas Charles Lea of UK wine merchants Lea & Sandeman tells The Economist, these vintages often have a value spurt over their first several years and then sit at the same level or even slide.

This period can stretch on for a long time. Then“..a decade later someone might open a bottle and realise the wine is delicious—prompting its price to double overnight”.

A reasonable level of market knowledge is required for success investing in fine wines, especially if you’re not at the top end of the Bordeaux market and are hunting out crus with investment potential but no guarantee it will be fulfilled. You don’t necessarily have to be an amateur sommelier but you do need to understand what drives the market and have a keen eye for spotting future trends that could play out. Like the next beneficiary of the ripple effect as certain other wines become more expensive.

This is of course the case with any investment class but investing in fine wines is more like stock picking than buying into an actively managed fund or index tracker, where you are relying on the wider market or an expert manager. Unfortunately, there are currently no ETFs that track fine wine indices that would allow for a more passive investment strategy. That means either putting in the effort to educate yourself as a fine wine investor or finding a trusted advisor you can rely upon.

Added expenses can erode wine investment returns. It costs around £10 a year to store a case of wine in a specialist cellar, unless you have a large enough collection of fine wine to justify further investment in a wine cellar with controlled conditions. It’s not a huge expense and should be comfortably absorbed under normal conditions and if the investment provides a reasonable eventual return but still something to be aware of.

A bigger expense and one than can potentially take a more significant chunk out of wine investment returns are merchant fees when you sell. Online exchanges are bringing these down but at the top end of the scale you might pay a merchant or auction house up to 10% to facilitate a sale.

Conclusion – Is Fine Wine An Investment Worthy of Consideration?

There is certainly as strong a case for fine wine as an investment class as there is for almost any other alternative investment. And returns over the past decade and more have been very attractive. But like most alternative investments, fine wine should probably be considered if you already have a large investment portfolio built around traditional, liquid investments like equities or bonds and are looking for some diversification.

It also probably only makes sense if you have a keen interest in wines and understand the downsides as well as being in a position to sit on fine wine assets and wait for the right moment to sell.

About the Author: Jonathan Adams

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