APM 2013 Year End Review
Overview
Investors with traditional portfolios built from Cru Classé left bank Bordeaux won’t be sorry to wave goodbye to 2013. A frustrating year to say the least: after an optimistic Q1, where prices rallied decently, what defined the remainder of the year was a gentle, dandelion seed descent which saw Bordeaux prices for the most part settle pretty much where they started the year (the Liv-ex 50, which tracks the First Growths, was about 2% down as of Christmas Eve, and the Liv-ex Bordeaux 500, which tracks a broader selection, was about 2% up).
Liv-Ex Bordeaux 500 Index
And so the idle observer might be forgiven for thinking that 2013 was a sludgy, uneventful year. Not so. Elsewhere, there were some dazzling returns witnessed, and often these occurred in the least expected of places.
Analysis of the top 20 performers of 2013 from the constituent components of the APM Fine Wine index reveals that Masseto – king of the ‘Super-Tuscans’ – features no less than 5 times, with Opus One from California hot on its heels. Narrow the performance timescale to six months, and we find other Super-Tuscans – Sassicaia and Tignanello – joining the party, as well as mighty Ozzy offering, Penfolds Grange.
The question the investor must consider, in order to make prudent decisions for 2014, is whether this change of mood points to a more general trend for wine investment, or whether these upstarts’ moment of glory will be brief, with the coiled-spring of Bordeaux waiting to regain its longstanding crown.
We shall consider this new market dynamic in our closing thoughts on the mixed case that was wine investment in 2013.
2013 Review
2013 has been a year of frustration in the Fine Wine market for those who obsess about indices, but that should not mask the great excitement experienced in other areas.
Part of the trouble for external viewers of this space is that the indices are a reflection of only one part of the market place. The Liv-ex 50, which is updated daily, and the Liv-ex 100 which is updated monthly, are heavily First Growth and Left Bank centric. This is because historically those wines have dominated trading.
In 2013 there was only one Left Bank wine in the year’s top 30 performers, despite forecasts from the merchant fraternity that the woes of the post 2011 period would be well and truly shaken off.
In fact the year started well, with a continuation of the rally begun in November 2012 lasting to the end of the Q1. Just when that rally needed momentum to be maintained by a coherent En Primeur campaign, this year’s was another disappointment, with only the Lafite being remotely well priced. The Chateaux seem to have forgotten that they are borrowing investors’ money for two years, and should be pricing at a discount accordingly.
As a result the Left Bank rally tailed off, but unlike in previous years of market correction, there were various pockets of significant strength.
It has been easy to categorise 2013 as a poor year for investments in Bordeaux, but actually this is far from true. The Right Bank actually dominates the outperformance charts taking 13 of the top 30 places. It has been a great year for Pavie and Angelus, in particular, but also certain vintages of Le Pin and Petrus have performed extremely well.
The region the journalists have been most excited about is Tuscany, despite having fewer top 30 performers than the Right Bank, as the Super-Tuscan producers Masseto and Sassicaia have really come through in 2013. One reason for this is that they are such recent arrivals on the scene. We examine Super-Tuscans elsewhere but it is worth noting that Masseto’s first foray into the Fine Wine market was only in 1986!
This year too the New World makes a meaningful appearance with a particularly strong performance from Opus One. 5 vintages from the 2003 to 2009 range make the top 30. In both Tuscany and the New World production levels are more akin to Burgundy than Bordeaux, and it may well be that a combination of quality and scarcity explains this outperformance.
After the traumas of 2011 and 2012 the Left Bank struggled to make a meaningful recovery. Q1 raised hopes only for prices to fall away again, but for the most part prices are at least ending the year at recognisable levels. The same can’t be said for the “Second Wines” though, with Carruades de Lafite and Forts de Latour being sold off quite heavily. It is interesting to note that on a five year view these are still showing gains of over 100%, and it is probable that this explains the ongoing willingness to offload.
Looking into 2014, the merchants are again talking up the old Left Bank favourites, and some are indeed showing up well in terms of relative price value. With “value” propositions it is always difficult to time the recovery phase. Even Warren Buffett can never tell you at what point a queue of buyers will form to pick up what he saw fit to buy earlier.
