Are You Long 2013, But Short Fine Wine?

One of the better things about being involved in the fine wine trade as a growing industry (more fine wine being produced and bought than ever before), is speculating what factors currently affect the market and which events are likely to in the future. Amusingly, even before the first half of January is over, we have already seen several disparate views on 2013, which can broadly be drawn down to one simple question – are you bullish or bearish on 2013?

Those who are bullish were buoyed this week by The Wine Investment Fund’s report predicting a positive year, with their central forecast projecting a rise of 14% on the main benchmark index. While those who are bearish are predicting a year of more stagnation and low volumes. A sentiment echoed by Goldman Sach’s Economics Research Team, made easily digestible thanks to the excellent folk at the FTAlphaville.

For those of you yet to make up your minds we offer the following breakdown:

For the Optimists: A Rebound in Asia, the End of the Fiscal Cliff, and a Look Back.

As has been mentioned elsewhere there is an apparent strong correlation between Asian stock-markets and the benchmark index. Irrespective of how strong this correlation is, it cannot be denied that the appetite for risk and the buying power of the world’s second largest economy will have a great affect on wine prices. With a new leadership in place that is adamant in keeping the status quo, whilst rebalancing their economy to avoid a hard-landing (in layman’s terms - to keep their GDP growth above 6%), and looking like it will succeed, we could well see a return to the demand levels of yesteryear as stability sets in.

Whilst it is more speculative on our part, an end to the fiscal-cliff problems that currently beset the U.S. economy would be a boon to the global economy and a boost to market sentiment generally. Admittedly this is a tad vague, but given President Obama’s success in previous negotiations we feel that this is a reason to be optimistic.

Looking back historically, with credit due to Chris Smith et al.  for their aforementioned 2013 report, fine wine is a proven asset class that has performed well in the past and while the usual economist disclaimer of past performance is no definite indicator of future events holds,  it is undeniable that  ”fine wine as an asset class remains very strong”. As Chris Smith continues: “since 1998 only four calendar years have seen negative returns to fine wine of more than 1%. 1998, following the Asian financial crisis and collapse of the hedge fund Long Term Capital Management; 2008, with the credit and banking crisis and the collapse  of Lehman Brothers; 2011 with the eurozone crisis…;and 2012″.

For Pessimists: A Weakening Pound, En Primeur, An End to Chinese Bungs, and No Sign of India.

Starting off with the least pessimistic of the four, the possibility that the Pound will weaken against the Euro over the coming year is fairly likely according to our FX-economist source. There are the few underlying problems that are, or probably will weigh on the pound rising further: including general weakness in UK economy, the fact that the UK’s external balance has deteriorated recently (that is, the current account deficit widening an overall bad sign for global competitiveness), and the remaining fiscal contraction that is bigger for the UK than for the Euro area as a whole. The effect of a GBP/EUR drop to around 1.18 explicitly is that wines purchased from the Euro-zone will be more expensive.

Although we touched on En Primeur in our last post, we didn’t highlight the changes that are happening with this centuries old system; first and foremost the exit of one of the top five First Growths, Château Latour. Given the dismal nature of last years campaign, and if this year is also a washout, will other properties follow suit and sell when and where they want to? Whilst this is less of a pressing question for 2013 specifically, it will be an interesting one to watch, as Latour is not alone in exiting the En Primeur system. Chateau d’Yquem too announced they wouldn’t sell En Primeur. Furthermore, there is talk of the 2012 Bordeaux vintage being both “heterogenous” and of “potential price decreases”. We think it’s still far too early to tell, but if the quality does not match the prices, as last year, then the demand will evaporate and we will see a re-run of 2012.

An end to Chinese bungs may seem like an odd notion for pessimists to pick up on but it’s wise not to discount it entirely. Last September there was an amusing article in the Wall Street Journal in the run up to the 18th PRC Party Congress (the change of leadership in China) about how the lack of certainty was causing a drop in luxury goods’ sales; put simply, “Sales are down because no-one knows who to bribe.” One of the key tenants of the new leadership was that they would crackdown on gaudy displays of wealth and high level corruption that is apparently rife in the country. To that end, they have already begun and it is not unreasonable to posit that with luxury bribes like Louis Vuitton hand-bags and bottles of Lafite falling out of favour, so too will the demand for them across the country.

Finally, India has long been trumpeted as the next China, in terms of growing economies yet to discover the joys of fine-wine, and although there were some positive signals last year, such as the lowering of trade tariffs, it is easy to forget that constitutionally India is still a temperance country, and federally still prohibitive in certain states. Given that the same barrier to entry, exorbitant taxation, still exists we doubt that 2013 will be the year that India takes off.

The View from the Trade: “The wine glass is filled up to the half way point.

Whether you find the above more encouraging or discouraging for the year ahead, we also offer the following small insight garnered from canvassing  the trade.  The prevailing sentiment is overall positive, with prices predicted to rise somewhere between five and ten percent. However this will not be due to any sizeable increase in demand, but a general lack of supply, with total global turnover remaining static.

2013 is set to be an interesting year whether you’re bullish or bearish, and we here at Vinetrade will continue to bring to light all the events that will affect the global fine wine market, right here in our blog.

Will 2013 be the turning point for fine wine prices?

New Year Fireworks on the London Eye

London saw in 2013 with a firework display on the London Eye. Photo by Marcia Taylor.

A Recap of 2012

2012 was for both wine and the greater investment markets globally a meagre continuation of 2011. The unceasing Eurozone soverign-debt crises weighed heavily on everything from consumer-confidence and spending, manufacturing PMIs, to equities and commodities, bonds and investor appetite for risk. However, whilst 2011 was in the words of one commentator “a great stagnation”, 2012 saw some emergence of hope, with a new same-same leadership in place in China, the Eurozone still whole and functioning-ish, the US economy growing slightly, and the world not ending on the 21st of December as many had hoped for thought.

