In this latest piece we look at the emergence of new actors in fine wine markets, by way of wine funds and the increased prominence of fine wine auctions.

In a series of questions and answers Ella Lister, the Auctions and Secondary Market Correspondent for the World of Fine Wine Magazine (WFW) provides critical insight.

New routes to market for the collector and investor

Until James Miles, Director of Liv-ex (the London International Vintners Exchange), put a figure to it at the Hong Kong International Wine & Spirits fair, estimates of the value of the world-wide fine wine market saw swings by as much as 100%. The figure Miles arrived to was $4 billion and one that has been referred to since. As Miles pointed out, this is composed of merchants (90%) and auction houses (10%), but not other actors, such as wine funds or financial entities holding wine as an investment.

Importantly, private collectors and investors, with whom most stock resides and who may freely sell or broker their wines independently, are not included within this figure. Thus, the real value of the fine and rare wine market must be significantly higher.

In the 10 years since the trading platform began, the fine wine market has changed dramatically, to the point where fine wine is well on the way to being accepted as a credible alternative investment. The 2008 decision by the Hong Kong government to go from a closed to open market, by reducing its 50% tariff on wine to zero overnight, ushered in startling expansion and is the most disruptive event since the entrance of the US market in the 1970s or the arrival of the internet and transparency.

The historic fine wine trade structure – centred on the traditional merchant, collectors and auction houses – has changed too. London fine wine merchants successfully established broking divisions in the expansive environment of the early to mid-1990s, which saw Asian buyers enter for the first time. Trading platforms, led by Liv-ex, and price tools like wine-searcher.com followed and have brought transparency to a hitherto remarkably opaque market place.

We may not have given it due attention at the time, but this marked the first meaningful step in the little-by-little sophistication of fine wine markets. New actors – professionally managed wine funds and a freshly dynamic auction scene among them – mean there are now new routes to enter and exit the market for the private collector and investor.

A common feature of fast-growing, but immature markets is that a rush of new money can push up value beyond the line supported by the fundamentals. Moreover, where will this new capital go in the event of a stabilisation of stock markets; will it remain in fine wine or will it return to the traditional fold?

How important are these newly empowered actors to today’s fine wine markets?

Certainly, hammer prices and fund headlines suggest increasingly so. The former is a leading indicator of sentiment, albeit for the irrational luxury market, so important to that essential ingredient of economic prosperity, confidence. The latter? Well, we don’t know exactly. A large part of the challenge with wine funds is that, behind the headlines, facts would seem to be hard to come by. Yet, understanding the role of these new actors matters. Accurate and transparent figures, traceability and the human face are a pre-condition to the fine wine market taking the next step and becoming a mature and accepted form of investment as well as pleasure.

Wine funds and fine wine auctions – behind the headlines with Ella Lister

DWT How important are fine wine auctions and wine funds to today’s fine wine market?

EL The wine auction market steals the headlines but represents no more than ten per cent of global fine wine revenues, at almost $400 million annually in 2010. Similarly, wine funds are on everybody’s lips, but total assets under management are no more than $400 million, and probably nearer to $300 million.

DWT Are fine wine auctions a good route to market for the private collector/investor?

EL They can be very lucrative, but the seller has less control over the final price, as you have to commit stock months before the actual sale, and auction houses will restrict the reserve price you can apply. Hence some wine funds steer clear of this riskier route to market.

DWT What is the current growth trend among auction houses and what is their regional spread?

EL The auction market is growing fast, but probably not considerably faster than the overall fine wine market. Revenue in the first three quarters of 2011 was up 44 per cent on the same period in 2010. Hong Kong now represents just over 50 per cent of global wine auction revenues.

DWT There has been a lot of talk about new funds being set up. Is this true or exaggerated? What is their impact and is this sustainable?

EL There has certainly been a flurry of announcements in 2010 and 2011, but the actual level of success is so far unclear. For example, Société Générale and Bordeaux Index have both announced funds that have yet to materialise. Despite bold aims to raise RMB 1 billion in its original statement in August, the much talked-about DeRouge fund has made no further noise. We don’t know whether it has succeeded in raising its initial target tranche of RMB 200 million.

DWT Do wine funds buy en primeur?

EL Some do; some don’t – see my series on funds in the WFW.

DWT Would buying into a fund outperform purchasing a basket as represented by the Liv-ex Investable index?

EL It’s likely to be a similar basket! You would like to think that the fund manager’s expertise and careful ongoing analysis would yield higher returns, but this is not always the case.

