UKV International News & Opinion
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Fine wine compared to other alternative investment commodities
There are many forms of so-called “passion assets”: luxury, highly collectable items that serve to strengthen an investment portfolio through diversification. Amongst these, most high-profile items are usually classic cars, stamps, antiques, and fine art. Fine wine also falls under this particular umbrella that makes up part of the alternative investment market – those investment avenues that fall outside the traditional stock or equities markets. When comparing the investment portfolios of the super-rich, passion assets account for an average of 10% of the overall value of the portfolio. These assets tend to deliver significant long-term returns, making them a valuable avenue for investors to explore.
Of these various assets, fine wine has consistently been ranked amongst the best performers and is experiencing increased interest and take-up by serious investors who are looking to diversify. Even when compared to traditional investment assets, such as gold or property, fine wine has massively outperformed them in terms of growth over the last 30 years. In fact, fine wine has outperformed almost 98% of other investments, with the market growing 2000% since 1988.
Fine wine is the best performing alternative asset by far. It has a high price transparency, as well as a relatively low entry price. A starting investment can be as low as £10,000, compared to luxury cars and fine art which can be several times that amount. The market for fine wine is ever broadening as secondary markets in places such as China, Malaysia, and Mexico begin to emerge and contribute to the growth of the overall global market.
When compared to traditional investment avenues fine wine clearly has an advantage, in the 30-year period mentioned above, the FTSE100 index from the London Stock Exchange showed growth of only 300%. Almost all passion assets either equal or surpass the FTSE100 in terms of 5-year returns, with collectible cars and fine art offering some of the best results, however, fine wine outperforms these to top the passion asset lists by a huge 40% higher average returns according to reports by top investment agencies.
When it comes to storage costs, fine wine also has an advantage, says Michael at UKV International. Passion assets such as luxury cars and pieces of fine art can easily accrue large storage and insurance premiums due to their size and relative fragility. Fine art pieces often require extremely specific conditions in order to preserve them well and maintain good provenance, and some luxury cars can cost tens of thousands to insure every year. Fine wine, on the other hand, is relatively simple and cost effective to maintain, even when paying for professional storage.
Two more distinct advantages emerge in the form of transactional fees and product homogeneity. Product homogeneity is the potential for variation from one product in a range to another, and with fine wine this is much easier to control. When stored to the industry standard, one bottle of a particular vintage will be functionally identical to another; ensuring an amount of certainty for the investor. This is not necessarily as easy to guarantee with products such antique furniture or stamps works, where their history and condition can vary greatly even within the same product range.
What becomes clear from this analysis is that fine wine is not only an excellent investment opportunity when weighted against more traditional portfolio options such as stock, but even among the various alternative investment options. It is singularly reliable when it comes to stable growth and optimal returns over the medium to long term.
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- Guide to wine regions for investors
When it comes to choosing fine wine to invest in, Bordeaux red has historically reigned supreme. However, there are many different regions producing investment grade wine every year, and some of the most valuable vintages have come from outside of Bordeaux chateaux in the past. This being the case, it pays to cast a wide net when it comes to choosing investment wine. The ever-expanding nature of the market means that investment in emerging wine regions could lead to great 5-10 year returns in the future. Recently, wines from regions such as California have been valued extremely high by collectors, and wines from Burgundy and Rhône are even beginning to approach the high value of the classic Bordeaux vintages. With that in mind, lets take a look at the top regions producing fine wine, as well as some of their most valuable vintages.
The Official Classification of Medoc and Graves, instigated by Emperor Napoleon III in 1855, was a ranking established in order to showcase the very best in French wine. These rankings still hold weight today and cover numerous Bordeaux chateaux that are responsible for producing some of the highest quality wine in the world. There are 54 official appellations, or “controlled designations of origin” within Bordeaux, and over 8000 individual chateaux. The majority of the wine produced here is red, sometimes known as Bordeaux claret in the English-speaking world.
Such is the reputation and influence of the Bordeaux region that their wine accounts for roughly 70% of all wine traded though Liv-Ex, the wine investors exchange. Bordeaux wine is therefore still the benchmark by which all other wine is judged for quality. Potential investors would do well to focus on Bordeaux as a way to guarantee that there will always be a market for the wine they purchase, maximising returns in the long term.
Some of the top chateaux to look out for are Lafite Rothschild, Margaux, Latour, Ausone, and Pavie. Bordeaux wines can typically command some of the highest secondary prices seen. A large format bottle of Chateaux Margaux 2009 sold recently for £122,000 and a single standard bottle of the Lafite-Rothschild 1787 Thomas Jefferson Collection can also reach upwards of £100,000 in resale value.
Burgundy wine accounts for the second largest share of the secondary market for fine wine, at around 12%, and this figure appears to be trending upwards. Between 2006-08, for example, it enjoyed only a 2-3% market share, but has become the single biggest challenger to the dominance of Bordeaux since 2012 onwards. The Burgundy region is one with a rich history, adding to its prestige and value. Burgundy wine dates back to the second century and the region produces both dry reds and chardonnay whites that are highly regarded for their quality.
Burgundy as a region has the highest number of official appellations out of all of the French regions, each producing its own signature vintages. This diversity means that there are relatively small quantities of the investment grade “grand cru” wine produced. The demand for these limited supplies means that there is always a good chance for resale returns through the secondary market.
A crate of Montrachet 1990 sold for around £100,000 in 2017, and a crate of Domaine de la Romanée Conti 1988 sold for over £250,000 in 2018.
