The Drinks Business, one of the British trade’s leading providers of news and reports, has published an article on its feed ‘Fine Wine on Thursday’. Quote:

Pontet Canet declared best value Bordeaux in retrospective tasting

A tasting of Bordeaux 2001 ten years on just ahead of en primeurs saw Pontet Canet declared the best value wine of the vintage after voting by a handful of press including Jancis Robinson MW, Stephen Spurrier and Neil Martin.

The tasting, organised by Bordeaux Index, was first instigated by the wine merchant three years ago with the 1999 vintage, and asks each taster to submit a top five wines of the vintage as well as a top five best value.

Notably, like last year Latour was voted the best wine of the tasting, although it was in equal place with Lafite and Pétrus, while Château d’Yquem and Mouton Rothschild came in joint fourth. 

When it came to rating the leading wines according to value, Pontet-Canet came out on top with Palmer, La Tour Figeac and Nairac Sauternes in joint second place, followed by Malartic Lagravière, Domaine de Chevalier, Vieux Château Certan, La Tour Blanche, Doisy-Védrines, Doisy-Daëne, Langoa Barton, Cos d’Estournel, Brane-Cantenac and Rauzan-Ségla – all of which received an equal number of votes. 

The drinks business, which was also present at the tasting, rated, among the reds, Mouton, Pétrus and Pontet-Canet particularly highly but also noted the value present in Margaux from this vintage, led by Palmer (£400 per case), but also backed up by Brane-Cantenac (£450) and Rauzan-Ségla (£440). 

According to Bordeaux Index, and referring to Stephen Brook’s The Complete Bordeaux, acidities in 2001 tended to be higher than the previous infamous vintage, but the tannins were not always as ripe. It noted that with some wines approaching 2000 in quality, the 2001 vintage has suffered from being in the shadow of a great year. 

Certainly Jancis Robinson MW, writing on Purple Pages, described the 2001 reds as “not overall quite as impressive as the 2000s had been en masse, but although they were less concentrated, they were nicely balanced and pretty impressive at this stage in their development.” 

Unquote

Pontet Canet currently retails for £480 per 12/75cl.

The record-priced Bordeaux 2009 vintage currently trades at -2% off its London release price and so far has failed to produce growth in accordance to expectations. We look into alternative fine wine investment strategies that – albeit with hindsight –  would have netted a better return.

Bordeaux 2010 would seem set to bring another high-quality and highly priced vintage. But will this make for a good wine investment? If 2009 is anything to go by, possibly not. But if – and it's a big if – that’s the case, 2010 will likely open the door to other, more lucrative strategies to pursue.

So what and how to buy?

On current trends, exceptionally high prices for top-performing vintages (2005, 2008, 2009) become the new price ceiling by which prior vintages are measured.

In this context, the emphasis on brand over vintage, and increasingly brand over score together with the apparent search for value would look set to continue. If that’s the case, lesser scoring vintages and chateaux outperform their higher-rated equivalents as they move towards the new price ceiling. Moreover, some studies suggest that buying into recent top performing chateaux can outperform the market over the short-term, a so-called momentum approach. We have commented on these phenomena here in the blog before.

We have compiled a list of 10 wines from 2006, 2007 and 2008 that fit into the categories “brand over vintage and score” and/or have been on the move and thereby would be candidates for the “momentum-based approach”. We have compared prices from June 2010 with the current market prices and calculated the % increase in price:

Source: www.wine-searcher.com and Liv-ex.

Is buying en primeur actually a good deal? It certainly can be, but much depends on the vintage, your allocations and on available alternative wine investment strategies.

With what appears set to be another high-priced – high-quality vintage in the ensuing Bordeaux 2010 en primeur campaign, we take a look at the evolving wine investment market. In particular, in the light of the low-priced but high-performing 2008 vintage becoming physical and record release prices for the slower-moving, still at chateaux Bordeaux 2009.

En primeur is the French term for wine sold as a futures offering prior to it being bottled. This advance sale, while long available to the trade, only became popular with wine investors and collectors in the late C20^th amid the scramble for a succession of good vintages, a broadly prosperous economic environment and the emergence of vintage reports and ratings from 3^rd parties, such as wine writers and (one) wine critics. It has become a – relatively recent – specialty of Bordeaux classed growth chateaux.

The theory is that by buying wine early, the public not only secures sought-after wines, he or she also pays less. This early-release frees up much needed cash-flow for the chateaux, funds they can use to fund the next crop.

However, financial benefit to the wine collector, drinker or investor is by no means invariably the case. We look at some of the phenomena becoming apparent in a string of high-performing recent vintages against the backdrop of a significantly changing China-demand led wine investment market.

So, is buying en primeur actually a good deal?

It all depends. Bordeaux 2009 currently languishes at an average -2% off its record London release price one year ago. However, some of the other vintages – notably the 2008 – have posted much better returns (albeit over a longer time period):

Source Liv-ex.com

Yet, has anyone ever lost money on a stellar Bordeaux vintage? In the long-term probably not. For the collector/investor holding wine rather than trading it matters. Bordeaux 2005, the last pre-2009 top vintage currently trades at a premium of 59% off its 2007 London release price. Moreover, anyone holding the underrated 2002 would now be looking at a whopping 800% return since release!