DWT Fast forward five years: what are your predictions?

EL Wine funds will continue to play a key role in the fine wine industry, as investors look increasingly to tangible assets. However, the limited size of the fine wine market means that it’s hard to imagine fine wine becoming a major investable commodity on a par with gold or even fine art. After all, the most expensive case of wine is nothing compared to the most expensive painting. The market will continue to become more sophisticated and transparent, but in five, or even ten years’ time, it still won’t be ready for large-scale investments or complex financial products. It is a niche investment product, best kept in the realm of the tangible.

The final instalment of Ella Lister’s three-part work, examining the pros and cons of funds vs. DIY wine investment, is in issue 34 of the World of Fine Wine Magazine, out now.

The WSTA has published a "wine investment guide". It is "published and maintained by the Wine and Spirit Trade Association. Its contents were drafted in consultation with a number of reputable UK wine merchants, retailers, brokers and law enforcement agencies. It is aimed at consumers who are considering investing in fine wines. It provides tips on how to protect yourself against becoming the victim of fraud".

"Fine wines can make a good, relatively low risk long-term investment. However as with all types of business, there are rogue wine traders who are intent on conning people out of their money. Whether you are a wine enthusiast starting your own fine wine collection or someone looking to build up an investment portfolio, this guide provides some tips on how to protect yourself from becoming a victim of wine fraud".

We urge you to read this, to make sure you make the right decisions, because, as the WSTA says "fine wine can make a good, relatively low risk long term investment. However, as with all types of business, there are rogue traders who are intent on conning people out of their money". 

View the full wine investment guide here.

Now that what seems to have been a very long summer break is over, it’s time to catch up.

The Fine Wine Market

Immediately after the En Primeur campaign finished early July (!), activity dropped right off. July still saw relatively brisk trade, but August was very slow, slower than recent years. Partly due to the trade having had quite enough of the long drawn Bordeaux En Primeur season, partly because of the holiday season, but mostly because of the uncertainty on the financial markets, coming right in the holiday season. There was not much demand and, as some stock holders preferred cash over paper profits, there was a steady stream of supply. As a consequence, prices dropped (more on this to follow). Particularly because First Growths led the way, and because we haven’t seen any monthly price drops for quite some time now, questions were being asked as to whether this could be the correction that has been predicted by many. The high prices of 2010 Bordeaux seemed to further fuel this thought, not unlike boom before bust. Speaking of the 2010 vintage:

The 2010 Bordeaux En Primeur campaign

Was long. Very long. High quality wines, high prices, big ego’s, long waits. We have covered this subject quite a bit on the blog, so for details please check the blog archive. Our opinion is that it was a very badly managed campaign, with basically all players in this market bar the Chateaux feeling hung over, the consequences of which we might well feel in the years to come. Ultimately, the concept of selling future wines needs to work for all parties involved, something which was not the case in the 2010 campaign. A shame really, because quality wise this vintage deserved much better.

What is interesting to cover is whether the 2010 campaign was successful in terms of sales. The answer depends on who you ask. The Chateaux had a bumper year, no doubt. I believe the French Negociants did do ok, although they were faced with a high risk of being left with very expensive stock. Remember, the Negociants pretty much have to take their historical allocation off the Chateaux, so they bear the risk, not the Chateaux. They sold through relatively well, although remaining stock must be higher than in 2009.

Because, overall,  consumers were not nearly as excited about 2010 as they were about 2009, it was the “secondary” trade (merchants around the world) that was left holding much more stock than wanted. Or, if not, at the price of reduced future allocations. The consensus seems to be that 2010 sold about 40% of 2009 (which admittedly was an incredibly successful year). Importantly, sales were at a historically very low margin. There was lots of discounting going on, anything to sell the allocations one wanted to keep.

Up until the last 2 weeks of the campaign (until Vinexpo), Ditton Wine Traders were actually up on 2009, by a whopping 60%. Early on in the campaign, there were great wines to be had, at decent prices, something we did much more successfully than in 2009. Over the whole campaign, we sold 20% more different wines than in 2009. The last 2 weeks, when the 1^st Growths and most super seconds were released, were not as successful as 2009 though, resulting in the end in a turnover of 78% as compared to 2009. When compared to most other UK merchants, we did extremely well. Although I don’t think this justifies being occupied with En Primeur Bordeaux for 2 months… Something to think about for 2011.

