Mention a fine Bordeaux and one elicits images of comforting Provencal meals, Loire valley
châteaux or maybe posh New York restaurants. Those images are so 20th Century. To an increasing number of savvy investors, a fine Bordeaux now elicits images more akin to Wall Street than the wine cellar.
For the past decade fine wine has been emerging into its own asset class. The value of the Liv-ex 100 Fine Wine Index, an index of the top 100 wines on the London International Vintners Exchange (Liv-ex), was up 1.2% in January. Other fine wine funds, essentially fine wine mutual funds, were up between 1.7% (the Fine Wine Fund) and 4.6% (the Vintage Wine Fund) over the same period. All wine funds posted losses in 2008.
Wine funds are making their mark as high-return assets but skepticism remains regarding whether they are better investment options than traditional asset markets. Wine Asset Managers, manager of the Fine Wine Fund, explains that slowdowns in the fine wine market are characterised by "consolidation" versus value loss -- essentially price plateaus. What keeps the fine wine market from losing value is its finite availability and growing demand in emerging markets, a combination that almost guarantees growth. "The supply of top-end wines is completely finite," says Wine Asset Managers partner Miles Davis. "Over time, as people drink fine wines, the supply dries up."
For those investors who do not know a 2001 Bordeaux red from a 2005 Loire white, rest easy. Investors in fine wine funds do not have to worry about the actual buying and selling of wines, the funds do. Led by teams of wine savvy fund managers, fine wine funds buy, sell and store bottles of fine wine on the second hand wine market, a modern iteration of buying wine en primeur. En primeur buying, a type of fine wine futures trading, takes place every spring at the Bordeaux châteaux. Top Bordeaux châteaux include Lafite Rothschild, Latour, Margaux, Haut-Brion and Mouton Rothschild, all of which are popular on both the en primeur and secondary markets. The primary difference between en primeur purchasing and secondary market purchasing is that the former takes place six to nine months after harvest whereas the latter happens after bottling.
"The Fine Wine Fund trusts the secondary market and older vintages because they pose less risk," says Davis. Secondary market prices are typically set by "investment grade wines" -- wines from exceptionally good vintages that set the price benchmark for other fine wines. The last investment-grade vintage was in 2005, which surpassed many earlier high quality vintages and set a new price benchmark.
After a wine fund purchases a particular vintage on the secondary market, the fund typically stores the wine until it reaches maturity -- a period that can last up to 100 years. According to Davis, Wine Asset Managers sells its wines when they are "in danger of going past maturity or deteriorating or because we feel it is overvalued".
While in storage, fine wine is continually appreciating. The top vineyards produce a set amount each year and with the emergence of new oenophiles in developing markets -- read Asia -- prices, both en primeur and second hand, are soaring. In 2004, the en primeur price of a bottle
of wine rated 90 to 93 out of 100 was €950 ($1,195).
During last year's en primeur season bottles could fetch as much as $3,650. Despite wine's popularity, fine wine fund subscribers are not necessarily wine lovers, they are investors looking
for strong returns. Davis attributes this contradiction to oenophiles' propensity to develop an emotional attachment to the commodity they are trading.
Most, if not all, fine wine funds are domiciled in offshore investment jurisdictions. Wine Asset Managers' Fine Wine Fund is domiciled in St Kitts and Nevis and many other funds, including the Vintage Wine Fund and the Wine Growth Fund, are in the Cayman Islands.
While outperforming almost every major exchange during the past few years, wine funds were hit -- like every asset class -- by last fall's credit crisis. From 2003 to 2008, the Liv-ex 100 posted compound average annual returns of 15%. Much of Liv-ex's growth occurred after 2005, a very good year that pushed investment-grade vintages higher than before. During the same period, other major indices, including the Dow Jones Industrial Average and the Hang Seng Index, posted smaller average annual gains of 3.7% and 4.6% respectively before losing much of their value last fall.
Since 1950, fine wine has grown at an average annual rate of 15%, fluctuating from as high as 27% to as low as 3%, based on five-year-rolling averages. Fine wine's continual growth is a testament to people's incessant demand for a commodity whose supply is fixed. However, daily fluctuations and the potentially long-term holding horizon of fine wines make it a market not for the day trader or amateur investor. At more than £14,000 ($19,820) per unit, the Fine Wine Fund is specifically designed for the serious medium- to long-term investor interested in higher-than-average returns.
Last year's negative growth can be attributed to excess supply and the credit crunch. "The wine market fundamentally will remain the same; demand will continue to be robust from people who want to drink and invest in this market," says Davis.
This prediction bodes well for the future prospects of wine funds. Advertising annualised long-term returns of 15%, the Fine Wine Fund and Wine Asset Managers have set the bar high. But with demand for fine wine only going up and fine wines' historical strength, prospects are bullish from the vineyard to the fund manager and investor.
This story first appeared in the Spring 2009 issue of Private Capital which was published together with the March issue of FinanceAsia magazine.