4th December 2013
As Christmas approaches, it is nice to receive as well as give. That means finding a way to make money out of all that excessive consumption. The Turkey Farm fund has yet to be created, but there is certainly money to be made out of the fine wine in which a number of us may be indulging. Cherry Reynard looks at the pluses and minuses.
Perhaps the first thing to say is that any investment in fine wine is not a generic play on wine consumption. For that, investors may be better off buying shares in Majestic Wine and benefiting from all the tax advantages of an Aim investment. Fine wine is a different market. It focuses predominantly on Bordeaux wine, where there is the greatest supply (around 15,200 cases per year) and a functioning secondary market. there is also a market for Burgundy wines (where there are 3-500 cases made per year) and in some parts of Piedmont in Northern Italy.
In general, there are just a handful of routes to market. The most common, at around 90% of the market, is the direct route. Recognised wine merchants such as Berry Brothers and Rudd (BBR), or Corney & Barrow offer various schemes to enable investors to buy fine wine regularly. In BBR’s case, these schemes start at around £250 per month. BBR will offer advice and storage options.
The advantages of buying direct are that if the investment doesn’t work out, the wine can still be drunk. Matthew Tipping, fine wine sales manager at BBR says that many of its fine wine buyers will take this mixed usage approach and the firm can accommodate both.
There are also capital gains tax advantages, at least for wine with a shelf life of 50 years or less. No matter how much a wine drinker may feel it improves with age, HMRC deems wine to be a ‘wasting’ asset and it is therefore exempt from capital gains tax.
However, buying direct has some disadvantages. It needs to be stored, and putting it in a corner of the attic is unlikely to preserve its unique flavour. Professional storage costs money – around £250 per year – and investors need to be sure that it is going to be done properly. In practice, reputable wine merchants are likely to offer this as part of the package.
A new option to buy direct is via www.wineowners.com, a kind of eBay for wine, a platform where buyers and sellers can trade. Nick Martin, founder says that the platform is used by both professionals and amateurs. There are tasting notes and analysis for every wine, just as there would be for a share dealing service: “The largest proportion of our clients are wine collectors and enthusiasts who self-manage. We simply provide a platform for them to transact and manage their collections. We list drinking dates, critic scores and current prices, making it easy for collectors to see what is happening.”
The other option is to buy through a fund. Although some may offer perks, sadly this means that the wine can’t be drunk if it all goes wrong. Investors are purely profiting (or otherwise) from the rise and fall in the price of fine wine as they might any other asset.
There are advantages to this approach, however. Andrew della Casa, director of the Wine Investment fund points out that fund investors will often look at the wine market more objectively than wine experts. They will take into account liquidity risk, manage the portfolio to sell out when prices are over-extended and focus on those wines with the greatest potential for investment returns. He says: “We focus on around 350 lines of stock. These are wines that it is possible to value properly. You need to be able to value a wine and get your cash out.”
Wine funds have gone wrong in the past. For example, the Luxembourg Nobles Crus fund encountered problems last year after rivals questioned its valuation practices. The fund was forced to defend itself against accusations that it had inflated its net asset value. Luxembourg regulators have subsequently forced it to suspend redemptions as Ft.com reports.
The sector undoubtedly attracts some chancers, but Tipping argues that it is relatively easy to spot the winners and losers: “Yes, we would rather these outfits didn’t exist, but if you do your research, speak to reputable merchants, you can find out who is well-established and who isn’t.”
There is clear best practice, for example, such as using Liv-ex for independent pricing. Wine pricing will never be as clear as it is for equity markets because wines may not be traded frequently and investors have to rely, to some extent, on the last market price.
Whichever approach an investor chooses, wine has proved diversifying for a general bond and equity portfolio. Wine prices are influenced by a range of factors: “Wine that is well supported and rated by wine writers will tend to perform better,” says Martin. Tipping says that in general as wine gets older the price tends to rise, and chateaux will move in and out of fashion. Lafite wine, for example, was picked up by emerging market buyers, which boosted the price. Prices can be influenced by the wider economic climate – wine became a ‘safe haven’ investment during the economic wilderness years between 2008 and 2011 – but this is not the dominant driver of returns.
Historically, it has been a good investment. Della Casa says: “It is one of the lowest risk asset classes. It has lower volatility than the stock market or commodities. We have been going for around 10 years and have made around 10% per year on average.” That said, the wine market did spike in 2011 and the top Bordeaux wines have been in a period of decline since then. This was largely as a result of influential Chinese buyers leaving the market as Chinese economic growth slowed. The rest of the market has remained more stable.
It will never be the core of a portfolio, but wine is an interesting diversifier. And if it doesn’t make any money, well, it can always be cracked open on Christmas day.