Fine wine prices

Starting in July and accelerating in August, most prices have come down. As measured by the Liv-ex 100 index, prices have decreased by about 6% in July and August. First growths, as measured by the Liv-ex Investables index, have done slightly worse, printing a fall of 7%. This was mainly caused by Lafite (see Liv-ex article), another major contributor being Parker’s downgrading of 2008.

What has caused this drop in prices? In our humble opinion, 3 main reasons.

Firstly, it seemed a natural moment for people to cash in on the profits they made over the last years. Well before the Primeur campaign, there was already lots of talk about price rises being unsustainable. It’s quite natural that people want to cash in on very handsome profits as they sense that the market might have reached a peak. Consequently, a lot of stock came onto the market.

Secondly, this boost in supply coincided with the holiday season and, importantly, the fact that the international fine wine trade was still holding a lot of stock, bought at cheaper prices. In particular the Chinese traders – we believe – held a lot of stock, bought when prices were going up ferociously. Note though this weak demand does not necessarily have anything to do with demand of the final customer (be it drinkers or investors).

Finally, the timing coincided with a general feeling of uncertainty, generated by another looming recession, continued systemic problems in the EU and resulting, massive falls on the financial markets.

Fine wine as alternative investment

First of all, we have to see this price drop in perspective. During the same period (July-August), the FTSE has lost 10% of its value, the German DAX even 17%. The financial markets have seen turmoil reminiscent of post Lehmann in 2008, with some very fundamental issues that have so far proven to be impossible to solve adequately. Given that Fine Wine is now, to a significant extent, an investment vehicle, it’s actually a remarkable resilient performance. From first hand experience, it’s clear that a lot of money is being swapped out of bonds and shares, into alternative investments like Fine Wine.

Secondly, no market can keep going up. If it would, there would be the mother of all corrections at some point. It is actually very healthy that prices have come off a bit. It allows for a period of consolidation, reflection and normalization. Which ultimately avoids boom/bust scenario’s.

As for demand of the final customer, September sees more activity again. UK investors are once again keen to invest in wine. Our customers in Asia are definitely back to buying, albeit more selectively than early in the year. We don’t see any indication that there could be a fundamental shift in the total level of demand, which – if true – will keep in force the age old adagium that demand outstrips supply.

Movers

Stock picking is very important and even more so now that there's a distinct gap in performance between several "classes" of wine. At the moment, there is a trend towards super seconds and "flying fifths" as well as cheaper Grand Cru Classees. It’s no longer anything 1^st Growth and their 2^nd wines. 

As predicted on our blog a few months ago, customers are more aware of value for money. Although, at the same time, the truly iconic wines and vintages keep on doing well (as always). 

At the same time, investment money is still flowing in. Wine investment funds and, to a slightly lesser extent, investment brokers make sure their portfolio’s are constituted of at least 50% 1^st Growths, in some cases even 100%.  These companies need to buy stock, there’s only limited supply, so we expect the current fall in 1^st Growth prices to be reversed in the very near future.

On a final note, we do see growing demand from Asia for super Italians, as well as for Burgundy and indeed some New World regions. As this fabulous part of the world gets more acquainted with fine wine, and as prices of their first choice (often most iconic) wines go up and up, it’s natural and healthy that the eye is being cast on other wine regions that make great wine.

Our Picks

Not everything has come down in price. Some wines are actually up (Lynch Bages, Cos Estournel, Montrose, Pontet Canet). La Mission Haut Brion has had an incredible run. There's a lot of coverage on the performance of the "super seconds" and "flying fifths" as well as some of the cheaper GCC. The common factor with these wines and the reason behind their succes is that they are all well known brands, that they have made stunning wines in 2009 and 2010 as well as in some older vintages, and that their prices do not (yet) reflect the quality. We'd be very happy to advise on them, so if that strikes a cord, do get in touch.

Worth an extra mention is that Robert Parker has recently conducted an extensive vertical tasting of Lynch Bages, spanning 1981 – 2010, re-rating the wines accordingly. The market has already reacted, but it's likely that some vintages of what's arguably the strongest brand behind the 1st Growths will continue to do very well. We will cover this in our next blog post.

