Investing in Wine

How to begin investing in wine? Well, there are many avenues for enjoyment and  profit in this wide and exciting market. As with all collecting fields, the aim for investing in wine is to form the finest holding within a particular budget. However, the particular enjoyment of this asset class is principally in the tasting of it, rather than just admiring the bottles in the cellar! Enthusiasm and appreciation for wine might encourage your interest in this investment field but it is not essential.

The cultivation of the grape vine, known as viticulture in the trade, is an ancient art. The Roman enthusiasm for wine runs deep in European languages with the Latin words vinum (wine) and bibere (to drink) remaining the root of our modern terminology about the subject. Wine remains a popular and profitable market to be invested in as other alternative investments such as whisky investment.

At the Lazy Trader, we now raise a glass to investing in the humble grape. Cheers!

What you need to know about investing in wine

 As with all investment classes, a good working knowledge of the wine industry is important and background reading is a must. For the novice, it may be more prudent to trust the experts especially if significant sums of money are involved. Even if you do decide to engage expert guides, a general understanding of viticulture and the wine trade will allow you to make informed judgements on investment proposals.

Five reasons to invest in wine

This Lazy Trader wine investing guide is intended to introduce you to this big and exciting subject:

• Do you have an existing investment portfolio? If so, investing in wine can be an enjoyable and profitable addition to an already diversified strategy.
• You don’t even have to take possession of the wine! Many wine merchants will offer to store wine in appropriately climate-controlled warehouses to ensure it is not spoiled. The warehouse may also be ‘bonded,’ i.e. the wine is held without duty or tax until it is withdrawn, which may help your profit-margin.
• There are a myriad of regions, types and styles to choose from. This permits many strategies for different tastes and budgets.
• Do you wish to make a profit? Wine is certainly not a risk-free investment. However, with wise (or lucky) choices, significant financial returns are possible.
• Do you appreciate wine itself? If you enjoy the occasional glass or two, wine investment may provide for your personal cellar as well as a financial return… as long as you don’t drink all the profits!

 

Which wines have performed the best?

As an asset class, wine has performed strongly as exemplified by the LIV-EX 1000[1] (the London International Vintners’ Exchange ‘Fine Wine 1000’ index) rising over 40% over the last 5 years. According to analysis by Cult Wines, the LIV-EX 1000 substantially outperformed the MSCI World Index over the last 15 years and benefits from not being closely correlated to equities.

 

France remains the world’s most prestigious wine-producing nation with the regions of Burgundy, Bordeaux, Champagne and the Rhône being especially famous. In May 2019, Bonhams sold a private collection of wines from the noted Domaine de la Romanée-Conti of Burgundy, France. One bottle of Romanée-Conti 2015 sold for £14,640 with the entire collection realising £226,981.[4] Secure provenance and a guarantee of proper storage conditions were factors thought to have encouraged strong bidding for this remarkable collection. In many collecting categories, a focused, in-depth strategy appears to be the most desirable to the market and this seems to be the case (no pun intended) with wine.

Rarity is still the key. A single bottle of Romanée-Conti from 1945 made over $500,000 at Sotheby’s, New York, in 2018! It was the most expensive bottle of wine ever sold at auction!

The famous names in wine do hold their value. However, as with all financial investments, past performance is not a reliable indicator of future performance. We would recommend that any potential investor considers vineyards beyond the most famous regions and names when looking for a potentially-profitable investment in wine, especially on a constrained budget.

Which wines are the best as investments?

Today, wine is produced in many parts of the world. The earliest known winemaking was in present-day Caucasus region, 6000 years ago. The craft slowly spread around the Mediterranean: to Greece, Italy and beyond.

The famous wine-producing regions often have legally-protected status with defined standards and production limits. In France, these restrictions are now known by the acronym ‘AOC’ (Appellation d’Origine Contrôlée) but other countries have broadly similar systems.  Austria-Hungary was the first state to implement such controls with the Habsburg decree in 1757 to project Hungary’s famed Tokaji wines. Wine not grown in Tokaj cannot be sold as Tokaji.