More specifically for wine and fine wine prices, 2012 was a year of ups and downs, with decidedly more downs figuratively speaking - The Bordeaux Index is down 7.3% for the YTD, whilst the Liv-ex 100 Index finished over 11% down for the year. For those who weren’t following the market in 2012 we provide the following recap:

  • The optimism of the start of a new year led to a surge in trading and speculation coupled with a renewed interest in Bordeaux, which had languished unfashionable for much of the latter half of 2011.
  • This boost in market activity was neatly buoyed by Robert Parker’s re-scoring of the 2009 Bordeaux vintage in February as every man and his dog clamoured for any of the 18! newly scored 100-point wines.
  • Unfortunately, either a fear of an over-heating in prices and/or, the realisation that the likes of Smith Haut Lafitte whatever the score is still Smith Haut Lafitte, led to a plateauing in trading in the Spring with anticipation for a successful Bordeaux En Primeur campaign, which was a resounding damp squib.
  • This combined with the ensuing general Summer malaise meant that the markets slumped in the second half of 2012, as they’d done in 2011, and so
  •  It wasn’t until mid September and early October that we saw a return in interest and an edging up in prices. The St Emilion reclassification also buoying trade.
  • The Festive Season provided it’s usual mix of demands and prices rose piecemeal.
  • That is not to say that 2012 was all doom and gloom; Burgundy, Rhone and the Super Tuscans all lifted off the back of Bordeaux’s perceived demise, particularly out east, where demand at auction saw rare Burgundies going for previous unheard of prices and buyers looking beyond the First Growths.

So with the state of the market tentatively hovering around stagnation and prices bottoming at a two year low, are we likely to see a repeat pattern of the events of 2012 or will prices edge up? Looking ahead there are several key factors and events that will affect wine prices, the first of which we cover below:

En Primeur Campaigns – Burgundy 2011 and Bordeaux 2012

The Burgundy 2011 campaign is already under-way as grower offers are starting to drip through and over 25 tastings are being held in the next fortnight. The quick comparisons that have been discussed so far is of a vintage qualitatively somewhere between the density of flavour of 2003 with the freshness of 2007, good although not stellar years, but again with the crop size similar to 2010 (with over-all production down).  As with all campaigns the release prices will cause some retrospective purchasing as speculative buyers look for bargains amongst older vintages, but this is not (thankfully) the vintage of the century. We look forward to providing you with our thoughts in the following weeks.

Bordeaux 2012 will be on everyone’s mind come the start of Spring, as the great and good of the world fine-wine trade and media descend upon Bordeaux to pronounce on the latest offering. Despite prices coming off around 40% from the previous vintage, many felt that 2011 was still too dear and rarely worth the asking price or even inclusion in the cellar. Whilst it is still too early to discern the quality of the vintage, the most important description we’ve heard so far is of a “winemaker’s vintage”. The long and short of this being that those wealthier and more renowned properties will make the better wines despite the difficult growing season and thus charge more for them, as the costs to keep the quality high ramp up. Whether we’ll see a repeat of last year’s prices and cellar-exclusion or a refreshing sea-change from the Bordelaise, where attractive pricing will lead to a bounce in demand for both current and previous years, still remains to be seen.

Wine Critics – Robert Parker and the Wine Advocate

Aside from his usual February vintage re-score of the 2010 Bordeaux vintage, the other factor that is likely to affect prices is Robert Parker’s interesting financial move of selling The Wine Advocate to a Singaporean consortium of investors. The proposed launch of a Chinese TWA will likely lead to a broadening in wine demand as Chinese consumers will have a greater confidence with previously untried brands thanks to the wealth of information available.

The 2010 re-score is also likely to have the traditional effect of uplifting those with good rescores and punishing those that failed to live up to their potential,  followed by the realigning of prices to their respective peers and scores and then an end to the initial price volatility as the vintage becomes physically available to all and sundry.

Finally, there has been mention that Robert Parker will be reassessing the 2003 Bordeaux vintage in the coming months, and as with any rescore we expect prices to fluctuate as they did last year when he re-tasted several vintages of La Mission Haut Brion. Whilst critical opinion is divided on the 2003 vintage it will be interesting to see if these are wines for the long-haul or whether they are over-baked and over-the-hill.

Food for Thought – Looking Ahead

From our perspective, Vinetrade will be tracking the market with great interest over the coming year, our gut feeling is that should global economic fortunes improve then so too will wine prices. We will be following on from this recap blog-post with several more posts, the first of which will be looking at those wines we think will benefit most in 2013 and the key factors related to them: The Asian Financial Markets, the Bordeaux Surplus, The Latour EP-Exit, and more.

Q4 2012 Fine Wine Market Report

One month into the 4th quarter of 2012 and it’s time to take stock of the situation. Looking around the trade, we have reason to be cautiously optimistic about the fine wine market. Whilst we have seen a general plateauing of prices across the Bordeaux-board, it would seem that the Q3 slide in prices, primarily led by the slump in First Growths prices, has ended. Below are the top points worthy of consideration as we go into the festive season and 2013.

The 2012 St. Emilion Classification.

The INAO (Institut National des Appellations d’Origine) reclassification of St Emilion Grands crus, on the 7th of September, led to the promotion of several properties. Two of which stuck out from the crowd: Chateau Pavie and Chateau Angelus, were both elevated to “Premier Cru Classe A” status. These two are now on par, in the eyes of the INAO, with Chateau Cheval Blanc and Chateau Ausone; whilst Pavie and Angelus have yet to raise their prices themselves to meet their new classmates, you can be sure Gerard Perse will consider the Chateau’s new position for the 2012 release. Interestingly enough, speculation from the trade and wine-owners has already happened with Pavie, where prices across the best past 3 vintages has already started to rise, whilst Angelus has mostly levelled.

