Investing In Wine: A Reasoned Perspective

As a prospective or actual wine investor seeking to understand the market and define the right strategy, it may make sense to step back, consider the historical record, and put wine investment under a critical lens. According to leading indexes, 2016 was an extremely positive year in terms of the appreciation of investment-grade wines, which outpaced gold and stocks, even though global auction revenue fell slightly (-2%) compared to 2015. This was largely due to the absence of more than USD 12 million in sales posted by Wally's in California in 2015. Worldwide leader Sotheby's (USD 73.8 million) and number two Zachys (USD 65.7 million) showed strong increases in 2016, while third-place Acker Merrall & Condit (USD 58.5 million) suffered a drop. One company, WineBid, dominated online activity with USD 25 million in sales (Wine Spectator End of Year Auction Report, January 18, 2017). Wine investment does imply the secondary market, but it also encompasses collectors who mix business and pleasure, stocking their private cellars and participating to widely varying degrees in auctions. Whether a keen trader or passionate aficionado, or a blend of the two, every smart collector shares one aim: spend money wisely.

The practice of investing in wine dates from the 1700s, following the advent of dependable glass bottles and cork closures which permitted the keeping of wine and, in turn, its possible appreciation in value. In modern times, such investments have attracted greater interest owing to a growing fascination with wine coupled with rising wealth, notably in the uppermost stratum of international society. In the United States, particularly since the 1970s, wine has come to be seen as a complement to other financial assets rather than merely an intriguing and pleasurable beverage.

The essential objective of any investor is to realize a return on financial goods. Anthony Rose, an English journalist who follows the wine investment scene, argues that it is predicated on the principle that "demand for the wine in question exceeds supply" (Oxford Companion to Wine, 2015). He also admits that this is a challenging criterion to assess, and he points to the "unpredictable fluctuations" which characterize the wine market. Wine which qualifies for investing, Rose suggests, should have a lifespan of at least twenty years. When it comes to investing in wine, it is fundamentally true that investors should take a long view rather than expect an immediate return. Investment-level wine is scarce in availability by its very nature; however, the trading of wine extends beyond those rarities which may appear only briefly on the market. Indeed, wines and vintages may enter and reenter the trading arena, albeit irregularly and unpredictably.

Secondary activity worldwide is dominated by France and, specifically, Bordeaux. One comprehensive study (Beijer, American Association of Wine Economists, Working Paper No. 124, November 2012) found that France accounted for 90% of auction lots (290,752 of 319,555) and also commanded the highest average price per bottle (USD 468) in the 1995-2012 period. Bordeaux typically controls around 70% of turnover, with variations by house and location, and has reached an even higher share. Sotheby's top ten producers by value in 2016 include the 1855 First Growths plus Petrus, La Mission Haut-Brion, and Palmer: eight Bordeaux estates in all account for 37% of the company's total revenue (Sotheby's 2016 Wine Market Report). As goes Bordeaux, so goes the secondary market - or at least that has been largely true to this point.

This inevitably leads to a discussion of en primeur or futures. The upper echelon of Bordeaux wines - primarily the 1855 Classified Growths - were actively offered to private individuals on an advance purchase basis starting in the late 1960s. When first quoted, in the spring after harvest, these wines are still in barrel and will be bottled in 18 to 24 months. Two leading auctioneers, Christie's and Sotheby's, opened their wine departments in this same period.

Futures have been an important element underpinning investment, enabling buyers to acquire blue chips at favorable prices, and then at some later date turn over some or all of their en primeur allocations for a meaningful return at auction. Access to an embryonic vintage has also permitted collectors to order, à la carte, large-format sizes which figure prominently at auction. The entire futures scheme has come in for criticism from many quarters in recent years, in part because of vintages which quickly lost (rather than gained) value after release. Moreover, a smaller share of production is being made available as futures by elite properties. One First Growth, Château Latour, even opted out of the en primeur market after the 2011 vintage.