Finallly, something else to take notice of, is the "Magical 20" as selected by, again, Robert Parker. On November 8, he will conduct a tasting of "estates that produce wines of "first growth quality" although technically not first growths...and because of that are under-valued and very smart acquisitions". This might well have some effect on prices. Here's his list:

1. Ch. Cos D'Estournel,
2. Ch. Pontet Canet,
3. Ch. Pichon Lalande,
4. Ch. Leoville Poyferre,
5. Ch. Leoville Las Cases,
6. Ch. Palmer,
7. Ch. Malescot St.Exupéry,
8. Ch. Pape Clement,
9. Ch. Haut Bailly,
10. Ch. Angelus,
11. Ch. Trotanoy,
12. Ch. La Conseillante,
13. Ch. Pichon Baron,
14. Ch. Lynch-Bages,
15. Ch. Smith Haut Lafitte,
16. Ch. La Fleur-Petrus,
17. Ch. Clos Fourtet,
18. Ch. Rauzan-Ségla,
19. Ch. Brane-Cantenac,
20. Ch. Le Gay

So, enough reason to expect this trend for value to continue. Go for well known, non 1^st Growth names with high scores. And don’t forget to stock up on 1^st Growths before they go back up again.

We found this interesting article on Wine Spectator: "Did China really save Bordeaux?" It gives some further insight into the success or lack thereof of the 2010 Bordeaux En Primeur campaign, and the role of Chinese /HK buyers:

Throughout this summer's sales campaign for 2010 Bordeaux futures, as châteaus released their wines at record prices and a number of loyal customers in America decided to pass, most analysts believed China would make up the difference. Thirst for high-end Bordeaux among China's wealthy has been growing for five years. This was supposed to be the year China came through for Bordeaux, leading to one of the most lucrative futures campaigns ever. If only it were that simple.

“We had a really good campaign,” said Jean-Pierre Rousseau, managing director of the négociant Diva. "We did as well as last year [value-wise]. But overall, we sold much less wine—fewer brands and less volume of each brand. And we also kept less wine than last year."

Several sources told Wine Spectator that yes, this was the most profitable futures campaign ever and China deserves a large amount of the credit. But the campaign was not the blockbuster many had hoped it would be.

Bordeaux’s top producers released the 2010 vintage at record prices, but the châteaus’ pricing strategy backfired in several ways. Merchants said that while some top names sold easily, other past bestsellers were not in demand. To move the wines, négociants would only give clients the top wines if they also took the others. Clients refused to hold onto “grossly overpriced” wine, and there was widespread discounting to quickly move the “toxic” brands out the door.

As for China, many châteaus priced themselves out of America and Europe and failed to attract the Chinese. “It would be wrong to say that Chinese customers have jumped at buying everything. That is not true,” said négociant Philippe Laqueche, general manager of Yvon Mau, whose 2010 campaign profits topped the 2009 campaign. “I think the campaign showed the strength of brands.” Pontet-Canet, Pichon-Baron, Beychevelle and Grand-Puy-Lacoste flew out the door. Smith-Haut-Lafitte, Rauzan-Ségla and Figeac, not so much, according to leading merchants in London and Hong Kong.

According to one broker’s report, 365 wines were released as futures during the 2010 campaign, with 89 percent of the allocated cases finding buyers. That’s the same clearance rate as the 2009 campaign, but fewer wines—403 wines sold during ‘09—and a far cry from the 93 percent clearance rate on 436 wines sold during the 2005 campaign.

Some merchants did well. ASC Greater China, a leading fine wine importer with 23 offices in China, increased its purchases but still only took a fraction of the offer. “We bought about 70 labels, of which 30 to 40 were for China and the rest were for Hong Kong,” said Don St. Pierre, Jr., CEO of ASC. “In total we purchased 90 percent more by value than we did last year and our total quantity was up by at least 70 percent. We took all the normal allocations and tried to get more allocations for the key wines that have demand and recognition in China.”

Demand for those key wines is fierce, and prices aren’t likely to come down unless the Chinese suddenly stop giving wine to business partners and high-ranking government officials. “The wine used for these purposes has to be famous and well-known in China [such as Lafite Rothschild]. Otherwise the gift giver or host may lose face,” explained Hong Kong businessman George Tong, whose own 2010 shopping list included the first-growths, second-growths, Le Pin and Pétrus. “If someone presents a bottle of Penfolds Grange or Harlan Estate as a gift or hosts a dinner serving them, he will lose face. They are very fine wines, but few people in China know them.”

But ongoing Chinese demand for other wines is less certain, particularly since China's nouveau riche were forced to take wines they didn’t particularly want in order to get their hands on the Lafite and other must-have gift items.

