Wines From the Vineyards of Bordeaux Make The Best Wine Investments
The Advantages and Disadvantages of Investing in Wine...

Fine wine investing can be an interesting, pleasurable way to add diversity to your portfolio. In fact, some of the best blue chip wines often outperform shares. Unfortunately, fine wine investing is no silver bullet. Like all investments, there are both pros and cons involved that must be taken into consideration if you are to become successful at building a winning fine wine portfolio.

For starters, it is important to understand that fine wine investing, as with all other investments, depends upon supply-versus-demand as its guiding principle. On the supply side, there are only around 75 investment-grade wine labels worth considering with more or less fixed production levels. On the demand side, more and more high net worth people worldwide are seeking wine as an investment, with a sizable amount of it coming from Asian markets. China alone has demonstrated an immense thirst for Bordeaux wines in particular. Some recent interest can perhaps be attributed to “monkey see, monkey do” behavior, but for the most part experts have found this growing trend to be more genuine than fad-like.

Supply and demand aside, another benefit to investment grade wine is that they are improving assets, meaning they get better with age. One obvious fact about wine is that not everyone keeps it to invest; sometimes they actually drink it. Consequently, their values increase with time due to dwindling inventories as bottles are consumed over time.

Recently, wine investments have outperformed the FTSE 100. This may only be encouraging for short-term investors, but long-term investors will find it reassuring that wine has also outperformed many equity and fixed income indices over the past 20 years. Long-term investors can expect to achieve annualized returns of 10% or greater. Fine wine investments are not highly correlated with equities and are even less volatile than stocks and shares. Even during crisis they still attract attention due to being considered tangible assets like gold and silver. They are considered a wasting asset so they do not attract capital gains tax either. Savvy investors can even avoid paying VAT and duty if their wines are kept in bond.

Although it has plenty of perks, fine wine investing does have its drawbacks. It is extremely easy for beginners to make mistakes in this market, as specific bottles have been known to drop 25% in value in just a few short months. The market as a whole moves generally upward but certain bottles can move down, and drastically at that. One false move made by a beginning investor could ruin an entire portfolio.

Fine wines have other drawbacks that affect not only newcomers to the game but everyone involved. Fine wines accrue no dividend payments and pay no interest. Fine wines incur considerable storage costs, with professional bonded warehouses charging around £71 pounds a case per year. Those who attempt storage on their own will be responsible for VAT and duties imposed upon taking possession, as well as the risks involved with physically storing the bottles on one’s own location (damage, spoilage, theft, etc.).

Fine wines are occasionally re-rated, which can result in a drastic downfall if negatively reassessed. Just a few points lost can have significant effects on a bottle’s price. Using Robert Parker’s system, a wine with 90-to-95 Parker Points is considered “outstanding.” A wine slipping into the 80-to-89 point category would then find itself to be within the “barely above average to very good” range, a range that is perfectly suitable for drinking wines but detrimental to one’s investment goals.

Losses in fine wine investing do not occur solely through storage accidents or negative re-assessments. Fine wine investors can lose an entire investment if a merchant goes belly-up. This is particularly the case when investing “en primeur,” or buying the wine before it has even been bottled. In this case, a failed merchant goes bankrupt or simply disappears before delivering the goods, leaving investors without even a single drop.

Wine merchants are not the only ones known to fail either. Investment funds and even entire investment companies have been known to fail, as was seen in 2006 with Mayfair Cellars and Uvine and in 2007 with Cellaret. If an investor chooses to invest via funds rather than individual bottles, he or she must take precaution when choosing an investment company to work with. The wine investment market is largely unregulated, with anyone being able to set up shop in the UK with little to no oversight by the authorities. Unscrupulous scam artists have been known to counterfeit wines, mislabel bottles, dilute high-value wines with cheaper ones, and even contaminate wines with chemical additives. The 1985 Diethylene Glycol Wine Scandal is an infamous example of this, where Austrian wines were found to contain up to 1,000 parts per million of the toxic chemical used to sweeten wines without the use of sugar.

The selling side to fine wine investment is also not without its perils. Selling costs can be expensive, with brokers charging around 10 percent in commissions off gross sales. Consignor fees max out around 10 percent, with higher value wines attracting lower fees. Bottles can be lost or damaged in the process of selling. Insurance can help mitigate this, but at a price.

Although there are clearly disadvantages to investing in fine wines, the advantages can more than compensate for them if the right precautions are taken. All investments have their drawbacks, but at least with failed wine investments you can drink the negative equity.