This is why it is important to consider taking a balanced approach to Fine Wine portfolio construction. Always buy quality, but make sure you are diversifying your risk. £100,000 will buy you a fantastic spread of wines, regions, and vintages, or it will buy you a single case of DRC 1996. The investment process is all about control of risk, and that is best managed through diversification.
That said, it is difficult to argue presently against a prolongation of the rally we have seen in the current year. At least until the “bargains” have disappeared. To unearth these we examine “value” propositions from sectors that are in demand, and there are still price discrepancies to take advantage of.
Why should Masseto 2001 trade at a 100% premium to the equally rated 2010 vintage?
Why should the Sassicaia 2007 (95 pts) trade at a 25% premium to the 2010 (96 pts).
Why should Opus One 2006 (93 pts) trade at a 50% premium to the 2010 (96 pts).
Then again, should we really be paying the same for a 98 point Masseto (2001) as for a 100 point Lafite (1996)?
At some stage next year this penny is likely to drop, but you don’t need to place this bet. You can avoid it by balancing your exposure to take advantage of both sides of the coin.
Good hunting!
2013 Top 20 movers
Time to break the third rule?
Back in early 2009, APM published a groundbreaking report entitled ‘The Rules of Wine Investment have changed’. We argued that the age-old, magic three-point profit formula (1: invest in a wine from a great chateau, and 2: from a great vintage and 3: with an outstanding Parker score) had become outdated. The crux of our argument was that newcomers to the global fine wine market, most notably in China, often made their buying decisions based on brand status rather than vintage quality. Consequently, we argued, the better value offerings from the top estates (the ‘off’ vintages) were likely to be subjected to the greatest demand; all the kudos but half the price.
And sage advice it turned out to be: an investor who had been buying up each of the First Growths over the preceding decade would have noticed an astonishing difference in 3 year performance of his ‘on’ vintages (loosely speaking, 00, 03, 05) and his ‘off’ vintages (01, 02, 04, 06, 07) from Jan ‘09: an admirable 77% for the former group, but put to shame by the whopping 181% of the latter.
Yet whilst our thinking was forward enough to empower us to break rules 2 and 3, we certainly wouldn’t have advocated breaking rule 1 – invest only in a great chateau – at that time. So would we still consider such a move overly cavalier?
In order to answer that, we must first define ‘great’ chateau. History, pedigree, quality, desirability and price all play their part, but with our investor’s hat on, we can actually be much more objective: a great investment wine must, by definition, have a ready secondary market. In other words, whilst donning our aforementioned speculator’s headdress, we shouldn’t give a monkey’s if the critics say Three Rivers or Harlan Estate or Quilceda Creek² knock spots off their stuffy old guard counterparts at a fraction of the price; if we can’t pick up the phone to the twenty or so major merchants in the UK and get a firm cash offer today, it aint an investment! No ifs and no buts; iron law.
The quick answer generally offered by the wine trade as to why Lafite & Latour et al enjoy this buoyant secondary market, but little gems like the list above do not, tends to be ‘history’. Which might sound reasonable, given that the First Growths pops up as far back as Samuel Pepys diaries; “I drank a sort of French wine called Ho Bryen [Haut Brion] that hath a good and most particular taste I never met with”. But is it still true? The two top performing estates from our Top 20 movers of 2013 rather put this theory under a cloud: Opus One and Masseto are positively embryonic with their first offerings in ’85 and ’86 respectively, but an investor could cash-in his investment into them in a heartbeat.
The reality, whilst not disregarding history’s significance completely, is that it’s a broader consciousness of the estate’s standing that’s more important, and in the notoriously complicated world of wine, simple hierarchical ordering systems and easily recognised names appear to be the key.
Emperor Napoleon III, who delineated his beloved Bordeaux wines into a 5-tier league (the Cru Classé system), might not have believed that his 19th century endeavours ─ which were designed to simplify Bordeaux wine and therefore increase exports ─ would go on to create the bedrock for a burgeoning investment market 150 years later.