The clear effect of the 2012 St Emilion Classification. Pavie Composite (2000, 2005 & 2009) v.s. Angelus Composite.

Château Calon Segur Sold.

Château Calon Segur has been sold to Suravenir’s life-insurance subsidy Credit Mutuel Arkea, in a similar move to Chateau Montrose’s sale in 2006, with JF Moueix of Chateau Petrus again bringing his expertise to the new business venture. Expect to see a similar rise in quality and prices, as with the likes of Chateau Pichon Baron’s purchase by AXA Millesimes, back in 1987, as JF Moueix continues the sterling work of the late Mme Gasqueton.

JG Prats to Leave Château Cos d’Estournel.

JG Prats is leaving his role as managing director of Chateau Cos d’Estournel. Jean-Guillaume is heading to LVMH, and whilst his departure is not until 2013 you can be sure his legacy of rising prices and quality will continue at Cos d’Estournel.

Bordeaux Prices Continue to Level Off.

Despite the slide in Q3 Bordeaux prices, the past 3 months has seen a levelling in the Bordeaux market as wines either reach their own lower limit or their appeal at their respective price point levels off. Amongst the First Growths, Haut Brion has taken the biggest slump in prices since August, with the likes of the 2003 falling over 6% to today’s £2795, whilst Lafite has seen the least price change, the 2005 for instance holding steady at £7450.

2009s Remain in Demand.

Beyond the First Growths, 2009 Bordeaux continues to be in demand with Ponet Canet, Cos d’Estournel and Clos Fourtet all being sought after, primarily we suspect due to Robert Parker’s 100 point score, coupled with the higher availability. The general perception of the vintage is one of quality and longevity and those yet to get on the boat are sorely advised to; now that we’ve seen the post-arrival realignment in prices we expect more stability for this vintage and resistance to extreme price volatility that has previous beset this vintage.

New EIS Companies and a new Fund to Launch.

Outside of actual market prices, there are several things happening that we see as healthy indicators for the future of the fine wine market. Firstly, several new wine companies have sprung up in the past months here in the UK, taking advantage of the government’s Enterprise Investment Scheme, and as they begin trading in earnest demand/activity and liquidity will increase. Secondly, whilst not yet corroborated in the press, we’ve heard news of another new wine fund soon to be launched, undoubtedly taking advantage of the perceived bottoming of Bordeaux prices and the expected demand from newer emerging markets as the global economy improves – Fine Wine is still a long-term investment for many.

The Coming Months.

Finally looking ahead, to both Burgundy 2011 En Primeur and Bordeaux 2012 En Primeur in the new year, we’ve heard mixed opinions about both vintages, but we’re keen to see how these wines fare. 2011 Burgundy coming off the back of two previous excellent vintages, and Bordeaux 2012 having the potential to be excellent, but with Chateau owners comparing it to both 2002 and 2006.

As the trade rolls into the festive season with the usual offers of Champagne, Port and drinking Claret, we expect to see another surge in demand in the new year as the East prepares to celebrate Chinese New Year and the Year of the Snake.

Super Tuscans

Courtesy of several tastings held by members of the London trade over the past fortnight, we’ve been very fortunate to try several different, as well as different vintages of, some of the best Super Tuscans: Sassicaia 2009, Ornellaia 2009, Tignanello 2001 to name but a few. Having been rather impressed by the quality of the wines we thought it’d be prudent to take a look at what makes a Super Tuscan worthy of inclusion in a cellar, and why you should not be without them. In short we’ll be looking at:

  • What is a Super Tuscan?
  • Why should you own a Super Tuscan?
  • Current Market analysis and pricing.

What is a Super Tuscan? – Is it a bird…

The name Super Tuscan started appearing in the English-speaking media back in the early 80s, but the history of them goes back another 40 years to 1944. The first vines for Sassicaia, the original Super Tuscan, were planted by Marchese Maraio Incisa della Rocchetta, from cuttings of Cabernet Sauvignon taken from Chateau Lafite Rothschild, at his estate San Guido in Bolgheri near the Tyrrhenian Coast. The difference with these plantings were not just the pedigree of the vines but also the type. Whilst Cabernet Sauvignon had been planted for centuries in Tuscany, the predominant grape varietal is Sangiovese, with Chianti, Brunello di Montalcino and Vino Nobile di Montepulciano all using strains of it to make world-class wine. Predominantly Cabernet Sauvignon wines weren’t allowed under the Tuscan quality-wine appellation rules, the Denominazioni di Originie Controllata (DOC), and as such Sassicaia was just labelled as a Vino da Tavola, a table wine. Incisa’s nephew, Piero Antinori persuaded his Uncle to sell the 1968 Sassicaia vintage through their Marchese Antinori exporters and Sassicaia has grown in fame since. Other Super Tuscans soon starter appearing, such as Tignanello in the early 70s, created as a more Sangiovese dominated blend by Antinori’s oenologist Giacomo Tachis, who is also credited with Solaia and several other Super Tuscans.

 Why should you own a Super Tuscan?

Apart from the time-honoured phrase, involving eggs and baskets, you should include Super Tuscans in your collection for the following reasons:

  • Super Tuscans are made to age,
  • They’re made with  precision and quality in mind,
  • They’re made in limited quantities,
  • They’re consistently rated highly by the leading wine critics.

Furthermore, whilst Bordeaux has seen a drop in both interest and prices of late, the demand for and performance of the Super Tuscans has never been better.

