Investing in fine wine

Pope Benedict said that wine was a gift from God. Fine wine is also an appreciating asset, writes Victor Hill. But you will need to engage the services of a reputable vintner.

The best things in life cost money. But collecting beautiful things can also make money – whether it be fine art, vintage cars, antique furniture or even wine. All of these things, if selected carefully and judiciously, can appreciate in value over time. In the case of wine, we purchase and store bottles or cases, usually through a reputable vintner, in anticipation of selling them at a higher price some time later. Often more than ten years later.

Investing in wine is something that any investor can do without specialist knowledge and with a minimum amount of funds to invest. Most people who invest in wine already have exposure to stocks, mutual funds, and exchange-traded funds, and regard allocating a small part of their portfolio to fine wine as an aesthetically pleasing diversification strategy. Wine prices do not correlate with any principal financial market.

Where to start? In my case, I made my way down to Berry Brothers and Rudd (BBR), one of the most prestigious names in the wine world, to their offices on the corner of Pall Mall and St. James’s Street in London’s most exclusive neighbourhood. To enter their lobby is to be transported back into the mid-18^th century (though with up-to-date technology). There I met one of their foremost experts in wine investment, Gary Owen, who took me through the basics.

A liquid investment?

First of all, wine may be a liquid investment (excuse the pun), but if you really want to get decent returns it pays to be patient. Consider five years a minimum holding period, though eight to ten years is better. Or even longer. Some of finest wines achieve their maximum values after 30-40 years. That said you can normally sell on to another investor at almost any time.

You buy wine in bottles (75 centilitres) – even though it might, physically speaking, still be in a barrel. With some grands marques of course you can buy magnums (a double bottle) or any configuration up to the Nebuchadnezzar (15 litres or equivalent to 20 bottles). Most investors buy cases of wine (12 bottles) or half cases (six bottles) – even though they never see them.

So I asked Owen what I could buy that morning for maybe £1,000. He suggested a case of 2000 Dom Pérignon (a classy Champagne) and a half case of 2016 Chateau Léoville Barton (one of the most distinguished Bordeaux labels). The latter would be en primeur: that is to say that the physical wine is still in barrels down in Bordeaux and will be bottled within about two years and then shipped to BBR’s bonded warehouse in Basingstoke. But one is not buying blind: BBR’s connoisseurs have been down to Bordeaux and have sipped the celestial nectar last April – and it promises to be mind-blowing (in about 16 years’ time).

The really important thing to remember is to buy from a reputable vintner with a track record. There are all kinds of conmen out there (especially on the web) who are desperate to sell you wine that they do not own. With BBR and others the wine is (at some point) physically imported and stored. Only when it is released for sale for consumption is the VAT and excise duty paid to HMRC. So long as the wine continues to reside in the temperature-controlled tranquillity of the bonded warehouse you, as owner and investor, can sell the wine to any third party (which could indeed be the vintner itself or a restaurant chain or another investor) without paying VAT or excise duties. BBR and others even offer investors access to a digital wine portal where they can check on the progress of their wines and their estimated market value.

So how does the vintner make a profit? Gary assured me that BBR doesn’t charge any up-front fee or management fee. They charge a mark-up on the original purchase plus a modest storage fee of £13.20 per case per year – which includes insurance. When you come to sell the wine (usually to another investor) they will take a commission of around ten percent.

There is a temptation to try to cut out the middle-man: but there is always a price to pay for that. If you trundle down to Chateau Léoville-Barton in the SUV and load up the goodies, first of all, they won’t offer you the best price for the goods. Then you’ll have to pay the costs of transportation plus the VAT and excise duty. And then you’ll have to find an appropriate place to store the bottles. Ay, there’ the rub. No respectable vintner will buy wine from an amateur because they just cannot be sure that the storage conditions have been ideal. They might have been kept in a mouldy cellar or (even worse) next to the Aga. They will not do business with you.

What’s your vintage?

The question then is: what sort of returns can wine investors expect to make? This is where wine investment, once arcane, has become a lot more transparent in the last ten years or so. Firstly, there are quite a few websites which offer wine valuation – but you may need to tread carefully here. Second, there are a number of broker-dealers who have been tracking wine prices closely over time and who have effectively created their own indices. BBR works with Liv Ex (the London International Vintage Exchange). (Liv-ex is generally only available to professional wine traders but index values are available to BBR account holders).

According to their numbers, over the last five years, vintage Champagne laid down has increased in price by 42 percent; the “Italian 100” is up by 38 percent; and the Fine Wine 100 (a diversified global selection) by 40.8 percent. So – very approximately – returns of 7-8 percent per year are realistic. Of course, experts like Gary can tweak your portfolio of wines so as to include some higher-risk-higher-return wine plays as well. Or you can just stick with the trusty grands marques.