Within each appellation, there are numerous estates or vineyards which are permitted to produce wine under that name. Some are more famous than others and some produce smaller vintages than others. A general rule of thumb is to buy the best vintage from the best estate from the best appellation that your budget allows. For instance, the wines of the Pomerol appellation of Bordeaux are famed; especially those of Château Pétrus with the 1990 vintage being particularly fine. Each bottle can cost thousands of dollars!

With all investment classes, it is often worth looking beyond the well-known names for an investment. This is the same with wine and it will take time and effort on your part, or the trusted advice of a specialist, to increase your chances of picking a winner. So, how should we approach investing in wine? Firstly, establish your own aims and objects for investing in wine. If you have only a small budget, the big names may be too expensive and might not provide the optimum percentage return on your investment. Then, explore the different categories available:

Should I buy old world or new world new?

The style differs, with old world wines tending to have lower sugar and alcohol content. The new world winemakers favour modern methods, a consistent product made in stainless steel vessels, while old world makers often favour traditional methods, wooden barrels and natural cork closures, with more variation in outcome.

Which country or region should I buy wine from?

France is the most famous country for wine but many other nations produce excellent wines. For example, Georgian wine is made with the ancient method of fermenting in ceramic vessels buried in the ground, offering a very different style of wine to those more commonly encountered.

Which wine type should I buy?

Some wines are better for keeping than others and investment-quality wines will often mature 10 or 20 years after bottling. Don’t forget the sparkling wines (e.g. Champagne), pudding wines (e.g. Sauternes) or fortified wines (e.g. Sherry, made in Jerez, Spain, using the solera method) as important categories.

Which estate should I buy wine from?

The most highly regarded estates and rarest wines will generally command the highest prices. For example, the Château Lafite-Rothschild, a famous estate of France’s Pauillac appellation. However, the best are not always the most famous.

Which year?

A particular vintage, or annual production of an estate, can be particularly sought-after due to the quality of the harvest that year.

En primeur?

Buying directly from the estate, before the wine is bottled and the quality of the vintage is known. This option may provide an opportunity to acquire wines at a low price but this can be a risk. Wine brokers and merchants may be able to facilitate this approach.

How do I start investing in wine?

From the outset, any savvy wine investor will need to set workable parameters. Decisions on budget and objectives for the investment need to be made at the outset. A key decision is storage and professional, climate-controlled warehousing is the safest bet. However, Wine Spectator offer a guide on storing wine in your home, if you are willing to take the risk. [1]

For optimal returns, it appears that purchasing complete cases of 6 (a half dozen) or 12 (a dozen) bottles each provides the safest investment. Do not split them up! Furthermore, in the case of most fine wines, retaining the original wooden case (‘OWC’) unopened appears to be a major factor in investment value as it reassures the purchaser that the wine has not been tampered with. The case will be branded with the vineyard’s crest and identifying information. If you decide to buy older wines at auction, preserve labels and (yes, we are serious) the layer of dust on the bottles as this assures a potential buyer of authenticity.

3 Strategies for investing in wine

There are many routes into the wine market but most options will fall into three broad strategies:

Buy equities with exposure to the wine trade

Drinks companies floated on the stock markets are generally large and diversified. Many brands, breweries and beverage types will be held under a single, unifying umbrella. Beer, soft drinks and spirits generally underpin the largest companies due to the relative ease of production at a large scale.

Anheuser-Busch originated as a German-American brewing empire in St. Louis, United States, but it was taken over by InBev in 2008 to form part of the largest brewing company in the world, AB InBev (XBRU:ABI), with over $50 billion in revenue in 2019.