Current Market Analysis and Pricing – which Super Tuscan is right for me?

Super Tuscans sit in a particular niche within the fine wine market:

  • Not quite as liquid as say, the First Growths,
  • More interesting than the similarly priced 2nd-5th Growths,
  • Not tied to the Bordeaux En Primeur campaign,
  • Not scored by Robert Parker himself,
  • Yet definitely wines that have performed well in the past and
  • That are improving in quality year on year.

Standing somewhere between Bordeaux in terms of taste and appeal, and the Northern Rhone in terms of craftsmanship and typicity, asking which Super Tuscan is right for you is down to price and taste. Currently with a perceived lull in the appeal of the left-bank Bordeaux staples and the more sought-after Burgundies now going for significantly higher prices for the latest vintage, wines like Sassicaia, Ornellaia, Masseto and Tignanello have never looked more underpriced or attractive. Consider, the latest release of Masseto from Ornellaia, the 2009, was around the £2750 mark, compared with the similar scoring Mouton Rothschild’s latest release, the 2011, at £3800, you can see why there’s very little available on the open market. Price-wise the Super Tuscans range from the lower end like Flaccianello at around £380 for the 2009 release, to the mid priced Tignanello at around £500 for the 2009, to the more expensive like Solaia 2009 at around £1450. As with all wines that have the potential for growth, a good score and a good price are key, so consideration must be taken.

The Trouble with Valuing Wine

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.

 

Wine Investment in the Tabloids.

The Sun this week published an article (that can be read online here) about investing in wine, and whilst the entire wine trade should laud their efforts for bringing this excellent alternative investment vehicle to their wide readership, we felt compelled to highlight a few inaccurate bits and offer some slightly broader tips with regards to their article.

Firstly: “A £1,000 collection bought then would now be worth a whopping £2,760.

Whilst this isn’t necessarily wrong, it’s rather vague and seems to be a reiteration of the previous comment that “wine” has increased by 176%. To be blunt, which wines have gone up by precisely £1760 and how was that measured? Furthermore, how was this return realised? In life before Vinetrade, brokers would charge upwards of 10% commission to realise your return, netting you £1484 if not less.

 Secondly: “International Wine Challenge Awards, handed almost a quarter of the gongs to supermarket tipples”

Very rarely can you buy investment grade wine off a supermarket shelf, and were you to do so  (Supermarkets have been known to offer the occasional deal on mid-level Bordeaux) there are several more problems with buying investment grade wine this way.

A) It’s highly unlikely that the wine will come with its Original Wooden Case (OWC), and thus be worth less as loose bottles.

B) As you’re purchasing it in a supermarket it will already have the duty and the V.A.T. paid on it, and so it is in a far less appealing state for when it comes to resale and realisation of your returns. Duty Paid stock signifies that the wine might not have been always been stored in ideal conditions, such as a bonded warehouse.

Thirdly: “Five top tips”

Ignoring the fact that there are only two tips and that this section is more of an FAQ, advising people to invest with as little as £500 is somewhat misleading. To make any kind of serious return on such an investment you’d be looking at over 10%, ignoring the fact that if you went through traditional methods you’d lose 10% realising your investment.

What the “Top Tip” hasn’t factored in, and really should, is the cost of storage. Certainly if you kept it in your own personal cellar then there is no storage cost (however see above the problem with Duty-Paid stock). The cost of storage at a bonded warehouse is around the £15 per annum mark, so that if your wine makes a 15% gain over 5 years, increasing to £588, it will have cost you £75 to store it for that long. To seriously invest in wine, consider at least 10 times the amount suggested to make it worth your while.

Fourthly: “Budget” – Prices per bottle?!

We would sorely like to know where one can buy Lynch Bages 2008 for as little as £33 a bottle today, whilst this is a somewhat pedantic criticism of the article we felt we should highlight the error (the cheapest bottle in the U.K. today is around the £70 mark, duty and V.A.T included). The main concern is listing wines by the bottle, as the article mentions in the “top tips”, wines in their OWC are worth more, and certainly to be serious about investing in wine you should only ever buy by the case.

The basics: “speak to a wine merchant

Probably the best piece of advice in the article was advising people to speak with an expert, and so we summarise below the basic points for investing in wine:

  1. Buy the right wines, investment grade wines, from the best of Bordeaux, Burgundy, Italian, Spanish, Champagne, New World Cult producers and not from the aisle in a supermarket.
  2. Buy by the case and store in a bonded warehouse, or better yet, as suggested have someone with experience store it for you, Vinetrade offers this service.
  3. Buy to make your investment worthwhile, consider storage costs, financing costs and inflation, again at Vinetrade we’re more than happy to advise.
  4. Know your exit, how and when do you plan to sell? Often merchants will take a large commission on your investment to realise your return, at Vinetrade we only charge a small handling fee.

3 Factors That Make a Wine Investment Worthy

Over the past two years there’s been a distinct broadening in the wine investment market, both in terms of nationality of the investors and of the wines in which they invest. In this week’s post we thought we’d take a look at  the key factors that make wines “investment grade”.

Photograph of dusty old wine bottles in a wooden case

Only wines that mature and get better with age are suitable for investment.

1. Ageability – Wine with legs.

When one hears about wine investment, it’s usually spoken in the same breath as Bordeaux/First Growths/Top 50 Châteaux and other references to expensive claret. However, Bordeaux is one of the largest wine producing regions in all of western Europe and it is only a tiny proportion of its annual production that is considered worthy of investment. So how do you know which Château to buy, or even whether to buy Bordeaux or not?