A historical rivalry with the Burgundy region, dating back to the court of King Louis XIV, is one of the most famous characteristics of the Champagne wine region. This rivalry was fierce and almost resulted in a civil war on numerous occasions. However, since the proliferation of sparkling wine the rivalry has mellowed, and Champagne has become famous the world over for its unique vintages. Only sparkling wine produced within this small region can legally be designated Champagne, and this prestige means that the investment grade wine produced there can rival Bordeaux and Burgundy in terms of value.
The Champagne house of Moët and Chandon is home to the Dom Pérignon brand, named after the famous Benedictine Monk who pioneered many techniques involved in the production of sparkling wine. A single bottle of Heidsieck 1907 Champagne has been valued at over £180,000.
Côte Rôtie, found in the northernmost region of the Rhône Valley produces the entirety of the investment grade vintages from the region. These wines include the Guigal La Landonna, Guigal La Turque, and Guigal La Mouline. Although the region is significantly smaller than Bordeuax or Burgundy, its wine regularly achieves perfect scores from industry critics, which raises its value to rival that of other regions. It is still growing as an investment avenue, accounting for roughly 2% of the secondary market share, however, the wine’s proven and reliable quality may make it a smart choice for great potential returns in the future.
California produces over 90% of all wine made in the United States, and the state has over 1,000 individual wineries. Its history dates back to the 18th Century, where vines were planted by Spanish missionaries. The region grew exponentially due to the gold rush of 1849, which helped to establish the Napa and Sonoma regions with the influx of new settlers. California accounts for roughly 3% of the market share of wine fine as of 2017. Their cult wines, from brands such as Screaming Eagle, Harlan, and Scarecrow, are produced in extremely low numbers – They are often very rare and therefore very valuable to collectors and investors alike. California stands to become one of the premier wine producing regions outside of France and investors would do well to turn their attention to their wine now to stay ahead of the curve.
To conclude, Bordeaux still reigns supreme in the investment wine markets, and produces the most well-known and sought-after wine in the world. It is a safe bet for investors and can generally be relied upon for a good return of investment over 5-10 years. However, it pays to diversify, and the other regions covered here can all be considered worthy of attention. Particular attention should be paid to the Californian and Rhône wine both for their assured quality and their relative scarcity, as these are factors that make vintages especially appealing on the secondary markets.
- How Fine Wine is Performing During the COVID-19 Pandemic
The phrase “these uncertain times” has been thrown around an awful lot in the past few months, however, it is certainly more than a just a banal talking point. The United States just released the worst GDP growth figures since their records began, and the United Kingdom is predicting a worse recession than the financial crash of 2008. It is absolutely going to be a tough time for investors as the recovery from the fall-out of COVID-19 gets underway over the next few months, and it will be years before the global economy returns to pre-pandemic levels.
With that being said, there are some investment avenues and markets that are holding steadier than others, and fine wine is one of them. When viewed over a much longer timescale, this is perhaps not a surprising turn of events; from 1988 to 2018 the FTSE100 saw growth of 300%, while fine wine grew over 2000%. Even in the past 5 years, this trend continues to hold true, with the FTSE100 falling 14% compared to a growth of 75% for the fine wine market.
Let’s narrow the timescale down again: in the last six months, the FTSE100 has plummeted 33%, the Dow Jones is down 19%, and Japan’s Nikkei 225 has fallen by 27%. In contrast, the Liv-Ex 100, the largest fine wine trading index, has fallen only 2.5% and this was largely due to geopolitical shifts such as Brexit, as opposed to being tied directly to the pandemic itself. The basic laws of supply and demand are largely responsible for this trend as the relative scarcity of top vintages produced every year means that over the medium to long-term, the vintages become increasingly rare and thus more valuable, not to mention their increasing quality as they age. It becomes clear from these numbers that fine wine has consistently provided a high level of returns due its position as the best performing of the co-called “passion assets” over the last decade. In fact, fine wine has outperformed 98% of all over assets during this period, and investors are being encouraged more and more to allocate between 1 and 10% of their portfolio entirely to fine wine.
Whilst this does afford the fine wine industry with a relative level of stability, there are still some minor concerns. Sanitary concerns in the face of an infectious disease has meant that many of the en primeur tasting events have either been cancelled entirely or attended have been by far fewer participants than is usual. With many potential overseas investors not able to attend the tastings in Europe this season, there is bound to be a knock-on effect and perhaps some market correction.
Much of the growth of the market growth over the last 10-15 years has been from the widening of demand to Asian consumers and global investors more generally. Unfortunately, there is not much demand left in reserve and thus we may be coming to the end of this particular bubble of growth. The market will instead now become ever-so-slightly more volatile as the quality of the yearly vintages once again becomes the primary factor in driving demand. The likely outcome in the short term is a drop in prices: Bordeaux, Burgundy, Tuscany, and other regions such as the many Italian wines, will have to lower their prices in order to entice opportunistic buyers – some reports are predicting a price fall of up to 30%.
It may not be all doom and gloom though, a similar price drop (25%) was reporting in the wake of the 2008 financial crash yet and the market quickly recovered, outperforming both equities and gold in the following 5 years. In fact, it took the Liv-Ex 100 index less than two years to recover to pre-recession levels. We do not know yet what the upcoming recession will look like; whether it will be V, U, W, or L shaped, but the low correlation between fine wine and equity (less then 1%) means that it still provides a high attractive diversification option for investors during such a crisis, potentially helping to offset any fears over the decline in prices in the short-term.
The predicted price drop could therefore allow a wide breadth of investors with access to top-quality vintages that would otherwise be unsuitable due to their price or scarcity. As opposed to signalling a bursting bubble, this market correction could put those who are willing to buy now, during the pandemic itself, in a position to make excellent returns as the consumer trends return to normal over the next five or so years.