I asked Gary who his investors were. He reckons most of them are high net worth individuals – though there are a few not-so-wealthy wine buffs as well. About one third is purely engaged for the investment potential; about one third wishes to serve the finest wines at their tables; and about one third is a mixture of the two. There are a few institutional investors as well.

Wine regions that have a reputation for consistently producing outstanding vintages have greater investment potential. Generally, wines from Bordeaux, Burgundy, Tuscany, and Napa Valley are the top crops for investors. I asked Gary if he thought English wine was a candidate for long-term investment. He agreed that some English sparkling wines compare favourably with Champagne – not surprising, since the Wield of Kent and Sussex share the same calciferous geology as that of Champagne – and with global warming, temperatures are analogous. But Gary thinks that, although Nyetimber and others have produced some outstanding wines, they just don’t yet have the longevity factor. That could change.

I can imagine that for connoisseurs, wine investment could be a lifetime passion. As newer wines are introduced to your portfolio, older wines may be approaching peak maturity. But don’t hold those wines too long. While the fascination factor increases, very few wines improve in quality after about 40 years – though brandy is another matter.

It is possible for the small scale investor to dabble in wine without using a vintner at all – just as many of us dabble in antiques (mostly for the pleasure of browsing rather than the returns). In terms of buying individual wines, a full case in its original packaging is more likely to increase in value. The exception is if you have an opportunity to buy a rare wine of which there are only a few bottles in circulation. In 2017, for example, a single, specially-created bottle of California cabernet sauvignon sold at auction in the USA for $350,000. (But remember that the auction house takes about 20 percent of the sale proceeds).

Take into account that, even if you go through a reputable vintner with a first-class reputation, you are buying someone else’s judgment – just as when you buy into an investment fund. Gary is confident that 2016 was a superb year for Bordeaux – on a par with 1947, 1961 and 2005. But of course that is not guaranteed.

High-end Burgundy (Bourgogne) prices have been rocketing recently. This most family-dominated of the great wine regions has been hit by a shortage of supply while demand continues to increase. The Cote d’Or, where the most famous and highly sought-after wines are made, is a fairly small place. The circle of wineries where the best wines are produced is even smaller – and the best vineyards within these estates are limited[i]. Burgundies are expensive because they are good, original, rare and they carry high prestige and strong brand recognition. They are outstanding because over the last 40 years, skills have developed and new investment has paid off, says Frédéric Mugnier, a vineyard owner in the Nuits-Saint-Georges area. The originality of these wines lies in the Burgundian approach to wine, which gives priority to terroir (an untranslatable French term denoting the specific harmony of location, climate, soil type and grape varietal).

Changing tastes

Then the wine business – just like the arts – is subject to changing fashions. For a while in the first decade of this century the Russians and then the Chinese couldn’t get enough French wine and for a few years prices were very buoyant. Then the Chinese “went DIY” (as a wine investor friend put it) and the Russians stopped spending – and prices fell.

(Interesting fact: about half of the output of Calvados is shipped to Russia – Russians have a penchant for the distinguished apple brandy. I’ve never understood why we can’t produce an equivalent product on this side of the Channel.)

The past two years have been tough for China’s wine trade. In the first 11 months of 2019 alone, wine imports dropped 12 percent by volume and nearly 17 percent by value, according to the China Association of Wine and Spirits. And local production has also fallen despite some Chinese wines gaining medals and critical praise. Right now demand from China has slumped as the Corona virus epidemic pans out with millions of restaurants having closed their doors.

Wine can also be in the first line of fire when it comes to global trade protection. President Trump has imposed 25 percent import tariffs on all French wine and sales in the USA of France’s finest wines are in free fall. The result? Bordeaux prices are on the wane. And just wait until we get the now expected Hard Brexit. (I’ll be advocating sending super tankers of Australian Shiraz and South African Pinotage to our damp islands just to keep us going. The thought of a wine shortage is unconscionable.)

If your wine does not appreciate in value as much as you might have hoped, you can always drink it yourself – in contrast to share certificates or bonds which are not even edible. But as soon as you ship the wine home you’ll be hit with the VAT and excise duty bills (plus any commissions).

There is always the lingering fear, expressed by one wine investor that I spoke to recently, that the wine cognoscenti (and their friends) get tipped off long before the rest of us as to where the stonking profits are to be had. But isn’t that always the case?

Why not take a small amount of the dividend cash from your share portfolio and plonk it into wine? If it doesn’t out-perform then you will still have a memorable birthday or anniversary party one of these days. Cheers!

[i] See: https://www.wine-searcher.com/m/2020/02/the-perfect-storm-behind-burgundys-price-boom?utm_source=newsletter&utm_medium=email&utm_campaign=20200226-article01