Vintage year promises a liquid fortune
Wine traders are doubling their money, despite the effects of the credit crunch, says Mark Leftly
Sunday 04 July 2010
Surrounded by Bath stone some 100ft beneath the Wiltshire hills near the market town of Corsham sit 650,000 cases of fine wine. The temperature is a constant 13C to 14C, perfect for the slow maturation process that gives these fine vintages their complexity and long aftertastes.
Run by logistics group Cert Octavian, Corsham Cellars is one of the few places in Britain where wine traders can safely store their cases, the long years passing as they wait to make a killing by eventually selling to an appreciative, thirsty investor. At Corsham's big rival, the London City Bond facility in Tilbury, Essex, bottles of Lafite Rothschild 1970 have been whiling away the decades waiting to be drunk.
Wine trading is a serious, hugely profitable business. In the three years since the credit crunch, the Liv-ex 100 index, which tracks trades in 100 of the world's most celebrated vintages, has wildly outperformed the FTSE 100 (see table). The Petrus 1990, with its sweet taste of strong black fruits and a little spice, is the most expensive on the index at £32,000 per case.
More than 90 per cent of the Liv-ex 100 is made up of wines from Bordeaux, which is having its most successful year yet. Potentially a wonderful vintage, 2009 wines are selling at €550-700 a bottle. Forget gold: wine is where the canniest investors have flocked since the market collapsed.
"People aren't keen on the stock markets now, so they move on to safe havens like gold and wine," argues Gary Boom, the managing director of fine wine trader Bordeaux Index. "But over a 25-year period, wine has outperformed gold as well. Watches, cars, armour, pictures – you name it, wine has outperformed it."
It takes some doing to outperform gold. The precious metal was up 13.3 per cent in the first half of this year, while the FTSE All-World Index has slipped 10.6 per cent.
William Grey, an investment manager at the Wine Investment Fund, one of fewer than 10 big funds in the sector worth £20m or more, says that it will make an annualised return this year of more than 16 per cent for its 2005 investors (it runs five-year funds), meaning that they will have doubled their money. Even during the height of the credit crunch, 2004 investors made an annualised 13.01 per cent when the fund matured last year.
Grey says that the 2009 wines should be ignored for now. The point of wine investment is that it is relatively risk free, but this latest vintage has not even been bottled yet and won't be ready to drink for five to 10 years.
In April, Grey spent a few days in Bordeaux tasting 100 of these immature wines. This is not as great a job as it sounds, as at this early stage the wine is an ugly inky black and not enjoyable due to the high tannin content that will decrease with age. "They were nowhere near ready to drink and are very difficult to taste," laughs Grey.
The Wine Investment Fund waits until a wine has some successful trading history and strong reviews, usually at least four years, until it starts investing. Also, the vineyards have started raising their prices in the past decade, determined that they, rather than secondary sellers, should take the bulk of the profit.
This means that the older vintages are the ones that the funds are targeting. The potential uplift on them is still greater than for the latest wines.
However, there is also a sense that vineyards are becoming more selective in the fruit that they use and are therefore producing fewer cases. "Twenty-five thousand cases [of a particular wine] might sound like a lot," says a Liv-ex spokesman. "But that is likely to be less than 1,000 cases per market in which it is sold." And the number of markets is growing, with Asia developing a particularly strong thirst. There are only 2,000 cases left of one of the DRC La Tache labels that are traded on the index.
Unlike gold, wine eventually disappears. A wine might move between traders but one day it will get into the hands of someone who actually wants to crack open the case. A diminishing asset in times of high demand will mean growing prices.
"The simple reality is that there is an awful lot of money sloshing around, and if you are super-rich and feeling extravagant you can impress friends and contacts by opening an expensive bottle of fine wine," says Peter Lunzer, the chief executive of adviser Lunzer Wine Investments. "In terms of perception, a truly exceptional bottle of fine wine can be as low as £500 a bottle, which is incredibly insubstantial compared with any other symbols of wealth." Lunzer, who admits that his budget for personal wine consumption is £10 a bottle, adds that, typically, investors are not fine wine drinkers but appreciate its ultimate price in that super-rich final market. "Most people who invest don't drink fine wines, but they understand their value over time," he says.
Since starting up in February last year, Lunzer's company has picked up nearly 20 clients, who develop portfolios in which they invest a minimum £100,000. The biggest single investor, an expat based in Hong Kong, has ploughed in £1m. The portfolios have risen at least 1.25 per cent a month for the past year, and Lunzer expects to have 30 clients by the start of 2011.
All this plus one further big advantage. As a diminishing asset, wine is exempt from capital gains tax. If it is placed in a bond facility, such as the aforementioned cellars in Tilbury and Corsham, there is also no VAT. Only if it is delivered directly to the purchaser will that VAT need to be paid.
So, that Lafite Rothschild in the port of Tilbury might have been bought and sold numerous times over the past four decades, but the taxman will not have got his hands on a penny from those transactions.
In these days of austerity, banking taxes and capital gains increases, any transaction that avoids a hefty chunk of its profit ending up in Exchequer coffers must be worth a look.
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