Opportunities for investors do not depend exclusively on futures and encompass older vintages of Bordeaux as well as other members of the global wine aristocracy. Burgundy's Domaine de la Romanée-Conti is a pacesetter in dollar sales for many auction houses (first in 2016 for Sotheby's). While the region's share - 5% to 8% - has improved in the past five years, Burgundy faces inherent supply constraints. Sauternes and Vintage Port are undervalued relative to their intrinsic quality and longevity; only fashion limits their appeal. (Château Coutet 2007, with 94 Parker points, last traded for USD 41.75, and Taylor's 1992, a 100-point Port, for less than USD 200 per bottle, per Wine Auction Prices!) Other regions may offer further possibilities. "Demand for Champagne, Rhône and wines from both Piedmont and Tuscany will grow," says Jamie Ritchie, CEO of Sotheby's (Decanter, February 2017). Similarly, California, Australia and South America could be areas of opportunity for the long term.

There are undoubtedly certain prerequisites for an investor who wishes to achieve satisfactory returns, along with the lowest risk, while pursuing wine as an investment. Experienced buyers and sellers know, for example, that wine in its original, intact shipping case, stored in a suitable cellar, and with traceable provenance will command the best possible price. Being vigilant with regard to wines often targeted by counterfeiters is also essential. Moreover, studying fine wines from regions present in this market segment and gaining substantial knowledge about the products and vintages will prove to be time well spent - and, no doubt, money saved or gained. As Benjamin Franklin observed, "an investment in knowledge pays the best interest." The more finely honed your instincts to anticipate trends and spot up-and-coming stars, the more likely you will come away with a favorable result.

At the same time, rather than sailing alone on Homer's wine-dark sea, it may be wise to have a seasoned hand on the tiller, perhaps that of Grande Marque Trading. At the very least, you should regularly consult the impressive databank of Wine Auction Prices containing more than 670,000 prices dating back to 2004 obtained from nine leading auction houses in multiple venues.

As wine investing has gathered momentum over recent decades, academics have wrestled with the calculation of wine's potential profitability as well as its place in an investor's portfolio. Making it rather complicated, one researcher found, after reviewing the literature, that "there is no academic consensus on wine investment characteristics" (Beijer, 2012). Then, in a study focusing on Australian wine (Fogarty & Sadler, Journal of Wine Economics, Vol. 9, No. 3, 2014), two economists add that "there is no standard approach for estimating the return to wine or testing for a portfolio risk diversification benefit from holding wine."

Another interesting study, this one by a trio of economists at the Montpellier Business School in France (Aytac et al., American Association of Wine Economists, Working Paper No. 163, July 2014) examined the role of wine in the diversification of investment portfolios. The authors mention that there is typically an emotional aspect to wine seldom present with standard financial activity. They point out as well that wine is "less liquid than traditional financial assets," which appears to be an amusing play on words but in fact refers to the fifteen days that are typically needed to sell wine. They remind would-be investors that "wine investment implies non-negligible storage, insurance and transaction costs."

The Montpellier authors quote Masset and Weisskopf (2010), who looked at the 1996-2009 period, concluding that "including wine in a portfolio increased its returns and decreased its volatility." They also cite Kumar (2010), who studied the years from 1983 to 2002 and proposed that "the optimal riskreturn efficient portfolio" was comprised of "58% fine wines and 42% equities on US markets." Their own examination led to the conclusion that "wine is profitable both as an individual asset and as a portfolio diversifier," based on the years 2007-2013. This reinforces the work of Beijer (2012), who examined a 17-year stretch, finding that "wine is superior to equity, as it gives both higher return as well as lower standard deviation."

Being prepared to consult and assess expert opinion - and consider multiple views rather than a single voice - may be the most important attribute of a successful wine investor. There is a wealth of information to digest and weigh prior to making investment decisions. Once more, having an informed partner to guide the process could well be an astute strategy. Nevertheless, no investor can expect to make perfect decisions, all the time. Fortunately, wine is vested with both monetary and hedonic value: a disappointing return can be offset by the pleasure wine offers. As the insightful Dutch writer, Hubrecht Duijker, has written: "The taste of a good wine is remembered long after the price is forgotten." Now that's something stocks and bonds just can't promise!

February 20th, 2017