Investing in wine: Wine matures as an asset class

There is a romantic notion about wine investment, which is that you can buy two cases of young wine so that, after a period of maturation, you can drink one and sell the other to finance the purchase of another two cases. This self-perpetuating policy may allow some wine enthusiasts to drink ‘for free’. The fallback position of those who hold this view is that if values don’t rise as expected, they can always drink the whole stock. Sadly, though, it’s not much of an investment policy.

Recently, interest in fine wine has been growing in the traditional markets of Europe and North America (which underpin the market for fine wines) and the emerging markets of Russia, India and China. The price of ‘blue-chip’ wines will increase with demand, yet volume remains finite: from their harvest date, the quantity of these wines can only decrease – sometimes at remarkable rates – especially when a wine is ready to drink.

While owning the physical stock of such blue-chip wines can give great returns, for investment purposes that’s not enough in itself. The key questions remain ‘what to buy?’, ‘where to store the wine?’ and, most importantly, ‘how much to pay?’. It seems that most wine investors to date have settled for so-called ‘investment advice’ from wine merchants who offer to put investors’ money into wines that the merchant already owns. This means that the investor pays the merchant’s margin in the price. Such advice may be given honestly, but it doesn’t ensure the best price is achieved – which is the key to investing in wine. Price determines the time it takes to make a decent return.

A lot of great wines sit on lengthy price plateaux during periods of maturation. Often, this has to do with whether or not the wines are being written about. For example, the now all-bottled 2003 Bordeaux is currently being shipped to clients and reassessed by the critics. The effect is to increase sales of the 2003 vintage and up the price of those wines that critics feel are of greater quality than they considered them to be during their en-primeur (ie, pre-bottling) stage. From an investment point of view, why tie up your capital during a price plateau?

Competing in the press for column inches will soon be the opening offers of wines from the newly hyped 2005 vintage. The quality is very high and rumours so far are that the demand will be exceptional, which will persuade many chateaux owners to cash in on the demand by raising their prices – possibly by as much as 30% above the 2004 prices. But what if you manage to acquire these wines at such a high price and the next (2006) harvest produces an equal, or better, quality vintage? I believe securing a stock of great wines early will ultimately produce terrific returns. It is purely that the time scale is debatable.

Investors have rarely been offered wine portfolios managed by truly independent fund managers and there have been very few pure wine investment funds, but some are now opening. And as wine becomes a viable asset class, more funds are likely to become available with variable risk levels.

On 20 March, Liv-ex (the international wine exchange) announced that its index of 100 investment grade wines had been included on Bloomberg Indices (which quotes indices of the world’s main investment markets). This is a clear sign that whatever our individual feelings about wine, for the first time ever the financial markets are being provided with performance data that will bring fine wine into the public domain as a viable and sustainable vehicle for capital growth.

Peter Lunzer is director and wine adviser for The Wine Investment Fund