Wine is generally produced on a small scale. However, some major companies do operate in the wine market. For instance, Pernod Ricard (XPAR:RI) has several major wine labels under its specialist subsidiary, Pernod Ricard Winemakers. These include Jacob’s creek, Bancroft Estate and Campo Viejo. Luxury goods conglomerate LVMH Moët Hennesy Louis Vuitton (XPAR:LVMH) has exposure to the wine market through numerous Champagne houses (e.g. Veuve Cliquot and Moët & Chandon), vineyards and distillers. An investment in any large company in the entertainment and hospitality sectors may broadly have exposure to the drinks sector but rarely will this be in the wine trade exclusively.  One exception is Wilamette Valley Vineyards (NASDAQ:WVVIP) of Oregon, USA.

Unless you are a seasoned investor, it is best to obtain professional advice before buying stocks and shares. Due to their size, blue-chip listed companies may provide dependable dividends but large swings in capital value are not likely… excepting during black swan events, such as a global pandemic!

Join a cellar plan

Berry Brothers & Rudd, the venerable London wine merchants tracing their history back to 1698, are one example of a retailer which offers the services of a “cellar plan.” With a monthly outlay, wine is purchased cumulatively. The wine can be delivered to the customer or held in the wine merchant’s warehouse (which should be appropriately climate-controlled) ‘in-bond.’ Most cellar plans will fall into the following overall ambitions:

• • Future enjoyment alone
  • For future enjoyment & investment
  • Investment alone

This Lazy Trader wine investing guide is focused upon investing in fine wine but it is worth considering a plan which can provide wine for your own table alongside a monetary investment which will (hopefully) provide an eventual financial return. We feel it is worth being able to toast a successful investment and what better way than with a portion of your own wine portfolio?

Select the wine yourself

There are many options for where to view and acquire wine:

Auctions

At auction, the product is generally ‘sold-as-seen’ and guarantees will often be very limited. For instance, there is not always a guarantee that the wine you buy will have been properly stored. Smaller collections are sold through local auctioneers and (should you be lucky enough)  bargains are possible. Specialist wine auctions will have greater variety and experts to assess the wine properly but will often be more competitive as a result. Remember that a ‘buyer’s premium’ is added to your bid!

Specialist wine merchants

This is perhaps the most approachable option. A retailer may command higher prices than auction but this is exchanged for more guarantees. An individual wine merchant will often have a specific specialism due to the sheer number of appellations and vineyards around the world. This detailed knowledge may provide access to smaller producers or less-well-known areas. Do not forget, your local wine merchant might have found special wines that the big names missed!

Directly from the vineyards

This cuts out the profit margins of other shippers or intermediaries but could place the logistical burden squarely upon your shoulders! Shipping, customs and taxes, not to mention the need to actually discover the vineyards in the first place. If wine is a hobby for you, this option will involve a significant investment of time …but vineyard tours could always be combined with a holiday!

Wine brokers

An expert knowledge of both wine and the wine market provide potentially the best guide for an investor in this sector. Some examples are Richard Kihl Ltd., UK, and UKV International, Switzerland. Wine brokers can provide storage, expert advice and access to en primeur.  However, private sales are an opaque market unlike public auctions or exchanges.

Wine exchanges

These platforms provide a forum for specialist trading as well as data on the market. LIV-EX is one example. This is probably the most transparent forum for buying and selling wine.

How to invest in wine in 5 steps

Step1: Determine a budget: don’t invest money that you cannot afford to lose! Establishing a budget will narrow down what options are open to you and what approach will be most appropriate.

Step 2: Do your research and due diligence: buy the book before buying the wine! Often, a detailed wine atlas and some professional advice will be far cheaper than an unwise wine purchase.

Step 3: Choose where to buy your wine: your aims, budget and wine investment strategy will all feed into this decision. You could use combination of methods or a focus upon one tried-and-tested route.

Step 4: Decide where to store your wine: This is crucial for the security of your investment. You will need a wine cellar with appropriate conditions should you choose to take possession. Another option is to keep your wine in a bonded warehouse. This saves paying of duty and tax upfront and the wine is stored in the optimal conditions. Some wine merchants and brokers offer this service.

Step 5: Determine your exit strategy: as we are discussing an investment, to realise any profit, the asset must be sold. A plan for divesting your holdings is a must. However, there is always a chance that you might decide to open a case for drinking in lieu of a financial windfall!

