How to Invest in Wine
When one talks about liquid assets, wine probably isn’t the first thing that comes to mind. As people try to recover from today’s fledgling economy, however, it doesn’t hurt to begin thinking of creative, unconventional ways to diversify one’s portfolio. Investing in fine wines just may be one of the ways you can do this for yourself.
Many people think investing is limited to so-called “traditional” investment avenues like stocks, bonds, commodities and real estate. For some, even investing in precious metals may seem too exotic. Although investing in fine wines may seem like a strange, far-fetched undertaking at first, there are many financially sound reasons to do so.
Since 1950, fine wines have achieved nearly 15 percent gross returns. They have achieved over 17 percent since 1960. First-rate wines have even withstood two US recessions and have even managed to defeat the Russell 3000 Index of top US shares over the past 13 years. Even during crisis it still attracts attention due to it being a tangible asset like gold. These are but a few of the benefits fine wine investing has to offer. With the best fine wines achieving double digit returns in a tax-friendly manner, it’s hard to ignore this growing worldwide trend.
While fine wine investment started catching on as early as 1996, it really didn’t gain momentum until around 2003. Although fine wine investing is growing as a global trend, recent years have show substantial growth in the sector due to massive growing Asian market. China’s recent demand for the top 20 Bordeaux brands in particular has been a major contributor to this unprecedented growth.
In 1999, the London International Vintners Exchange, or “Liv-ex” for short, was created as an exchange for investment-grade wine. It not only provides a marketplace where merchants may trade wine, it also publishes the “Liv-ex 100” and “Liv-ex 500” fine wine indices. Established in 2001, these indices are used to gauge general price developments for the market’s top fine wines as they represent the price movement of the most sought-after fine wines having a secondary market. The indices are computed monthly using the Pound sterling prices of London-based wines in bond.
Most of the Live-ex indices are made up of Bordeaux wines with a few others from Burgundy, Champagne, Italy, and the Rhone. Wines only qualify for the index if they:
1. Attract critical acclaim from a leading fine wine critic (95+ score)
2. Attract a regular market on Liv-ex
3. Are physically available in the UK market
A wine’s value is calculated using Liv-ex Mid prices and then weighted to account for original production levels and increasing scarcity as the wine ages (and gets consumed).
It is critical for fine wine investors to develop a basic understanding of the Liv-ex indices. Both indices, for example, are completely dominated by red Bordeaux wines, thus reflecting the market reality that Bordeaux wines should make up the majority stock of any successful wine investor’s portfolio. That being said, it is also worth the time to become familiar with the Claret Chip Index, Live-ex’s index comprised solely of top-rated Bordeaux First Growths.
Calculated weekly using the Liv-ex Mid Price, the Claret Chip Index only allows wines that fit the following criteria:
1. Must be a Bordeaux Left Bank First Growth
2. Must receive an in-bottle score of 95 or above from Robert Parker
3. My be physically available (no “en primeur” wines allowed)
4. Must be less than 15 years old (based on vintage date)
As your portfolio should be predominantly made up of Blue Chip wines such as those from Bordeaux, this index is definitely not one to ignore. If you do your homework right, a balanced, well-chosen wine portfolio should provide annualized returns of around 10-12% per annum. You can invest as little as £500 in a single case of wine to get started, although a more practical minimum of £10,000 will enable you to create balanced profile that spreads your risk across multiple types and vintages. The Blue Chip Winery fund offers an alternative approach by investing in wineries and vineyards worldwide with a minimum investment of only £6,300. Those with deeper pockets can go for options like The Elevation Wine Fund, the first US-based wine fund launched in August of 2008. This fund requires a sizable £160,000 minimum initial investment. Regardless of the budget range you choose, wine should only make up a small fraction of your total investment portfolio. As with all investments, never invest more than you can afford to lose.