His hierarchy (N III only addressed the left bank Medoc, but later arrangements have leagued other parts of Bordeaux) has made it very straightforward for the wine lover (expert or not), trader, observer or – latterly – investor to understand the importance of each estate. Sure, the list is a little out of date in parts, but it’s broadly relevant. And all a First Growth needs to do to keep its crown is not mess things up! Conversely, an estate further down the league but punching above its weight in quality needs to work hellishly hard to levitate above its station.
The necessity for a recognised hierarchy is likely what has held back other regions. As the overheated Bordeaux market crashed in ’11, a new hero was needed, and Burgundy, the obvious heir, stepped up to the plate. But there was a huge problem: Burgundy is unbelievable difficult to understand. To really be able to make head or tail of a Burgundy label, one needs very specialist knowledge – not just in wine, but of the local geography too. The better the wine, the more localised the designation on the label will be. But how could you possibly judge if you don’t know the sub regions let alone the villages of the area? And even then the rule isn’t definite: right at the top of the pile we revert to Bordeaux style producer labelling, rather than geographical (but not always!).
Given that fields with similar names can be divided and divided again, and that the same Domaine name may appear on a dizzying array of offerings, it is only the very committed who fully understand the Burgundy hierarchy. And so, whilst it is true that Burgundy took Bordeaux’s mantle for a while, the market was painfully narrow and polarised. For the most part it was the six wines of Domaine de la Romanée Conti (DRC) that took off. Why? Because the DRC moniker made it simple to establish that each of its offerings were very special.
Italy is arguably even more confusing. Sure, there’s a sort of hierarchy, the three main categories are DOCG, DOC and IGT (formally DO). DOCG is the top and if you see this on the bottle you know the wine was produced following some very strict regulations. DOC is far more common and IGT was created sometime after and accommodates produces that couldn’t meet DOC or DOCG criteria.
But the problem is that many of the top producers dropped out of the DOC system so as to have more freedom from its draconian rules. So the very best wines might not say DOCG at all. But then again, so might the worst. And given that the text on the labels is so long and confusing that it’s nigh on impossible to work out the actual name of the wine, where on earth does one start? DOH!
Which brings us rather neatly to Masseto and co – the Super-Tuscans. How very decent of our Latin friends to produce a latter-day moniker for the wines from one of their top producing areas, Bolgheri, and give it such a high impact. These wines are, evidently, from Tuscany and – even better – they’re ‘Super’!
Oenophiles across the country are doubtless now writhing in agony at the patronising message, but it’s not them we need to worry about – it’s the broader, global market. That’s where the easily understood hierarchy and name has impact. And let’s not forgot, many in these markets don’t speak English, let alone French or Italian.
So what about our friends in the Top 20 from Australia and California? Same theory: simple to understand. Those stars that rise to the top have clear, memorable names; Grange, Opus One, Screaming Eagle. There’s no need for a PHD to unravel the label – Screaming Eagle is Screaming Eagle, no mistake.
But the interesting thing is that whilst the hierarchy might well form the foundation of the investment market, sooner or later the truly preeminent wines – whether or not their labelling and marketing is confusing or not – take off. This was evidenced in the Burgundy Bull Run last year. Whilst it is true that DRC lead the charge, the prices of the offerings from other equally notable producers – Henri Jayer, Comte Vogue, Armand Rousseau – later also took off too in DRC’s wake. This is the inevitable broadening effect of an expanding market in action.
And so we’re watching you Italy. Whilst the Super-Tuscans are undeniably worthy of their moment in the sun, some of the world’s finest and most historic wines are found elsewhere in Italy, notably Barolo and Barbaresco, and these really should feature on the wine investment map. These, then, might well be the gems for the future. Indeed, they will be a focus of our analysis early in the New Year, and we will report our findings to you. So the answer is no. It isn’t time to break rule 1, you must still invest in a great chateau. But it may well be that you won’t have heard of it.
¹Each of these estates’ wines was accredited a perfect 100 points by Robert Parker five times or more