For the truly uninitiated, the simple reason that makes certain wines investment worthy is their ageability. That is to say that, these are wines that can, and do improve with age, and from particularly good vintages, age and improve for many many years. This does somewhat beg the question as to “how do you know which wines age the best?” and this is where the role of the critic or expert wine advisor comes to importance.

2. Critical Score – The role of the experts.

Today, thanks to the ubiquity of the internet, there is a wealth of information available with regards to wine history, price, quality, condition, storage location, critical opinion and analytic research. Of course, discerning which websites or people are worth your time and which are mere speculation/biased opinion is much harder, below we offer several sources which we think deem close reading:

  • Robert Parker Jr’s Wine Advocate and associated internal sites are considered the top resource for Bordeaux and New World wines.
  • Likewise, Allen Meadows’ Burghound.com is The invaluable source of experienced and critical  Burgundy opinion.
  • James Suckling launched his own namesake site after leaving his position as Senior Editor of the Wine Spectator in 2010; both websites contain a wealth of knowledge on the finer wines of the world.
  • Jancis Robinson, through both her own website and her tireless work on The Oxford Companion of Wine, provides some of the most concise information on the world of fine wine.
  • Stephen Tanzer, another respected American critic, has his own site focusing on Burgundy, northern Italy and California.

All of the above experts and critics have their own rating system, which they judge wines with; from Jancis Robinson’s straight forward “points out of 20″, to Robert Parker’s famous “100point scale”, aped by so many other critics since inception. The key with all of the scores, and a point of contention for many in the trade, is the review that goes with the score – several journalists and critics have decried the use of a point system; but for many the numerical value is paramount. To wit, most would consider that any wine that gets 95 or more points out of 100 from Robert Parker is investment-grade.

3. Brand Appeal – the importance of a good name.

A key feature in the investment quality of a particular wine is it’s “brand appeal”, and this can be quite a hard aspect of a wine to place a discerning quantity or number on. What we mean by this is, that while a wine may come from a storied producer and receive good scores from the leading critics, the actual demand for the wine may be rather small or not command a price that it’s pedigree would suggest. For instance: Château Saint Pierre, outside the village of St Julien in Bordeaux, consistently out-performs the likes of Château Beychevelle, and yet the latter is considered far more investment worthy; simply because of demand from Asia.

Further afield in Burgundy, the importance of brand is further reinforced, simply due to the number of producers, making wine from the same named sites. To the extent that, there are hundreds of vignerons producing wines from Gevrey Chambertin, but the range of prices between the best producers and the inconsistent ones are huge. Even within one of the famed Premier Cru sites, for example Gevrey Chambertin Clos St Jacques there are five famed producers all asking different prices for the same-named wine from the same vintage. With Vinetrade’s Watchlist feature we collate the best of the critical opinions and weekly recommend wines that we think merit watching.

Summing up – How to choose investment grade wine.

Ultimately, with any investment there needs to be a reason for adding it to your portfolio. For wine to be worthy of inclusion in your portfolio it should, at the very least, have:

  • A good brand appeal, or sufficient demand to make it worthwhile.
  • A high score from respected critics; typically 95+ from the likes of Robert Parker
  • Sufficient ageability, that is with ageing potential and not at the end of its lifespan and unlikely to improve.
  • Been stored under-bond; as mentioned before in our previous post, a wine stored in a bonded warehouse is VAT exempt and kept in optimal conditions.
  • Come from a good vintage, or have sufficiently good reason for investing in.

Vinetrade only deals with wines that are stored in bonded warehouses, in impeccable condition, and with years of industry experience are more than happy to advise on which wines we consider age-worthy and merit inclusion in your collection.

How to Avoid Wine Investment Scams

With another story in the news of yet another fraudulent wine investment company disappearing without a trace, leaving customers high and dry, we thought it would be good to highlight the less savoury side of Wine Investment and provide some helpful pointers. More specifically, we’ll be addressing:
  1. The Wine Market.
  2. Market Members.
  3. Information is Key.
  4. Spurious Claims.
  5. Making the Most of Your Investment.

Bernie Madoff being led away by the authorities after being found guilty of a running a giant ponzi scheme. Wine scams are not as long lived or widely reported as Mr Madoff”s.

 The Wine Market – An Unregulated Market:

To recap, by unregulated market here, we’re following the FSA definition of an unregulated market, as one that is not covered by Financial Services and Markets Act 2000. The long and short of this is that, as wine is not a financial retail product, anyone can sell it or offer advice on it. However what one cannot explicitly do is offer specific investment advice on a particular wine, “this wine will make you X amount of money” or “investing in these wines will get you 300% returns” (which we look at in more detail below). Thus wine-investment is quite a grey area. For example we can recommend the 2001 Cos d’Estournel as an under-priced (v.s. its peers) vintage of Cos d’Estournel, and say that it’s price has risen from £650 two years ago to around £875 today, but we cannot recommend that it will continue this rise in price and be, say, £1095 in a further two years.

Market Members – From Funds to Fraudsters:

As we’ve briefly touched on before, the wine market has evolved from solely consisting of traditional merchants/negociants, to now include traders, brokers, funds and, to refer to them under their colloquial name, bucket-shops. Definitively a quick run-down of the distinctions between them for the uninitiated should show the differences, however the line between their distinct roles is blurred as many of the below trade and broker wines depending upon market conditions.

  • Traditional Merchants or Négociants have long established and storied histories, often with exclusive agency agreements with producers, usually making 10-40% margin in doing so.
  • Traders buy wine on the grey market, from other traders or brokers who have access to reserve stock, generally making 10-20% margin.
  • Brokers offer to place wines on their client’s behalf, taking a similar fee to the trader in doing so.
  • Funds buy wine from all of the above for a defined period of time and then have to sell the wine, sometimes at a loss.
  • Bucket-shops/Boiler-Rooms, such as the firm recently mentioned in the news, often don’t buy wine, offer imaginary stock to customers at 20-60% over the market price and then disappear with the proceeds. To avoid these two market members the key is information, and this is where Vinetrade can help.

