Develop a nose for some vintage investments

The case for laying down wine has become stronger as prices have soared, with the value of certain Bordeaux rising over 400 per cent this decade.

But prices can be volatile, and returning from Calais with a car full of bottles won't turn you into a millionaire. James Moore offers some advice to prevent any vintage portfolio going sour.

Serious wine drinkers have been crying into their glasses and looking mournfully at their wallets. Because, like it or not, their favourite tipple has become one of the hottest investment commodities around.

Some of the gains in price of the top Bordeaux Chateaux make even the FTSE 100's brightest stars look dim by comparison.

If you had bought a 12 bottle case of Chateau Latour 1990 from wine brokers Farr Vintners in August 1991, for example, you would have paid pounds 376. The same case in August 1997 would have cost pounds 2,000 from the same merchant, an increase of 432 per cent.

Gains of 300 and 400 per cent over the same period are common for the top 10 investment wines from Bordeaux, such as Chateaux Latour, Lafite, Margaux, Mouton-Rothschild and Petrus from top-rated vintages. Returns at auctions have been even more spectacular.

In recent years the price of fine red Bordeaux, where the majority of "investment" wines are made, has shot up. Other investment wines, such as vintage Port, fine red and white Burgundies, Sauternes and one or two top names from the New World, have also seen impressive price rises following their release on to the market.

Aside from the potential returns, one of the advantages of investing in wine is that it can be bought and sold in bond to avoid payment of excise duty and, because it is seen as a commodity and buying is a commercial transaction, any appreciation in price avoids liability to capital gains tax.

This has not gone unnoticed by the professional money men and some have gone so far as to set up firms with the accent on selling wines on the back of their investment potential as much as their drinking quality.

Gary Boom, a former currency broker, is now chairman of wine broker Bordeaux Index. He says: "Taking the compounded returns each year since 1978, the Dow Jones Index would give you 14 per cent, the FTSE 100, 12 per cent but the Decanter magazine index of auction prices of the top 59 Bordeaux wines would give you around 17 per cent."

He thinks prices will continue to rise and the opening up of new markets for the best wines will add fuel to the fire.

"I'm very bullish about prospects. I still believe that fine wine is underpriced. Say wine catches on in China, the top producers can't increase production and every time a bottle is drunk that is one less on the market. It also has an archaic system of pricing and distribution - when that gets sorted out prices will rise."

The independent financial advisers, Quest Bureaux Financial Planning, set up a sister company, Quest Fine Wine Investments, to cater for investors willing to sink serious money into a bit of what they fancy.

Marjorie Henry, the company's marketing director, says: "Our interest in fine wines came from experience of clients with portfolios of fine wine.

"The people who are approaching us are looking to have wine as part of a portfolio. It is a good long-term investment." This led to the launch of the new company in 1995, followed by the launch of an internet service at the end of last year.

She says the company is run on the principles of best advice like Quest Bureaux Financial Planning, though the wine broker is not regulated by the Personal Investment Authority because the sale of wine is a commercial transaction and outside the scope of the Financial Services Act, which covers most investment products.

But there are pitfalls. As with any investment, the price of wine can fall as well as rise, and there can be considerable volatility in price.

Buyers should also take care to get a certificate of ownership and to ensure that each individual case bought is marked with their name and details.

If this is not done, in the event that the company from which the wine was purchased collapses, it can be difficult to establish ownership. Thousands of pounds could be lost.

It also pays to ensure the wine is stored correctly, in a dark cellar at a constant cool temperature, and to take advice.

Gaylene Thompson, a wine trader at Farr Vintners, says: "When you look at the numbers it is hard to argue but I would advise caution.

"You have to realise that the price of wine can go down as well as up. You have to stick to the blue chip wines from good vintages and know what you are doing - after all, I certainly wouldn't start investing in shares without any knowledge."

Simon Woods, editor of Which? Wine Guide, says the really spectacular gains have come to an end for the present.

"The rushes of blood are now finished and things have got more sensible, prices have stabilised," Mr Woods says. "The gains are likely to be more long term now."

The boom has been fuelled by increasing interest in fine wines from the newly enriched in the "tiger economies" of south-east Asia, where recent events will have priced buyers out of the market for a while.

But there are still good reasons why prices will rise rather than fall. There was a run of poor vintages in the early 1990s in Bordeaux. Stocks of the great vintages from the 1980s, such as 1982, 1985, 1986, 1988, 1989 and 1990, are now thin on the ground and new vintages such as 1995 and 1996 have been released at ever higher prices.

The wine producers are also waking up to the money being made from their products and have increased prices at release accordingly.

Mr Boom says in the long run he is optimistic that the prices of top wines will continue to surge forward in price.

He adds: "If you get a portfolio of the top wines you will do very well. Even if the price does go down you can always drink it. You couldn't do that with a share."

As for wine drinkers, some of them have been catching on. Ms Henry says: "A lot of people are looking to build up their cellars; their interest is in wine for drinking." These people buy more than they need and sell the excess to fund their purchases. "This means it is possible to get their wines for drinking for free so they can drink the very best."