Vintage really does count
31.10.17 – Wine Investment
Eagle-eyed readers of last week’s note have pointed out that you can “throw a blanket” over the prices of 5 quite different Petit Moutons, and are wondering what exactly this means in respect of a tactical approach to the market. Does it mean, for example, that considerations of quality are irrelevant and that all wines eventually polarise to the same spot?
Further to this particular discussion, the Liv-ex in an Insight over the weekend highlighted that activity in Australian wines had broadened out somewhat, but the article also illustrated some interesting price performance over the last year in respect of a range of Penfolds vintages. The 98 point 2002 has moved from £3,300 to £4,442 over the last year whilst the 98 point 2006 is stuck at £3,200.
To us at Amphora both of these situations are a reminder that the fine wine market place is in its infancy. In mainstream markets, by contrast, almost all price inefficiency is arbitraged away. The principle behind this is quite simple: if 2 things look alike, and indeed to all intents and purposes ARE alike, they should be priced the pretty much same.
The fine wine market will move in this direction, but only when sufficient people spend sufficient money on the tools to enable them to understand where the arbitrage opportunities lie. Over time, this will happen, despite the wailing and gnashing of teeth from people who would prefer the market to stay in the Dark Ages (when they made all the money!).
Happily for us, we have our algorithm, which tells us what to buy and sell, although as we have pointed out many times in the past, irrespective of Liv-ex talking up liquidity and breadth in the Australian wines, you have to be alert to opportunities because illiquidity tends to equal volatility. Although its Insight points out the outperformance of the 2007 vintage, the last trades on the Liv-ex platform were in 2015.
What this means is that you have to be opportunistic and patient at the same time, opportunistic enough to be able to take advantage as stock you are interested in comes along, and patient enough to be able to sell over time at the price you want. So what might we be interested in at the present time?
In recent years the stand-out vintage in the Barossa Valley is 2010, scoring an excellent 96 points. I mention this because overall vintage quality does count. In 2008 Penfolds Grange produced a wine which Lisa Perrotti-Brown has on successive occasions awarded 100 points (in tastings in 2013 and 2014), but which has had a sluggish time of it in price terms. The vintage score for 2008 is a lowly 85 and the evidence is that producers don’t get awarded a premium price for making a brilliant wine in an indifferent year.
We all know this anecdotally, I believe. People talk of great vintages all the time, but not so often do you hear anyone say: “Well I know the vintage was poor but isn’t this wine fantastic.” At this point we believe it fair to suggest that consumers are more conditioned by vintage than anything else, and ultimately it is the consumer that sets the price. Ultimately.
This may sound banal but it is also possible that Penfolds Grange 2010 will eventually benefit from being produced in a year which seems to have been spectacular worldwide, and given the climatic complexity that goes into the creation of a good vintage it is quite remarkable that regions as diverse as France, Italy, Spain, California and Australia should all have been so blessed in 2010.
This leads us back to Petit Mouton, where as we noticed last week an indifferent vintage like 2011 can cost more than a great vintage like 2010. This is actually sufficiently bizarre as to be unsustainable, in our view. The Pauillac vintage scores for 2010 and 2011 respectively were 98 and 88, an absolutely ginormous difference. The individual wines scores were 93 and 87 respectively. Go figure.
What has happened with the group of Petit Moutons in the current phase is that, temporarily in our view, buyers have lost sight of the fundamentals. This happens quite regularly even in mainstream markets. We all remember Alan Greenspan’s “irrational exuberance” worries back in the 90s and there are plenty of commentators and strategists around in equity markets at present who think it’s all a bubble.
A couple of weeks ago we argued that a lot of investors seem to believe things which are actually wrong. It is equally true that there are times, or should be, when it is possible to know that the herd mentality, as represented by the market, has got it wrong. In saying this we are perfectly aware that the dear old market can go on “getting it wrong” for longer than investors can stay solvent, which is why a short trade is so much riskier than a long trade, so we have to be careful how we tread.
Suffice to say, we believe the market has got it wrong at present. The evidence:
If you are an investor in fine wine you presumably don’t think that wine prices are conditioned by none of the above. If you think, as we at Amphora believe, that the market has further to run, then buying a few cases of Petit Mouton 2010 seems a decent way to play it.