Information is Key – Know your Wine Price:

As with everything in life, the more you know, the better position you’re in to make a decision. If someone calls you and offers you wine unsolicited at a certain price saying that this is a “one time opportunity”, the first thing you should do is check the “real” market price. Vinetrade tracks the real market price daily, on hundreds of investment-grade wines, and so will give you a clear indication if you’re likely to be paying more than you should. Secondly, check the company’s history, ignore testimonials on the website, and go straight to the official statistics provided by Companies House, or in an easier to read format, via Duedil. If the seller’s website states that they have years of experience and have been trading successfully for an equally long time, but the company was only incorporated last year, alarm bells should be ringing. A further check is to see what other companies the Director of your seller is also a director of. If they’ve been involved with either several dissolved companies, or offering land-banking schemes, you should likewise be wary.

Spurious Claims – A Case Study:

One of the most misleading themes that we often see on wine-investment guides or websites is the reference to the 2008 Bordeaux vintage, and particularly to the almost unbelievable price rises that occurred post En Primeur release. Often a website/guide will include a handy breakdown of the top wines of the 2008 vintage En Primeur release price, including Châteaux Lafite, Mouton, Carruades de Lafite and Pavillon Rouge, to name but a few and then their price in the following years.

Now, the key point is that these wines were all released mid-recession, when all of the financial markets were in turmoil, and the Bordelais and Chateaux owners were terrified that no one would buy their wines, especially from a less than stellar vintage. So as any distressed seller does when they have to sell their wines, they dropped the prices to pre-2005 levels and hoped that they would sell. Looking back at historic 2008 release prices from merchants, you could’ve bought a case of Mouton for £1950 and a case of Lafite for £3375; quite unsurprisingly the savy buyers out there snapped up these wines and made a killing as the markets recovered due to the stabilising effects of the G20 and QE. The other crucial point about 2008, specifically with regards to Château Lafite and Chateau Mouton was their decision to capitalise on the Chinese love of number 8, with both Châteaux adorning their bottles with Asian oriented designs. Wines that were released cheaply and then subsequently rose in price, spiked even further, Mouton 2008 rocketed almost over night from under £5000 to over £8000. The crucial point with all of this is that it was a one off event, driven by the economic turmoil and the huge rise in demand from the East.

Finally, concerning misleading claims revolving around the 2008 vintage, one often comes across handy price graphs showing the meteoric rise of the top 2008 releases inferring that all wine investment behaves like this. However, what they nearly all fail to show is the post April 2011 market correction – Mouton 2008 is currently trading at around £3600, and Lafite has fallen from its high of £15000~ to today’s £6100~.

 

Chateau Lafite 2008

The post April 2011 correction was not kind to those wines that had risen to previously unheard of prices: Lafite 2008 crashing back to earth with a bump.

 

Making the Most of Your Investment – due diligence, prudence and timing:

Clearly, if you bought wines from the 2008 vintage En Primeur, at release prices, and still haven’t sold your wines, you’re nonetheless in a better position than many who have invested in other assets. With the rate of inflation of under 5% average over the last 3 years and with only one year’s storage costs, the rate-of-return on your investment would be significantly pleasing. The gist of this, is that all investments merit prudent research and timing is crucial. Whilst I doubt we’ll see the likes of the 2008 vintage, and all it’s knock-on effects, for a while, stranger things have happened. Upon researching this post we came across a rather amusing post that in hindsight could not be more wrong.

Additionally, one should never forget the importance of context when looking at fine wine’s investment history/potential. Lafite 1982 has performed far better than anyone ever expected, least of all I suspect Chateau Lafite themselves,  but the fact that it would have offered 900% investment return in 2009, had one bought in 1983, does not mean that all Bordeaux performs in such a stellar way; to wit, such headlines are appallingly misleading.

Ultimately, wine is a proven asset class with regards to investment for reasons that we looked at in our previous series “Is Fine Wine A Good Investment”, either on its own or as part of a diversified portfolio. To avoid the dangers of companies like the one listed above the rule is simple: Do not buy from them – for if it sounds too good to be true it certainly is. If you like the idea of investing in wine Vinetrade is uniquely placed to help you, with regards to wine advice, storing your wines, supply at some of the keenest prices and helping you rationalise your investment without loosing a substantial amount in fees upon exit.

Is Wine a Good Investment? – Final Thoughts

In our series “Is Wine a Good Investment” we’ve looked at what specifically wine investment is, a recent history, the factors affecting the market, En Primeur and also where the wine market looks to be going; all with a view to answering that question. In this our final post we look to answer that question specifically as well as summarise the previous posts in the series. To whit:

  • An investment, but a good one? – Points to consider.
  • Which wines? – Longevity  Popularity
  • Selling Wine - The crucial exit.
  • Should I invest in wine?

    Prices of some Bordeaux 2009 wines rose dramatically after being given 100 point scores by critic Robert Parker.

An investment, but a good one?

As we discussed in the first post in the series, Fine Wine makes a very attractive case for inclusion in any investment portfolio, as it is a fungible, tangible, finite, tax-exempt (in parts),  sought-after and a historically proven asset class. There are several key points worth considering:

  1. What is the cost of the investment?
  2. What are the risks?
  3. Buyer Beware.
  4. What are the returns?

Firstly the cost of wine investment, beyond the initial outlay, are the financing and storage costs. Financing simply is how much capital you’ve got tied up in the wine, and also whether you’re paying interest on that capital. Storage costs are thankfully much easier to calculate and most bonded warehouses or storage companies will charge around £12-18 pounds per case per annum, including insurance.

