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

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.

Expert View:

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.

Suggested Topics
Life and Style
Farah returns to the track with something to prove
Commonwealth games
John Barrowman kisses his male “bride” at a mock Gretna Green during the Commonwealth Games opening ceremony
peopleBarrowman's opening ceremony message to Commonwealth countries where he would be sent to prison for being gay
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Shinji Kagawa and Reece James celebrate after the latter scores in Manchester United's 7-0 victory over LA Galaxy
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
Life and Style
fashion Designs are part of feminist art project by a British student
Very tasty: Vladimir Putin dining alone, perhaps sensibly
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
Joining forces: young British men feature in an Isis video in which they urge Islamists in the West to join them in Iraq and Syria
newsWill the young Britons fighting in Syria be allowed to return home and resume their lives?
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    IT Transition Manager - Stirling - Banking - £400

    £400 - £420 per day: Orgtel: IT Transition Manager - Banking - Scotland - £400...

    Test Lead - Financial Reporting - Banking - London

    £350 - £400 per day: Orgtel: Test Lead, London, Banking, Financial Reporting, ...

    Business Analyst, Retail Bank, £375-400p/d

    £375 - £400 per day + competitive: Orgtel: My client, a leading bank, is curre...

    PMO Analyst - London - Banking - £350 - £400

    £350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

    Day In a Page

    Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

    Screwing your way to the top?

    Good for Lana Del Rey for helping kill that myth, says Grace Dent
    Will the young Britons fighting in Syria be allowed to return home and resume their lives?

    Will Britons fighting in Syria be able to resume their lives?

    Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
    Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

    Beyoncé poses as Rosie the Riveter

    The wartime poster girl became the ultimate American symbol of female empowerment
    The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

    The quest to find the perfect pair of earphones

    Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
    US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

    Meet the US Army's shooting star

    Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
    Climate change threatens to make the antarctic fur seal extinct

    Take a good look while you can

    How climate change could wipe out this seal
    Should emergency hospital weddings be made easier for the terminally ill?

    Farewell, my lovely

    Should emergency hospital weddings be made easier?
    Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

    Crowdfunded novel nominated for Booker Prize

    Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
    Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

    Vladimir Putin employs a full-time food taster

    John Walsh salutes those brave souls who have, throughout history, put their knives on the line
    Tour de France effect brings Hollywood blockbusters to Yorkshire

    Tour de France effect brings Hollywood blockbusters to Yorkshire

    A $25m thriller starring Sam Worthington to be made in God's Own Country
    Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

    Will The Minerva Project change the face of higher learning?

    The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
    The 10 best pedicure products

    Feet treat: 10 best pedicure products

    Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
    Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

    Commonwealth Games 2014

    Great Scots! Planes and pipers welcome in Glasgow's Games
    Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

    Jack Pitt-Brooke

    Manchester City and Patrick Vieira make the right stand on racism
    How Terry Newton tragedy made iron men seek help to tackle their psychological demons

    How Newton tragedy made iron men seek help to tackle their psychological demons

    Over a hundred rugby league players have contacted clinic to deal with mental challenges of game