This week the financial press and wine trade has been abuzz with news that one of the largest wine funds in existence, the Noble Cru fund, is potentially over-valued. The long and short of it is that the valuation method used by the Fund’s advisers is apparently not accurate enough, especially when compared with other independent valuations. ”Why the sudden interest from the press?” you might ask. Apart from the obvious, that ‘potential financial scandals’ sell papers, there is something in this story that doesn’t sit right with the facts. And more interestingly, this story does raise two important economic questions:
How do you value something that is so rare as to be almost illiquid?
This first question is raised in conjunction with a rather pun-filled aside from the FT’s own Lex. While it’s easy to value the more liquid portion of the Nobile Cru portfolio, the fast traded Bordeaux, it’s far harder to correctly value something like a Double-Magnum of Mouton Rothschild 1945, a wine that is considerably rarer and is not in an easy-to-calculate format, as opposed to a 12x75cl bottle original wooden case.
Here at Vinetrade we had a go at a section of the easier, full cases, Bordeaux bit of the Fund. Basing our price data accumulated from the market on the 31st of August and using the Euro Exchange rate on the day of 1.26 to the pound, we calculated that there was a 21.6% difference between their total of €21,076,754 and ours of €17,037,939.
However, market data on the rarest wines is somewhat inaccurate and unreliable, simply because there is little in the way of a market for them. Echezeaux 1985 from Henri Jayer may be currently offered in France for around £3350 a bottle, but the last full case sold, was under the hammer at a recent Sotherby’s Auction for £49350 (or £4127.5 a bottle, 18% difference). The crucial point being that any valuation that is based on auction prices is A) dependent entirely on the context of the Auction (number of buyers, economic climate, simple demand) and B) likely to be wildly different from a merchant’s listed price the rarer the item gets. As one auction-specialist who would prefer not to be named put it: ” when it comes to the super rare items you have to be a little more open-minded and take into consideration: both the buyer and the seller, historical prices, similar vintages, trading climate, and also who your potential purchaser may be. Effectively, these wines are worth what someone is willing to pay and if there is a lot of interest on the lot, the price will be driven up“.
How do you realise the value of a wine without selling it?
Without the wine being sold, how do you make a monetary gain or reward and how does this fund actually make money? Specifically, rarer wines will only tell you their real value when they’re sold. Thus, how does this wine portfolio actually generate a return without sales? Or more pressingly, if this fund is on paper increasing year on year, and a performance fee is being paid, what are the checks and balances for the investors who won’t see a return before this fund unwinds for its 5 year horizon? Or, that potentially because the valuations are based upon unrealised, potentially wrong, figures the reward of 20% is erroneous? Of course all of these questions assume that the valuation of the wines is not based on sales.
Whilst finishing this post, a further update to the story broke here, to the extent that, Noble Crus Fund are working on “automatic and scientific valuation system with two renowned finance professors who have no financial interest in the wine market”. How the two finance professors go about addressing the problems above, we will be interested to see, although we question what added experience a renowned finance professor has that an experienced-auctioneer or a dedicated database of wine-prices, such as those collated by Vinetrade, does not have when it comes to valuing wines.
Addendum: the previous version of this post included a reference to moral-hazard with regards to performance fees paid on unrealized gains. Our intention was not to call into question the nature of open-ended equity funds in general, which do book performance in such a way based on independent benchmarks/valuations (like the London Stock Exchange). It was rather to query how illiquid wines increase in value without being sold and how performance fees are paid on such a perceived increase.