Secondly, the risk is the condition of the wine you’re buying. One should always check the condition before you buy; that is, make sure the case is in-bond, in it’s original wooden case (OWC), that it doesn’t have foreign import-strip labels like US strips, and that the levels in the bottle are all into the neck. Thankfully Vinetrade only deals in such high calibre stock, so the main risk of the investment, other than price variation, is mitigated.

Thirdly, one of the less savoury aspects of wine investment are being offered stock by an unknown or an disreputable source. There are cold-calling companies and boiler-rooms that will try and force overpriced wine on unsophisticated customers at 20-50% over the market price. Leaving you with a wine that’ll never be realisable at the price you paid.

Finally, what are the returns? Ultimately that depends upon which wines you choose, how long you hold them for, and when you sell?

Which Wines?

Paramount to any investment should be research and due diligence. It is all very well going to Bordeaux saying that you’d like to invest in wine, only to end up with 100+ cases of Château Maucaillou 2008 (certainly not a bad claret as it will improve with age, but definitely not investment grade). A term often passed around in the trade and media are “blue-chip wines”, with regards to Bordeaux these are the top 50 or so Châteaux, and more importantly the First Growths (Châteaux Haut Brion, Lafite, Latour, Margaux and Mouton), that have the pedigree, high critic score and volume of trade, as well as agebilty and track record, to be called investment grade.

Outside of Bordeaux, and whilst they’re less readily available they are by no means less popular: the top Cote Roties and Chateauneuf du Papes from the Rhone valley, the likes of Domaine de la Romanee Conti and Domaine Armand Rousseau to name two from Burgundy, the wines of Aldo Conterno and Antonio Gaja from northern Italy, and Cult Cabernets of the Napa Valley like Dominus and Ridge Monte Bello, all merit inclusion in the set of “investment grade” wines.

However, as previously mentioned the role of the critic is a very important factor to consider when choosing your wine, as too is the vintage. Pichon Lalande 2005 is a classic example of both an excellent pedigree Château and a stellar vintage, but unfortunately showed badly in the eyes of Robert Parker, with a meagre score of 86 points, and so too in terms of investment performance. Thus the returns that one can make on wine investment all comes down to choice and timing. Taking a recent example, Château Lynch Bages 2009 was released En Primeur at around £900, upon physical release two years later, and rescoring by Robert Parker, the demand and price jumped to £1300, making it a 30% increase over two years.  Such sizeable price increases over such a short term are rare and the more common increase is usually less than 5% YOY, it does however entirely depend upon which wine you choose and, arguably, whether it is in vogue or not at the time.

Selling Your Wines

Possible the biggest vexation of any wine investor is realising the returns on their portfolio. Historically the only place to sell your wine was at auction, and in those days there was less of a market, or need to. With the rise of the brokers and Wine Funds on the scene, a huge increase in market liquidity has taken place and whilst it is much easier and faster to sell your wine, it isn’t without problems, primarily due to antiquated nature of the market.

Furthermore before the rise of the ubiquity of the internet, it was very hard for sellers to ascertain whether they were getting a good price on their wine from their merchant or broker, and although these days every merchant puts their price list on-line, a seller is still liable to lose 10-20% of the value in commission. Thankfully Vinetrade charges a minimal fee by comparison and allows you to list the price you’d like the case to sell for.

Should I invest in wine?

Although this blog is, of course, naturally biased towards the affirmative, we believe that with careful choice, an investment in wine is essential to any diversified portfolio. Both in terms of potential for gain and sheer enjoyment of this alternative investment, the wealth of history, content and information that’s available to be discovered. Ultimately if you’ve found your way here and have read this series of posts then you either do own fine wine, with an eye for investment, or you’re ready to. The key points to remember are:

  • Always buy from a reputable source and check that what you’re buying is in acceptable condition (Vinetrade offers both of these services).
  • Wine investment does not, currently, offer a quick return. Expect to speculate for 5 years or more.
  • Only invest in wines that are investment-grade, the best thing to do if you’re unsure is ask.
  • Due to storage fees and logistics it makes more sense to invest in fewer higher value cases than a large number of lower value cases, unless intended for a quick return.
  • And the truism that all wine investment guides say: “the worst thing that can happen with your wine investment is that you end up drinking it.”

Investing in Wine on Vinetrade

Investing in wine via Vinetrade is very simple and can either be done entirely online or with the help of our Sales & Marketing Manager.

  1. Decide how much and for how long  you want to invest, as well as how risk-averse your portfolio will be.
  2. Credit your Vinetrade account on-line.
  3. Start bidding on the wines you’re interested in.
  4. When your bids are successful, we’ll handle all the storage and logistical side of your wine investment.
  5. You can track the value of the wines using our Watchlist feature.
  6. Either upon advice, or when you feel the time’s right, you can place your wines up for sale, at a price you choose.
  7. When they sell, we’ll then credit your account with the funds, that you can withdraw whenever it suits you.

The Future of Wine Investment

As we’ve mentioned previously in this series, the history of wine investment is a relatively recent one, and predicting where the market might go, or even extrapolating where it’s come from with a view to future events is quite difficult. In attempting to see what the future of wine investment might be we need to consider the following:

A vineyard in Burgundy

A vineyard in Burgundy. Despite the Bordeaux crash that started in 2011, Burgundy prices have continued to rise.

