Investing in wine
Investing in wine is no laughing matter for investors, though. Its transformation from a jolly hobby into the more serious mix of investmentarguably began in the mid-1980s, when prices for fine wine began to rise in earnest. One factor behind this was the success of wine critics such as Robert Parker at predicting which of the top châteaux in Bordeaux would produce the best wine in a vintage. More collectors sought out the limited number of wines most highly regarded by these critics, boosting their value. A bull market in stocks and bonds in the decade or so that followed also helped spur interest in alternative assets.
If you have a taste for investing in wine, you must first understand how France’s premium wine market — easily the most important — operates. The annual highlight of the wine merchant’s calendar is the en primeur market in Bordeaux, the closest thing the wine world has to a futures market. Every spring, the best of the region’s winemakers provide merchants with a chance to acquire their product early, before it even enters the bottle. The châteaux offer limited en primeur allocations to the market only through authorised French distributors known as négociants, who in turn offer the wine to other merchants around the world. Usually after about two years the wine is delivered. Other French regions, such as Burgundy, do not offer such early access to their wines.
For consumers and investors, en primeur has proved a popular way to buy the best wines at a discount to final retail prices, especially when reviewers gave high marks for any given vintage. Popular, that is, until 2011 when the wine market hit a blip. Demand flowed away just at the beginning of a series of mediocre vintages from Bordeaux. Prices suffered. That damaged long-run returns. Fine wine has only just kept up with shares over the past decade. Liv-ex — the international wine trading exchange — has an investable wine index, made up of top Bordeaux wines from various vintages since 1990. This has risen at a compound rate of just over 5 per cent annually in sterling terms (pre-tax), just ahead of the FTSE All-share index including dividends. Wine lags UK gilt returns, though. However, this year prices have rebounded. This summer’s decision by UK voters to exit the EU had an immediate impact on fine wine prices partly due to the sharp drop in the British pound, down 16 per cent in trade weighted terms since late June.
That means fine wine held in the UK has fallen in price in most currencies, other than sterling. Good news for overseas buyers; bad news for British customers and any merchants which import wine. Around £2bn of fine wine stock sits in UK, according to data from the specialist warehouses.
The UK is a popular location for good reason. There are positives to investing in wine within the UK, not least of which is capital gains tax protection plus the ability to store wine in bond, free of customs and VAT, for the life of the investment. That said, interest from overseas has brought lots of business to UK wine merchants such as Farr Vintners.
After one of its busiest summers in its history, trade has remained brisk this autumn. “Hong Kong [buyers are] particularly active,” points out chairman Stephen Browett, “thanks to the great exchange rate for them. However, stocks are now very low and prices are starting to rise as we have to replace them from France.”
Wine prices from Bordeaux’s premier cru — top growths most popular with collectors — have jumped a quarter this year alone. Bear in mind though that fine wine prices have not appreciated in other currencies such as the dollar and euro in the past year. In yen terms, they have fallen. That may change if the pound stabilises. Wine investors do, of course, buy from other French regions as well as other countries, such as Italy and the US. Indeed, you would have fared better holding the best of Burgundy and Champagne over the past decade, rather than Bordeaux. Yet Bordeaux is vital to the wine market, both for investment, and for those of us who enjoy drinking it. The region produces much of France’s fine wine. Top châteaux, such as Lafite Rothschild, can annually produce 20,000 cases of their best label. Meanwhile, top estates in Burgundy, such as Domaine de la Romanée-Conti, measure their output not in cases but in individual bottles. With minimal supply, Burgundy rightly has some of the priciest wines. For these reasons most established wine investment funds tend to prefer top Bordeaux, usually more mature vintages. Not for them the hustle of the en primeur season. Chris Smith at The Wine Investment Fund mostly accumulates the older, long-lived vintages, which can last for decades while consumers slowly drink away the available supply. While he agrees that overseas investors will not have made gains in their own currencies recently, he thinks the UK wine market still deserves attention. Mr Smith believes that those overseas “are buying into a market with stronger-looking fundamentals (tighter spreads, good bid/offer ratios, etc) at no greater cost”.
With supply quickly disappearing, they may well have the last laugh.