Where to sell your investment in wine

Auctions

Most major auction houses have a fine wine department which hold periodic sales, including Bonhams. As an auction depends upon cash buyers present at a fixed time, it may not achieve the highest possible price in all circumstances. However, it is a public sale and is often the quickest way of realising your investment in wine. Remember, a commission and other fees will be deducted from the hammer price (final bid).

Dealers

Selling through a private dealer outright or on consignment may achieve a higher price than public auction. However, this is an opaque market without the ability to compare prices achieved historically and sales may take time. A dealer will also probably work on a commission basis for consignments and the percentage can vary significantly.

Private Collectors

In theory, this is the optimal method as no intermediaries will be taking their commission. However, the parties cannot independently determine pricing unless a 3^rd party valuer is appointed (ideally, one for each side). Fundamentally, you will need to know who to approach. The address book of a professional dealer or broker will likely be more comprehensive than yours!

Wine Exchanges

Wine exchanges provide the most opaque and instantaneous market in which a sale will be subject to any spikes (or troughs) in price. As with public auctions, the price achieved at an exchange will depend on the pool of ready buyers at any given moment. Exchanges often keep detailed pricing information. Some wine merchants operate their own wine exchanges, including Berry Brothers & Rudd.

What are the Pros and Cons of investing in wine?

Pros

• Potential profit: sizeable returns are possible in this asset class.
• Enjoyment: if you are interested in wine or wish to learn more about it, combining investment with a hobby is an enjoyable way to learn. There is also the option to use part of your holdings for your own table.
• Physical asset: it is not just a number on a screen but an asset you own.
• Limited output: supply from exclusive appellations and estates may be severely limited with high demand.
• Dual purpose: as wine is both an asset class and a social lubricant, so there will (hopefully) always be a market for your holdings, if properly stored.

Cons

• Storage: keeping your wine in optimal conditions is essential. This will either require a cellar at home or the ongoing cost of warehousing fees.
• Transport: for larger collections, transporting heavy crates of wine will be a major expense unless your purchases and sales are through brokers or other intermediaries who offer these services.
• Breakage & spoilage: insurance is a must as accidents do happen. As wine making relies upon natural processes, flaws in production or storage can undermine your investment.
• Time: the investment horizon is going to be longer than 5 years, potentially 10-20 years, so quick profits are often impossible.
• Fashion: fashion can drive prices up but it can also cause the value of some wines to fall.

 

What are the risks of investing in wine?

As with all collecting categories, there are risks:

• Fashions change and less established wine producers can see the prices jump from celebrity endorsement. Good wines fall ot of fasion. Sherry is one example, only returning to popularity in recent years.
• The current market leaders or most famous brands might not remain popular with all collectors, investors and gourmands.
• Climate changes may alter the wines that many areas can produce or render cultivation impossible. Conversely, it may improve the quality of wines grown elsewhere.
• The new collectors, especially from mainland China, who have helped drive recent price increases will turn to home-grown wines as newly-planted vineyards mature. As a result, prices in established names may decrease.
• Wine making is a natural process and is not an exact science. Wines purchased en primeur might not live up to expectations and so fall in value.
• Cork taint, from natural corruption within the cork, can ruin a wine.
• Improper storage is a major threat. Too much heat, fluctuations in temperature and exposure to sunlight are all threats to preserving wine. A simple accident in the warehouse or at home may mean bottles dropped and smashed. Proper storage and handling will help minimise these risks.
• Wine investment scams can be a problem. The issue you have is that few wine connoisseurs actually get to taste the wine they invest in. As a result it can be possible to dupe seasoned wine collectors.

 

Conclusion

This Lazy Trader introductory guide hopes to have introduced the world of investing in wine to you. We have seen the need to define your aims before embarking upon this journey. Many wish to invest in wine to make a profit. Like other specialist subject, this is unlikely without a thorough understanding of the field and expert advice, at least at the beginning. Proper handling and storage are a key factor in retaining value. We raise a toast to your future success!

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