Hit the bottle for an alternative investment
Although the fine wine sector was affected by the economic downturn, there are profits to be made if you're willing to risk it. Chiara Cavaglieri reports
Sunday 11 April 2010
Prices for the world's top wines are on the up, and leading critics have been in raptures over the Bordeaux region's 2009 vintage, sparking a surge in interest. With returns from cash savings leaving a sour taste, should you be looking to these alternative investments?
The fine wine sector was by no means immune to the global credit crisis. In the last quarter of 2008, the London International Vintners Exchange 100 Fine Wine Index (Liv-Ex 100), which tracks the price of the world's most sought-after wines, fell by 20 per cent. However, in the past year and a half, it has shown a remarkable recovery and the Liv-ex saw a rise of 5.5 per cent in March, representing a 12 per cent gain in the first quarter of the year.
"Prices have bounced back strongly from the lows seen at the end of 2008. Many of the top Bordeaux wines are now more expensive than they have ever been. These price increases are largely due to increased demand from Hong Kong and China," says Justin Gibbs, a director of Liv-Ex.
Investors who want to hold wine as a physical asset must go through a merchant, not the houses themselves. There will be several costs to factor in if you decide to take this route. Firstly, a merchant will charge either an upfront fee of about 5 per cent of the total value of the wine or an annual management charge. When it comes time to sell, they will take a commission of about 10 per cent.
Storage is yet another expense, albeit a vital one. Incorrectly stored wines can be rendered worthless so it's advisable to store wine in a bonded, temperature-controlled warehouse. Some merchants offer their own warehouses but a safer bet is to use a professional storage company such as London City Bond and Octavian Vaults. This will incur an annual fee of up to £15 per case but it does mean that there is no VAT or duty to pay if the wine is sold on.
Savvier investors can also cut out the middleman and buy wine at auction. Investing in a wine fund is another option, although there aren't many to choose from and the fees can be high at about 2 per cent of assets under management, plus 20 per cent of the profits. Many also have early redemption fees which can eat into potential returns.
"I've never been convinced by the notion of buying wine through a fund," says Ben Yearsley, from independent financial adviser (IFA) Hargreaves Lansdown. "It can be a problem because you can't sell underlying holdings immediately as you can with a stock market fund."
If you opt for an investment fund, pick one regulated by the Financial Services Authority (FSA) such as Vintage Wine Fund and Wine Asset Managers.
There are three different price stages to be aware of when investing in wine: en primeur (before it's bottled), on arrival into the country two years later, and on maturity. "The advantage of buying en primeur is that you're not paying for storage for two years – it's still in a barrel in France – but it's vital to buy from a reputable merchant who is likely to be in business two years later when the wine is shipped," says Joss Fowler from wine brokers Berry Bros & Rudd.
This is generally the cheapest option and has the greatest potential for returns. However, if it turns out to be a poor vintage, it could be a costly error. The opinions of experts such as the highly regarded American journalist Robert Parker can have an extraordinary influence on prices so they are well worth keeping an eye on.
Historically, the long-term success of fine wine as an asset class is difficult to argue with. In the past five years the Live-Ex index has increased by 166 per cent, beating all of the major share indices, including the FTSE 100 and the S&P 500. Recently, the market has been dominated by the wines of Chateau Lafite-Rothschild, which have been marching upward in price. A case of the 2004 Lafite cost £2,150 but will go for £5,250 per case today.
The success of wine as an investment is mainly down to scarcity – the market focuses its attention on the top 20 or so chateaux of Bordeaux and wines from this region have quantity limits in place each year. Moreover, supply is ever diminishing as they are being consumed. For consistent performers, the first growths of Bordeaux are the driving force behind the sector: Lafite-Rothschild, Mouton-Rothschild, Latour, Margaux and Haut-Brion. For first-time wine investors, Bordeaux wines are the equivalent of the FTSE blue chip companies and are a good place to start.
Mr Fowler says that when deciding whether a particular wine is worth buying as an investment, it should look cheaper than older vintages of a similar quality. Current prices for Chateau Lynch-Bages are £800 per case for the 2005 vintage, £1,300 per case for 2000 and £2,000 for 1990.
With rave reviews for the 2009 vintage, prices will be released in May and June and the wine world will wait to hear Robert Parker's scores at the end of this month. "If we assume that 2009 is as good, if not better than these vintages, then it would look attractive to me at £600 per case or so, maybe more," says Mr Fowler.
Another benefit to investing in wine is that for tax purposes, it is deemed a "wasting asset", so there is no capital gains tax to pay when it comes time to sell, unlike profits made from shares.
However, wine should be considered only for long-term investors. Wines can easily fall out of favour, but by far the biggest pitfall is that the fine wine market is unregulated. Merchants going bust is not uncommon and there are instances of bogus wine companies being set up. Play it safe by sticking with reputable traders.
Selling your wine can pose further problems. A wine broker is often the best bet for a quick sale, but offers poorer returns so many wine investors simply sell it back to the merchant, but they will take 10 per cent. Auction houses such as Bonham's are another option, but again, auctioneer's fees can account for up to 15 per cent.
Many advisers remain unconvinced that wine investment makes a useful part of a diversified portfolio. "In the past, demand for fine wine has been linked to good years in the City. Although things have changed with the rich Chinese buying up French wines in recent years, I'm still not convinced it should be anything other than a bit of fun," says Mr Yearsley.
He advises wine lovers to keep their passion separate from their investment portfolio and pick only the wines they actually like.
"If worst comes to worst you've still got a decent case of wine to drink," he says.
By Justin Gibbs
"When investing in any asset, the first step is knowledge. One can gain this by subscribing to independent information suppliers such as Liv-ex.com, Decanter.com and JancisRobinson.com, and by building a relationship with a wine merchant. UK residents are particularly spoilt in this regard with a host of wine merchants of great expertise who have been trading with Bordeaux for many years. You can find a list of such merchants at Winesearcher.com," says Justin Gibbs, a director of Liv-Ex.
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