Wine: Liquid assets

There's an old maxim in the wine trade that the best way to make a small fortune out of wine is to start with a larger one. Despite the occasional headline splash of untold riches made from fabulous rare bottles, like the 1811 Château d'Yquem which recently fetched £37,900, the mundane truth is that successful investing in wine requires a combination of caution, knowledge, experience and skill; and add a dose of luck for good measure.

This week, an anonymous European investor who accumulated 40,000 bottles of 2000 Bordeaux shortly after their release in 2001, will put them up for sale at two separate auctions on Monday and Thursday at Christie's. That's an awful lot of Bordeaux 2000 to put on the market at one time, but if he achieves the estimate of £1.3-1.6m, Sven (let's call him for the sake of argument) looks to make a killing.

Investment-grade wine boils down to quality, longevity and track record; and the most important factor is buying the right château in a great Bordeaux vintage. In the past 50 years, you can almost count the uniformly great Bordeaux vintages on the fingers of one hand: 1959, 1961, 1982, 1990, 2000 and 2005. To work out if it's going to be a banker, you first need to follow the form book and study the critics. The next rule is to buy the right wines, preferably in the period when prices are released in the spring after the vintage (en primeur). Of the many thousands of châteaux in Bordeaux, there are only 50-odd, so-called investment-grade wines. So, stick to the old masters of the wine world, bring in arm-twisting skills for prising out tiny allocations, add that dash of luck again, and you might just find yourself ahead.

That's where Sven comes in. Stored in good condition in a bonded warehouse, his vast cellar includes eight cases each of Château Lafite, Latour, Haut-Brion and Mouton-Rothschild, four of the five blue-chip first growths. Taking Château Lafite as an example, the average pre-release (en primeur) price was £1,600 a case. Its asking price, based on its current market value, is £7,000-£9,000. Even assuming Sven achieves only the lower estimate, his eight cases of Lafite will net him £56,000 on an initial outlay of £12,800. That's 337 per cent over seven years: a nice little earner of 48 per cent a year. And since wine is considered a perishable asset, it is not liable for capital gains tax. Over the past year, demand among the newly wealthy, brand-conscious Chinese for the luxury label Lafite has soared. Sven bought 50 cases of Carruades de Lafite, the second wine of Château Lafite, for around £150 a case. Now worth £750 each, he stands to make £35,000, at Christie's lowest estimate, on his initial £7,500 outlay: a 52 per cent annual profit.

Luckily for wine drinkers, Sven has also invested in a mass of lesser châteaux, some of which he's almost bound to take a loss on. Sarget de Gruaud Larose, for instance, the second wine of Château Gruaud Larose, cost £100 a case in 2001. Next week's lower estimate is a modest £130. Deduct commission of around 4 per cent plus VAT, annual storage charges of £8.50 over five years since delivery, and Sven is out of pocket. There are many such excellent wines which will cost less than Sven paid for them in 2001, taking financing into account. Apart from the Sarget, wines like Château d'Aiguilhe, estimated at £140-£180, La Tour Carnet, £130-£160, Cantemerle, £140-£180, Cambon la Pelouse, £100-£120, and Fombrauge, £140-£180, look like superb buys for drinking from now and over the next 10 years. Overall, Sven's investment still looks set to be the exception that proves the old wine-trade rule, but at the same time, his losses will be our gain.