As you will likely be aware of, prices of fine wine, as measured by the widely adopted Liv-ex 100, have fallen 20% over the last 3 months and the drop has not yet stopped. You might therefore think, why should I invest in a market that’s going down? You might also think that any advice to buy coming from a fine wine merchant should be taken with a pinch of salt or two, as they want to sell, right?
Well, yes, but more important to us is that our customers are happy and will return. Anyway, don’t take our word for it, have a look at below facts and information and do the interpreting of it yourself.
Investing in fine wine, a longer term view
Fine Wine (as measured by the Liv-ex Fine Wine Investables index), has shown an average compounded return of nearly 15% over 20 years time.
This significantly outperforms the FTSE 100, which over the same period of time, only returned 3.5% (!) Not only that, it also outperforms the other SWAG commodities / collectibles (Silver, Wine, Art and Gold).
What’s more, Fine Wine not was not only best of class in terms of return, it did that with the lowest risk:
The main reason for this impressive performance is the simple mechanics of supply and demand. Supply is finite and diminishing, whilst demand for luxury goods has been steadily increasing. Even well before China happened, the Western world had no problems at all soaking up all that the top 25 Chateaux could produce. Nowadays, the Chateaux produce 15% less than 20 years ago, whilst demand has greatly increased.
The fine wine market is still immature
Transparency has greatly increased with the internet, allowing for more reliable price setting (as well as lower profit margins for sellers). This process is likely to continue, with more and more online price checkers as well as professional exchanges being launched.
Furthermore, logistics and most importantly, proving provenance is very amateuristic, scaring away professional fund managers that otherwise can see the compelling case of investing in Fine Wine.
The relevance being that, as the market gets more transparent, regulated and professional, it will also become more interesting as an investment vehicle.
A point in case is China. An enormous amount of wine is being shipped to China, even though it’s largely brought into the country in an illegal manner, as duties and tax (at 50%) are on the whole being avoided. Many argue we’ve only seen the beginning of demand from China – once that market becomes more transparent, mature and liberal, that’s when demand will really start going.
But why buy now?
I think that the structural case for wine investment is quite convincing when you look at above information. Prices are still dropping though, so why should you buy at this moment in time?
One argument has to do with risk-return. The correction of 20% we have seen in the last 3 months, has taken the average CAGR (compound annual growth rate) nearly back to its 50 year average. Whilst there is of course a risk that this correction is not yet over, one could argue that the downside potential is far less than it was when fine wine was trading at historically high CAGR rates. Please see below graph – courtesy again of Liv-ex.
Chances are that, if we look back in say 5 years time, adding wine to your portfolio at this point in time, will not have been a bad time to do it.
Further to this point, let’s have a look at one of the most heavily traded wines of late, Lafite Rothschild 2008.
The price of Lafite 2008 is now back to where it was just before the massive speculation around the special bottle with the Chinese symbol started. At this level, it’s not far off the prices of its peers with similar scores. The point? Again, that a lot of the risk of Lafite 2008 dropping in price has been taken out already.
Mouton 2008 by the way follows exactly the same pattern. There are lots of other examples that I can hopefully point out at some later stage.
These are exactly the kind of data that professional investors are looking for. They analyze data and buy when that particular wine is at the right price, at the right moment, fitting in the right strategy.
One less factual but hugely useful insight: I’m in Hong Kong at the moment and have been talking to lots of HK and mainland China customers. I’ve asked all of them what it takes for them to resume buying en masse again. The answer that shone through is very simple and powerful: the Chinese wine buyers are followers – we will start buying again once prices go up again. Demand is there, all it takes is to see prices going up again.
Bottom line: there is a lot of money that wants to get into wine. Money from wine investment funds, private investors, private wealth managers and the trade. In the Western world and in China. And that’s not even taking India and Brazil into account. All that money is sitting at the sideline. Waiting for the right moment.
On the financial markets, it’s usually the smart money (read professional money) that goes in when Joe Public finally gets out.
What to buy then?
Most of the investment money goes into the top wines. This means the top 25 Bordeaux Chateaux and a handful of others, mainly Burgundy. According to Liv-ex, only 8 Bordeaux wines account for 80% of leading wine funds portfolios. These are the 5 First Growths plus Cheval Blanc, Ausone and Petrus.
There will be a good opportunity to add these must have wines to your portfolio. For the moment though, there is a better opportunity. First things first.
I’m referring to those wines that have been labeled as “super seconds” and flying fifths”. It’s these wines that James Miles, in his speech at the Hong Kong International Wine & Spirits Fair was referring to when he commented “While timing is always difficult, we remain optimistic about the market for many of the reasons we have highlighted. Nevertheless, we suspect that the next bull run is unlikely to be led by Lafite. Indeed, as the Chinese market becomes more sophisticated it seems inevitable that it will experiment with a broader range of wines”.
Indeed, demand for these wines has already greatly increased.
The red line represents the “Magical 20” (ie the wines we are now talking about, more about this later). The blue line represents the Liv-ex 50, the graph starts in Sep 2006.
It’s easy to see that the Magical 20 have increased in value since May 2010, by about 60%. You can also see that the gap to the Liv-ex 50 (just 1st Growths) has narrowed, proving that demand for these wines is strong and has momentum.
Robert Parker has selected these 20 wines for a high profile tasting in Hong Kong, because: "For my tasting at WineFuture Hong Kong, I have chosen estates that produce wines of "first growth quality" although technically not first growths...and because of that are under-valued and very smart acquisitions".
So, finally, here’s our tip
The Magical 20 tasting in HK has just finished, today. The presentation where all of the above slides were shared was last weekend.
Apart from the intrinsic investment value of Parker selecting these wines, something he did some time ago and to which we commented on our blog, it is very likely that it will receive a lot of attention, particularly because there was an overwhelming consensus that the wines (all 2009) showed very well. If anything, it will firmly plant these wines into the mind of wine investors.
So we thought to give you this info ahead of the crowd as it might just be the right wines, at the right time (as extensively argued above).
The 20 wines are:
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
Please see our list for what we can offer – a selection of the most promising and least risky out of these 20.