Grapes of Math

Grapes of Math

Über-investor Warren Buffet preaches to invest in what you know. So if wine is what you know, the wine investment market may be worth a look.
Some experts say that now is the time to invest in wine, with prices poised to rebound to highs last seen in 2007. In fact, some even argue this is the best opportunity in a decade. And for those so inclined, the availability of desirable vintages is better now too: the credit crunch actually led some wealthy investors to unload their collections to raise capital.
A quick tutorial: beyond the accidental investor who may have a few valuable bottles stashed away at home, most people invest in wine one of two ways:
Private investment. This may mean buying and selling cases at auction or through a wine merchant or investment firm. One benefit of this approach is that private investors may have the option of snagging cases to drink, and selling cases at a premium can subsidize the case that becomes part of a personal collection. However, private investors may need to handle details such as finding an appropriate bonded, temperature-controlled warehouse for wine storage, or taking on risk related to breakage or spoilage. Some larger private investment firms will look after these details on investors’ behalf.
Wine investment funds. In this case, investors purchase units in the fund, similar to purchasing shares in a mutual fund. This bypasses issues related to physical ownership of wine, but fund investors will never see a bottle: payments are returned in cash. The initial investment can be as little as $20,000, although The Elevation Wine Fund, the first U.S.-based wine fund, which launched in August 2008, requires a hefty $250,000 initial investment.
Would someone who enjoys drinking wine also want to invest in wine? Not necessarily, says William Grey, investment manager of the London-based Wine Investment Fund. “You drink for enjoyment and invest to make money,” Grey says. Unfortunately, few people are able to divorce drinking wine from investing in it, he adds.
However, “a person who can appreciate wine and knows what they like probably will be better informed than other investors,” says David Boren, director of Port Funds and Fund of Wine Funds at Harmonious Group. That said, “I’m not sure everyone should invest in wine as an asset class.” Why not? “It takes more than a good palate for wine. You need to understand how markets perform.”
In general, most financial experts say a good rule of thumb is that wine should make up no more than 10% of a well-diversified investment portfolio.

Everything old is new again

Modern-day investors wishing to track the fine wine market look to The London International Vintners Exchange, or “The Liv-ex.” This Internet-and phone-based exchange was launched nine years ago, and has been credited with bringing some transparency into the infamously opaque fine wine market. Its 240 member merchants and funds can buy and sell wines (some being en primeur, wines still in the barrel, a state compared to wine futures). Each month, Liv-Ex also aggregates wine prices into the Liv-ex 100 Fine Wine Index, widely regarded as the wine industry’s leading benchmark.
Liv-ex has estimated that wine investment activity represented $3 billion internationally, which is a drop in the spit bucket compared to other markets. But the fledgling market has taken off in the last five to ten years, encouraged by favorable tax regulations in some countries in Asia and Europe, and savvy investors looking to diversify portfolios.
It’s relatively simple to generalize about which regions historically offer investment-worthy wines. But truly interesting opportunities, based on exceptional circumstances, much of of it driven by elite critic reviews, could await, and give the lie to what’s here. In general:
Bordeaux is widely considered the “most investment-worthy” of the wine regions, tracked closely by the Liv-ex and a staple of wine investment portfolios. According to Bridgehampton, NY-based rare wine merchant David Sokolin, also author of Investing in Liquid Assets, Bordeaux represents 90% of all investment-grade wines. In addition to their longevity and the fact they are “built to age,” Bordeaux wines are the highest volume, most liquid, and overall most profitable. It’s also the group most tracked by reviewers (and tends to garner relatively high scores) and certainly is the most followed by investors. In addition, many investment-grade wines are made in Burgundy, the Rhône Valley, and Champagne regions of France.
Italy. Although some Super Tuscans are considered investment grade, in general few Italian wines, even great ones, fall into the category. Why? Simply because most don’t age well.
Spain. Until recently there was very little interest in most Spanish wines as an investment class, but some see an “immature investment market” taking shape. Appellations to watch include Rioja, Priorat, Toro and Ribera del Duero.
Portugual. Despite the ageworthiness of Port, as an investment the wine unfortunately suffers from slackening demand for sweet and fortified wines by modern wine consumers.
California makes up less than 1% of the overall investment-grade wine market, according to Sokolin. Many California wines are made to drink young, and few wines from the region have any track record of longevity. Further, the few wines established as investment-worthy have prices jacked up to high levels that make them poor investment candidates. However, a number of cult classics are grown here, and have investment potential for shorter-horizon investors. The best bet for obtaining these investment-grade wines is to join a winery’s mailing list; however, many are closed to new buyers.
Australia. Its wines have gained the reputation, deserved or not, for being “fruit bombs” that don’t age gracefully, making it difficult to achieve price premiums years down the line. One notable exception: Penfolds Grange.

What’s ahead for the wine market?

In terms of the long-term (12 to 24 month) outlook for the wine market, experts generally are quite optimistic. Sokolin sums up the current climate as “dynamic demand for static supply.” In other words, since wines are produced in limited quantities and are consumed over time, the supply becomes progressively scarcer, and as the wine matures, often becomes more valuable and desirable. Meanwhile, the pool of consumers who would like to buy those specific, valuable wines is growing in leaps and bounds.
Experts point to the burgeoning Chinese market in particular, where wine is used to show hospitality to friends, as well as to signal prosperity. “The Chinese are the biggest buyers of wine in the world,” assets Boren. “And they drink it; they are not storing it for 20 years.” Boren estimates that China consumes wine at 8.5 liters per capita, compared to six liters per capita in the Western world.
Stacey-Lea Golding, investments director and co-founder of Premier Cru in London, made a name for herself when she correctly predicted that the market would bottom out in December 2008/January 2009. She too points to “enormous demand” in Asia driving the wine market, as well as the “emerging market” of younger drinkers worldwide who are likely to grow to appreciate more mature, older wines.
While she predicts a “significant ride” in the wine market over the next two years, yielding a 10% to 12% return overall, she recommends that wine investors consider narrowing their focus to specific high-end producers, such as Château Lafite-Rothschild, where the 2000 vintage is in high demand, Château Pétrus, or on the lower-cost end, Château Talbot. “In the next 12 months, we’re going to see serious returns in specific châteaus,” Golding says.
In conclusion, while wine investment isn’t for everyone, it can be worth considering as a “passion investment,” as Golding describes it, something to buy and hold on to. “A good wine can go on for generations, if it’s managed correctly.”
For private investors who subscribe to the basic “one case to sell, one case to cellar,” theory (essentially, that selling a case or more at a premium later subsidizes the case purchased for personal consumption), wine can be a sensible choice compared to other luxury investments such as fine art and real estate. At least if the fine wine bubble eventually pops, it offers something no other collectible can claim: it can be consumed. Just try eating a Picasso.

• It’s “built to age.” A wine with excellent longevity can be cellared and sold at a substantial premium when it matures.
• High score from reviewers. In fact, some speculators try to “game” reviews and scores, buying certain wines ahead of an anticipated favorable rating and selling directly after the news is announced.
• Pedigree (ancestral lineage of a chateau). Sometimes a great pedigree can override a good-but-not-great point score.
• Excellent vintage.
• Highly liquid. Bordeaux is a safe bet, since it is easy to buy and sell.

Published on February 11, 2010
Topics: GrapesWine Market