In his seminal work, ‘Wine Investment for Portfolio Diversification’ (the Wine Appreciation Guild 2006), finance academic, Mahesh Kumar, concludes there are 3 stages at which wine typically returns a profit; the first 6-18 months after its purchase en primeur; when the wine has matured is more valuable and there is less of it; or, after an event that triggers sudden price appreciation such as the re-rating of a vintage or an increase in scarcity (a favoured strategy among wine funds). For 2009, the first opportunity seems to be lost. 

Timing is of the essence

With buying en primeur, when you buy matters. See below for the evolution of 2009 release prices by tranche as compared to the respective 2008 release prices:

This is extremely important. The above quoted return for 2009 up to now of -2% compares the London release price with the current market price. The London release price is the price at which a wine was first traded on the secondary market. This is not necessarily the price you can get it at if you have a relationship with your merchant.

For example, Lafite 2009 was first sold by the Negociants at €550 per bottle, which at the time equated to roughly £5,500 per case. London release price was £13,500….. Hardly anybody had any at this first price though. The second tranche was around £7,500 and there was some volume of that, but still not nearly enough to even satisfy loyal customers, let alone offer it on the secondary market. 

So, you can vastly improve your return if you can secure an allocation early on. For those who can’t, money invested in 2009 so far might have been put to better use.

We are not saying buying en primeur doesn’t make sense. What we are suggesting is that top quality vintages that are highly priced en primeur leave the door open to alternative, potentially more profitable strategies.

One could argue that very high prices for stellar vintages (2005, 2009) will be the new price ceiling against which previous vintages are measured. Should the brand-led/value vintage buying continue apace among a new wine public (China, but possibly also India, Brazil, Russia, Indonesia), then we can expect to see the appreciation of lesser scoring, physically available recent back-vintages and lesser scoring chateaux towards this new ceiling.

Next time we will look at this strategy in more detail.

By James Swann and Mark Schuringa

Is not the time-honoured investment advice to buy low and sell high?

A fresh new study by 3 London Business School (LBS) economists is the latest challenge, in a series of long-running research going back as far as the 1980s, to the efficient market hypothesis.

This hypothesis states that a given asset’s price reflects all available information, therefore responding only to unpredictable news and events. Price, thus, is the true optimal estimate of value at any given point, making it impossible for investors to predict whether that price will move up or down. At least that is the theory. 

However, in 2010 economists Mike Staunton, Elroy Dimson and Paul Marsh took a renewed look at momentum investment, an approach that involves buying the top-performing shares or products of the recent past. They took the largest 100 stocks in the British market since 1900 calculating returns from investing in the top 20 performers over a 12 month period, holding them and enacting a monthly rebalancing of the portfolio.

The result; an investment of £1 in 1900 would, by end 2009, be at £2.3m whereas £1 invested in the lowest performing 20 would have returned just £49. Although this approach uses only the top and bottom 5^th of the market, the implication here is that such is the performance of the top 5^th that it would represent a better investment than a broad-based buy and hold, i.e. efficient market/undervalued strategy. 

The predominant feature of fine wine investment is to seek out value by way of buying up undervalued stock – buy low, sell high. However, Liv-ex, the wine exchange, applied the momentum approach to fine wine. So in essence, buy high and sell higher still. They came up with some thought-provoking results.

The exchange used the Liv-ex Fine Wine Investables Index, its broadest index covering 24 top-scoring chateaux, taking the top-performing 25% of wines of the previous 12 months as compared to the lowest-performing 25%, starting in June 2000 and re-balancing every year in June. Findings show that a portfolio managed in this way would have brought returns of 390% as compared to 280% for the bottom 25% as per December 2010.

Important issues arise when considering the momentum effect. In an efficient market, the assumption is that the market is rational. However, studies in momentum suggest that irrationality might be playing a hand, whereby investors could buy assets just because they have seen the price rise. This could help explain the appearance of bubbles or why fund managers have placed capital into start-ups or other apparently hot investments with little other plan apparent.

Could this irrationality be occurring in fine wine - in particular Bordeaux classed growths – and if so, how could an investor potentially profit from the effect of this on price formation, gains and losses in the year ahead? 

Just follow the momentum theory then, yes? Well, maybe not because, applying a 5% dealing cost and assuming a churn rate of 50% reduces the top quartile return to 270%, which is almost exactly equal to the performance of a buy and hold strategy of purchasing the entire Liv-ex Fine Wine Investables Index. This strategy, the closest proxy to the efficient market theory, shows a return of 269% in the same time frame.

To complicate matters further, as the same report shows, until mid 2008 it was precisely the bottom 25% that would tend to give the best returns. So what has changed? Since the market shock in 2008, a range of new phenomena can be observed, to do with China, with brands over Parker, aggregate demand and momentum. These have signficantly changed the way the wine market behaves. We try to consider these and other factors relevant to wine investment decision-making over the year ahead. Specifically in the context of a possible softening of demand alongside a slowly widening market and what looks set to be another high-priced – high-quality 2010 en primeur campaign.

We will be discussing these issues and the outlook for 2010 in upcoming blog pieces. 

By James Swann and Mark Schuringa