by Guillaume Jourdan
A recent report made it clear that investing in fine wines over the last 5 years was a very clever approach. Using Thomson Reuters Datastream (it tracks the Liv-ex Fine Wine Investables Index against the MSCI developed world stock index and the Goldman Sachs Commodities Index over the past five years), Wine has more than tripled from a 100 base in 2006 to over 300 while equities are around 125 and commodities have actually fallen on a total return basis. Wine not only managed to weather the recession and stock market crash, it thrived in comparison with the others. The popularity of wine as an investment has risen in recent years on the back of new money coming in from mainly Asian emerging markets.
But for fine wine investment managers, all that is now history. They now have the most difficult task: anticipate the wine market, value future expectations and invest in wines that will get the highest returns over the next few years. And before taking any decision, wine investment managers should consider the new environment they are facing. At this period of time, being heavily invested in a portfolio of mature or soon-to-mature wines may be a risk for managers who have to consider their future positions. What should they learn from the past to beat expectations over the next 10 years?
1) Fine wine prices are often correlated to the scores given by famous experts. So, for fund managers, it may appear that investing in 100 points’ wines would be a safe strategy. Maybe the safest for some who only value their investment according to the points given. But buying a 100 point wine today does not assure the buyer that this wine will still be 100 points in the next 5 years. Over time, wines may be downgraded and valuations may be impacted. A first growth chateau which was 100 points and only gets 97 points after a critic’s new review certainly won’t have the same appeal to future buyers. In this scenario, less people would be potentially interested in bidding up on this particular wine at next auctions. This risk should be taken into account by investors.
2) Fashion is not only for clothes or jewellery, fashion is also in the wine’s world and it makes the investor’s strategy even more complicated. A decade ago, Australian wines were the “darlings” of the international market. Suddenly the world of fine wines included some wines from Australia and prices went up for some of the most acclaimed Barossa Valley wines and others. Attracting eyeballs, becoming the new “darlings” in media….Investors bought some of these big names and consequently diversified their portfolio holdings. Things have changed since, these wines are not anymore the “darlings” in media and those wines have dramatically depreciated in value. This risk should be taken into account by investors.
3) “International taste” may change over time and wines that funds are now buying may not be those who will be appreciated in 10 years. Big, powerful, overripe wines with high alcohol level were very successful over the last 15 years. Extraction, high alcohol, fruit and big colour were attributes that people were expecting when they were proposed a wine. Some top wines from France, Italy, Spain, USA, Australia were all on the same level and reached extremely high prices and high scores. But now this “international taste” is changing for more delicate, easy to drink wines. A refreshing acidity, less oak, lower alcohol…This strong trend is putting at risk investments made over the last 10 years in superpowerful wines. In fact, Wine funds still have these wines in their portfolio at a high valuation. And they now have to invest for the future. This risk should be taken into account by investors.
4) Among current wine portfolios, some bottles may prove to be simply already…dead. Our job is to taste wines, current releases as well as aged wines. From France, Italy, USA and the rest of the world. And what do we observe now? Some wines released at a high price a few years ago have now lost their charm. Drunk young, they were impressive. But now they do not show much, they are disappointing and never took benefits from the ageing. For fine wines, experts and collectors are aware of this point and are not interested in buying those wines at auctions. Even worse, some of the best white wines in the world – I mean white Burgundies – extremely expensive and much appreciated by investors may be risky assets if the vintage shown on the label is between 1995 and 2000. Oxydized, dead, gone…A web site http://oxidised-burgs.wikispaces.com/ is dedicated to this subject. Some wine funds still have these bottles in their portfolio at a high valuation. And they now have to invest for the future. This risk should be taken into account by investors.
The world of luxury wines is a beautiful world. Chinese investors are active on this market. And a couple of weeks ago, a report said that, on this specific market, trends may change. Market experts at the Wine Investment Fund reckoned there was growing evidence of a shift in favoured brands, with Haut Brion and Mouton Rothschild grabbing the limelight from the previous preferred tipple, Lafite. Both Haut Brion and Mouton Rothschild recently posted price rises of about 9%, with specific vintages surging in price by far more. With Mouton seen as most likely to be the “next Lafite” in terms of popularity. In fact, a new range of individuals or companies have decided to invest in them to make a high return. Asset allocation is always risky and fine wines, as such, can not be considered differently. Wine fund portfolios are not easy to manage as investors have to consider their current holdings and also define the right strategy for investing in the future. A minimum of 4 different risks should be taken into account by investors if they want to make their investment as profitable as it was over the last 5 years. A minimum of 4 as counterfeits have become an extremely complicated issue that could make your wine investment go from millions to thousands..