Where we are right now – the state of the wine market

Currently the wine market is down from its unbelievable heights of 2011 where a case of Lafite 2008 would’ve set you back £13,000, a sizeable increase from two years earlier at £3,000. Many see this as a necessary correction of a rampant price bubble that had been blown out of all reasonable proportion, others as the waning demand from the Far East. Yet, to be specific, by wine market here we’re talking the more heavily Bordeaux weighted price indexes; Burgundy, Rhone wines, Champagne as well as new world cult wines have all gained in price, above the year on year vintage price increases, as the popularity for Bordeaux has apparently diminished. Whether this is down to a broadening of tastes in emerging markets, the knock on effect of the Euro-zone Crisis, or an over availability of stock in places like Hong Kong, it is hard to say exactly. What we can say for sure is that Bordeaux prices have dropped off: a case of Haut Brion 1998 from a reputable UK merchant cost £2850 in 2008, £3400 in 2010, £4600 in 2011 and today £3100.

How Wine Investment has performed to date – Bordeaux beats Spanish Bonds

Depending upon how bullish or position the person you’re speaking to about wine investment is in, you’ll get wildly different answers. On researching this post we’ve seen some utterly shameless graphs that depict a straight line to the sky of supposed returns on wine investment, or the, less obviously misleading, example of the Bordeaux-weighted index pre 2011 crash; the implication being that everything is still rosy in the wine investment market. Over the past 5 years, classed growth Bordeaux has risen by just under 15%, considering the state of global markets on the back of the financial crisis, is not a bad return. However, given that most classed growth Bordeaux does not physically mature in only 5 years, a longer term picture of say 10 to 15 years would be a better period to consider the returns.

The New Players moving the market – Wine Funds

One aspect of Wine Investment that we have yet to touch on, and probably deserve a post of their own, are the so called Wine Funds. These are companies and investment vehicles, set up with the sole purpose of  investing in fine wine with an objective of steady, high capital growth. Unlike the traditional merchant, who would offer wine as an object to be consumed, Wine Funds are solely interested in the capital gains of wine as an alternative investment, and such are regulated by the FSA. The net effect of these funds appearing on the scene has been twofold, firstly to increase the amount of capital in the fine wine markets, and secondly to provide liquidity, in terms of volume of trade. To clarify, as often is the case with investment vehicles a certain expiration date is mandatory on the wines. The long and short of this is that at times the fund has to sell the wines, unlike a merchant, even if it is at a loss; some closed funds only run for 5 years.

What Might Happen – Grexit, BRICs and other economic lingo

Currently you could argue that the volatility in global markets is due to an over-riding uncertainty, and that once we have an answer, or a base, or some kind of clue as to what’ll happen next, or even whether Greece will leave the Eurozone, then the markets will stabilise and prices rise, prosperity will boom etc. etc.. With regards to fine wine the same is certainly true – the prices of classed Bordeaux, specifically the First Growths, has been tumbling since mid last year and with no one actively calling the bottom and buying en mass, the prices keep falling. That is not to say that no one is buying however, new wine funds are continuing to appear on the scene and with their surge in demand, prices on certain wines will only rise.

There is also the case of the other emerging markets, particularly in the so called BRIC economies. China, one could argue, is now well established on the scene, with hopes that both Brazil and India will follow suit in the coming decade and demand for luxury items like fine wine will rise.

Finally, we should consider not just emerging economies but high net worth individuals (HNWIs). A report published on June 19th by Cap Gemini and RBC Wealth Management found that the number of (HNWIs) continues to rise, especially in the Far East. “The 16th annual World Wealth Report finds that the number of HNWIs in Asia-Pacific expanded 1.6 percent to 3.37 million in 2011, making Asia-Pacific the largest HNWI region for the first time, surpassing North America’s HNWI population of 3.35 million. North America remained the largest region for HNWI wealth at US$11.4 trillion compared to US$10.7 trillion in the Asia-Pacific region”.

SWAG – Safe assets? Silver, Wine, Art and Gold

Joe Roseman, a former headfund manager, has recently coined the term SWAG, a collective acronym for physical assests that all have the properties of being tangible, finite and less correlated with currency and stock market values. “I have read the views of many economists who tend to class SWAG-style assets as not ‘proper’ assets because they  have no income stream,” said Roseman. “ Such thinking is, actually, tremendously naïve.  To define an asset as needing an income stream fails to appreciate the very essence of an asset.” Roseman goes on to say that “SWAG assets (that) share a similar asset DNA. Assets that have risen in price materially over the last decade notwithstanding the bursting of the internet bubble, the subsequent recession, the credit crisis, the deepest recession in living memory and now the European sovereign debt crisis. Every investor needs to explore the benefits of having some SWAG assets as a part of their savings.”

The Future – Assumptions and Summary

The old economist’s get out of jail free card “past performance is not an indicator of future results” is maybe the safest, but certainly not the soundest of truisms for Wine Investors. Wine prices have come off the more renowned Bordeaux names, but that is more likely due to a surge in demand and a change in the model of Bordeaux-trading that had previously existed. However that is not to say that investing in Bordeaux is a loss maker, quite the contrary, it is investing in the “right wines” that is key. In summary:

  • Assuming there is a conclusion to the Eurozone crisis, we see prices will rise again.
  • As demand for the best wine increases globally, so too will the prices.
  • With prices seeming to rise, more people will want to be in on the action and we suspect more funds will emerge.
  • That is not to say that one can just “buy Bordeaux” and sit back, ill-researched investors will likely get burnt.
  • To this end Vinetrade will be commenting on three wines on a weekly basis with a view to buy, sell or hold.
  • With the growth of the end market, and the availability of some aggressively priced investment wines, fine wine investment remains a solid option for the diversified investor.
  • Ultimately we believe that wine investment is not a short-term investment and that a diversified selection of wines is essential to the prudent investor.