Nor did Chinese companies appreciate the disorganized tempo of the campaign—snail-paced at first, then frantic at the end, with 35 estates releasing in a single day. Pricing and tempo left private investors, a growing segment in China, disenchanted. “If prices drop later, everybody will be upset,” said Bandy Choi, a Macau and Hong Kong retailer who provides wine investment training to Bank of China executives.

Speculators are also muddying the waters. “We see quite a few wines that are not selling so well yet in China, but because of demand in Hong Kong the perception is they are very popular in China,” said St. Pierre. “We think most of the speculation is coming from brokers in Hong Kong and the U.K., betting on the next big thing. But since none of these companies have much of a presence in China, they are really very far away from reality.”

Aside from the seasoned importers with strong distribution networks like ASC and Aussino, most of the Chinese buyers, many of whom are large corporations who would just as happily import scrap leather, are worried about the next step: turning a profit. “They bought in '09 and haven’t seen any profit and now with 2010 they question if they will see profit again, so they are right to be cautious,” said Doug Rumsam, managing director of Bordeaux Index (HK). “Time will tell as to how these corporations offload these wines and the success of their long-term strategy.”

At its essence, the futures game is one of opportunism, nowhere more so than China. “If the Chinese cannot make big money in the primeur business, they will quit,” said Laqueche. That is particularly worrisome, because a large amount of Bordeaux’s grand cru classé now goes to China and Hong Kong. “The new concern over the long term is the geopolitical balance of wine,” said Laqueche. “Shifting from loyal customers to new customers—that’s an upside-down way of thinking. Perhaps it’s a historic move but it’s a dangerous one. We need to maintain traditional markets.”

Some négociants hope that Americans will begin buying petit châteaus priced between $15 to $35. But those wines aren't well-known in the U.S. “There really is not much of a petit [château] market,” said James Gunter, senior vice president at Glazer's, a major U.S. distributor. “Négociants want to sell them, but do nothing to promote them or help sell them and build in the marketplace. Estate owners really don’t get marketing and promotion in the U.S.”

Which means Bordeaux may be putting all its eggs in China's basket before it truly knows—or understands—the Chinese market.

Unquote. Now that the holiday season is finally over, we will shortly give our take on the campaign as well as the current market. Watch this space.

I find it slightly bizar that the whole wine trade is occupied with Bordeaux En Primeur during nearly 3 months. The tastings were done in April and the last of the reviews (Parker) were released at the end of April. Yet, a month and a half  later, we’re all still waiting for the campaign to get serious. Frustration in the trade mounts and customer interest is waning. An esteemed fellow trader dubbed the campaign “operation Escargot”. And rightly so. Can we please please get on with it?

Some thought Chateaux were waiting for the Latour auction in Hong Kong.That auction has happened but still no sign of live from Bordeaux. Perhaps the reason for the wait is hope that the euro will crash? If so, the gamble didn’t work: over the past 2 weeks, the single currency has only got significantly stronger against the dollar and sterling.

There are still roughly 200 wines to be released. With 9 working days left until Vinexpo (starting June 19^th), it’s highly unlikely the big guns will release in the next 2 weeks. We were hoping that today would finally see some bigger releases but no: today is a bank holiday in China and Hong Kong.

Andrew Jefford posted an article on decanter.com last week, Bordeaux 2010 – The Titanic campaign, which he starts by saying “…I’m thinking of a magnificent vintage of unsinkable quality leaving port, buoyed by a nation’s pride – and heading for a rendez-vous with a very large iceberg”. According to Jane Anson, the Bordeaux based journalist, this article has received a lot of attention in Bordeaux.

Jefford mentions that, according to Farr Vintners, “demand is about 20% of what it was last year”. Not all agree and speaking to Bordeaux Negociants, I found it very much depends on the wine. Some have done really well – notably Beychevelle but also Cantemerle who got their timing spot on. Everybody seems to agree though that prices are being pushed to the limit and arguably over the limit of what customers can and will stomach. Very few chateaux so far have released below their 09 prices and fears mount that “without significantly lowered prices, “the whole process will stutter and stall”.

Mind you, the UK trade has always been very vocal during the en primeur campaign, pushing for speed and lower prices. Fact of the matter is though, we all want to sell wine and to do so, there has to be some momentum. Which there isn’t at the moment. Fingers crossed some brave Chateau owner with a big reputation will release tomorrow, at -10% on 2009 prices- and will resuscitate the near comatose patient.