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Liquid assets

Investing in fine wine can be a rewarding experience if you take some precautions to avoid common pitfalls, says Amy Wislocki

Investing in fine wine can be a rewarding experience if you take some precautions to avoid common pitfalls, says Amy Wislocki.


When fine-wine exchange Liv-ex launched 15 years ago, the first trade made on its platform was five cases of Bordeaux second-growth Château Gruaud-Larose. Back then, the wine had a market price of £964 per case; today, its value is £2,950, an increase of 206%.

Over time, wine has produced consistent returns. A recent academic paper estimated that fine wine yielded 4.1% in real terms (after inflation, storage and insurance costs) between 1900 and 2012, putting it ahead of art (2.4%), stamps (2.8%) and only slightly behind equities (5.2%).

It’s this impressive track record over the long term that has attracted investors and wine is now firmly established as an alternative asset. A 2012 survey by Barclays found that 25% of high-net-worth individuals owned a wine collection, with 2% of their wealth tied up in wine.

Clearly, not all this wine has been bought for investment purposes, and that’s the first consideration for anyone planning to dabble in fine-wine investment. Might you ever want to drink those bottles?

If not, and it’s only the financial return that interests you, you could invest via a well-established wine fund with a good historical performance. Such funds have sprung up in the past 10–15 years and will save you the administrative hassle of buying the wine, arranging storage, insurance and other important but unexciting details.

However, some would argue that this takes the fun out of wine investment. If you decide to do it yourself, the experience can be enjoyable and rewarding, but there are certain golden rules to follow.

First, be prepared for returns only in the medium to long term. Fine wine’s unique characteristics (finite supply and increasing demand) mean that, if you buy wisely, your investment should only gain in value over an extended period. But the market does experience peaks and troughs, so you need to be able to ride these out.


Next, buy from reputable sources. Auctions account for 10% of the global market and can be a way to find a good deal if you work out your strategy in advance. But it’s likely that most of your money will be spent with fine-wine merchants and it’s vital to deal only with well-established and financially stable businesses.

Avoid cold callers like the plague, advises fine-wine market analyst Ella Lister, and even when buying from a well-established wine merchant, remember to check the condition and provenance of the cases you’re buying. Is the wine in original wooden case (OWC, in trade-speak)? Are the levels in the bottle high? Are the labels soiled (this could make resale more difficult)? A case’s history is crucial—immaculate provenance should mean the wine is in good condition and that it’s authentic (China, for example, is awash with fakes, although many of them are crudely executed).

If you’re buying wine en primeur—that is, the most recent vintage, before it’s even bottled—provenance won’t be an issue, but Miss Lister stresses the need to do your homework and be selective when going down this route. The theory of buying en primeur is that you’re securing the wine you want, at the lowest market price.

However, recent Bordeaux en primeur campaigns have demonstrated that some wines will appear on the market a few years down the line at a lower market price than en primeur buyers paid for them.

To track the value of your investment, you can use wine-searcher.com for a free, basic indicator. A more sophisticated tool is Liv-ex’s Cellar Watch service, which offers subscribers a window on the market, tracking prices in real time through the activity of its 440 merchant members, who trade about £2 billion of fine wine per annum.

Most trading activity is in classed-growth Bordeaux and this should comprise the greater part of your portfolio—this will provide the liquidity to enable you to exit a position quickly. At the same time, it makes sense to diversify, says Miss Lister. This advice is borne out by the market. Bordeaux first growths appreciated 4.5-fold between 2005 and 2011, according to Liv-ex data, before falling 41% between 2011 and the end of 2014.

In the case of fine-wine investment, diversification means looking beyond Bordeaux to the top wines from Burgundy, Champagne, Italy (mainly the Super-Tuscans with a smattering of top Barolos and Barbarescos from Piedmont) and the New World. These categories have outperformed Bordeaux in recent months, according to Liv-ex co-founder and director Justin Gibbs.

At present, says Mr Gibbs, we’re deep in the bust part of the boom-and-bust cycle, with a cycle lasting usually about 10 years.

This makes it theoretically a good time toinvest in Bordeaux, while prices are relatively flat. Unless you’re buying the greatest vintages—2000, 2005, 2009 and 2010 among recent years—he suggests you focus mainly on the first and second growths or the few wines below this that trade at the same level. In the best vintages, you can look more widely within the five tiers of classed growths.

Miss Lister suggests also looking to older Bordeaux vintages—there is a recent trend, she observes, towards more mature vintages that are approaching drinkability.

Prices for younger vintages sky-rocketed following the hype surrounding 2009 and 2010, she explains, and may still have a little way to fall to bring them into line with prices for pre-2005 wines, which represent good value, given that they’re ready for consumption.

Whatever your strategy, one final word of advice: put aside a little of your proceeds to buy a few bottles of something special to drink. 

 

How to store your fine-wine investment

The best way to protect the value of your investment is by storing your cases in a licensed bonded, ‘duty paid’ warehouse such as Octavian Vaults or London City Bond. These facilities guarantee optimum storage conditions, with temperature and humidity carefully regulated—Octavian can even provide a certificate of pristine storage, which is helpful should you go on to sell your wine at auction. You can expect to pay about £15–£20 per case per year, which will include insurance.

Wines stored in bond are not liable for VAT or UK excise duty as they’re considered ‘in transit’. Only when the wine is removed from bond are the taxes payable.

 

Five buying tips from Liv-ex’s Justin Gibbs

● Regions including the New World and Burgundy are at their peaks. It may be time to look again at Bordeaux, which is at a four-year low

● Bordeaux 2005, 2009 and 2010 are the three most highly scored vintages of all time—and there’s still plenty of liquidity in the market

● Bordeaux 2010 wines have fallen significantly since their high release prices at the peak of the market, yet the quality is clearly there

● Haut Brion is the cheapest first growth, yet it has the highest average score across the four ‘great’ vintages of this century (2000, 2005, 2009, 2010): 99.75/100

● Mission Haut Brion has more 100-point scores than any of the first growths, but has been out of favour due to high release prices

● Mission Haut Brion has more 100-point scores than any of the first growths, but has been out of favour due to high release prices

 

 

Amy Wislocki is managing editor of Decanter magazine (www.decanter.com)


This article was taken from the Winkworth Country Life special. Click here to read the full edition. 


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