During a period when markets across the world face unprecedented volatility and currencies are under inflationary pressure compounded by unpredictable institutional policies, alternative assets are emerging as a key diversifier in portfolios. The growing popularity and appreciation for wine across the world has expanded the investment landscape for fine vintages as a collectible asset. Philippe Bera of Omtis Fine Wines who is a specialist in investment-grade wines and a proprietary investor within his family office, has contributed input for this article.
Wine could be considered the essential luxury asset, owing to the depth of its cultural heritage and the universality of its appreciation. As a tangible, collectible investment that embodies passion, finesse, values and a continuity of tradition that spans centuries, wine is uniquely compelling. Many cultures view wine as an expression of the defining characteristics of a region, from the unique composition of the soil, features of the local climate and distinctive signature of traditions in cultivation and cuisine. Wine regions such as St. Emillion in France, Lavaux in Switzerland and Alto Douro in Portugal have gained UNESCO World Heritage Status, in recognition of their history and living heritage.
Beyond its long-standing cultural legacy, wine is also a resilient, low volatility investment that defies macroeconomic trends. During the 2008 financial crisis, the prices of investment-grade wines remained stable. The same trend holds true in 2022, as wine indices are free of the erratic shifts that have rocked stock markets throughout the year. Wine has arguably never generated a negative return over a five-year period, and its volatility is similar to gold and comparable to Fixed Income. Considering that the growing global demand for the asset far exceeds its supply by virtue of the years-long process of winemaking and consumption that consistently depletes its supply, the market dynamic works in favor of investors. As the quality and value of investment grade wine improves with age, so too does the potential for return on the investment.
In addition to its inherent benefits, investing in fine wine provides an opportunity to hedge against inflation and protect against destabilizing factors in the international trade environment, because wine is a real asset with intrinsic value. As a component of a diversified portfolio, fine wine may help investors strategically navigate the current economic environment.
However, it is vital to appreciate the nuances of wine investment in order to gain the full extent of its benefits. This includes fine wine’s unique investment dynamics, procurement options, and most importantly, how to understand the value of a vintage when making an investment decision.
A soundly-constructed portfolio should include prestigious wines from renowned production regions which spur worldwide demand. Diversification, rather than timing the market, is the key to success when investing in fine wine. In this context, it entails varying the range of vintages. Top rated vintages command a higher initial price, and take longer to yield a profit- they do, however, age over the course of a long timeframe owing to their higher quality and appreciate in value over an extended period, performing well over the long-term. Lesser vintages, on the other hand, are normally released at a discounted price and generate returns in a shorter interval, because their prices mirror the general market trend, although their more limited shelf-life requires that they are actively monitored and monetized within a relatively short window.
While lesser vintages acquired at a discount provide the advantage of short-term profit, wines priced higher than their indicated quality should always be avoided. The value of any investment is contingent on prudent assessment and careful management throughout the asset’s life cycle.
Towards this end, investors should take every precaution to ensure that their wine is transported and stored by a professional and trustworthy service provider, from the time of release until it is sold or consumed. Furthermore, because investment grade wines are almost always imported, it is advisable to store them in a bonded warehouse or ship to a duty-free jurisdiction for tax efficiency. Insurance should always be purchased along with storage, in order to ensure that the investment is protected.
Provenance is essential to the value of fine wines as such, investors should only purchase from trustworthy sources, in the original wooden cases. Investors that develop a track record of only trading in pristine inventory can develop a reputation that can in turn translate to higher selling prices and therefore, better performance. It is generally preferable – and highly recommended – to purchase wine during the En Primeur period, prior to bottling, if the purpose is indeed to invest in the asset.
En Primeur is a futures contract that offers the opportunity to procure wine while the vintage is in the process of maturing in the barrel. This method of purchasing investment-grade wine secures availability at the initial release price, which should normally be less expensive than acquiring a bottled vintage. Investors can choose to follow a wine for which they have an interest or affinity and purchase the latest available vintage. This is often the most effective course for well-known wines for which demand always outstrips supply. Rare, sought-after vintages or small batch wines that are not available at retail often yield higher returns.
The performance of investment-grade wines and wine futures can be tracked on market indices, such as the Livex Fine Wine Investables Index, which focuses on Bordeaux wines. Livex is the longest running wine index, dating back to 1988. As an asset, wine’s compound annual growth of 11% outperforms equities (8%) and gold (4-5%). But wine’s decisive advantage stands out during volatile economic cycles with market disruptions.
Although each market phase is unique and subject to a range of factors, analyzing multiple disruptive market phases can demonstrate consistent patterns of correlation that can be taken to be characteristic of an asset class. In the case of investment-grade wine, statistics from volatile economic periods over the years show a negative correlation with other asset classes- meaning that wine’s performance trends in the opposite direction of investments in equities. Although this is usually the case with safe-haven assets, wine should not be considered as such. Rather, its intrinsic value, coupled with its natural scarcity gives it unique cultural capital and entrenched appeal among collectors and commercial enterprises. As such, selling is consistently counterbalanced by new bids.
If you would like to further explore alternative diversification strategies, discuss your current allocation or plan your activities for the upcoming year, we are always available for a free initial consultation. We specialize in personalized wealth planning services, and we are committed to helping all our clients pursue their objectives and achieve the best performance over the short, medium and long term.