Can fine wine protect you from bad money?
By Joe Roseman
11 June 2012
www.winvestmentweek.co.uk
At the recent London Wine Fair, the Financial Times’ John Authers alluded to the fact that should the euro collapse, investors could be driven into alternative assets like fine wine as a place to store their money.
There is an economic law that explains this process – Gresham’s Law. Stated simply, it means that bad money drives investors to seek good money. In this instance, the bad money is the euro currency and the good money is an asset like wine.
Over recent years, wine has emerged as an alternative asset class. It certainly has the credentials for being so. According to a recent study by Liv-ex, fine wine prices over the preceding 20 years have achieved higher returns with lower volatility than virtually any other asset class.
Academic research has also confirmed wine’s status as an asset class.
Masset & Weisskopf studied wine prices between 1996 and 2009, covering over 400,000 data points. The research shows wine to have conspicuously low correlations to traditional financial assets, making it a very attractive portfolio component.
Jancis Robinson, the famous wine critic, was also speaking at the same conference as John Authers. In that speech, she said “the one thing that makes me saddest about wine is that nowadays I am expected to give investment advice. Personally, I feel that is not what wine is for.”
Seemingly, it is tasteless and vulgar to look at wine as an investment that investors can use to produce profit. As I have said before, my interest is not in whether or not something is or is not vulgar. So long as it is legal I want to evaluate it as a potential asset class. On this basis, wine deserves a lot of attention.
One of the counter-arguments to owning wine is that one has to be so careful about which wine is chosen as the wrong wine will prove to be a disaster. Whenever anyone says this to me, I have one word back for them: Enron.
Regardless of what asset class one chooses, unless one uses expertise and good advice one can end up owning an Enron. All assets regardless of nature need careful selection. Wine is no different.
As an asset class, wine benefits from a supply-demand dynamic that is relatively unique. Once a vintage is produced, supply falls each and every day. Supply is very inelastic. Even if demand doubled, the various top chateaux would have great difficulty expanding supply in any given vintage.
Top ‘terroir’ is simply not being made any longer. Emerging economies are now about the same size as the OECD. In 10 years’ time the emerging bloc will dominate global GDP and it is only just starting to get a taste for fine wine.
I appreciate there is a snobbishness to wine as there is to art. People who appreciate wine and art for purely hedonistic reasons may well look down their noses at those who can see the investment potential.
There are definitely a number of people like that, but actually, very few.
Then there are those who claim to appreciate wine for purely hedonistic reasons and in the same breath make a very good living from it. I have no problem in the commercialisation of expertise, but let us strip away the hypocrisy, eh?
Or at least let us try to understand where the hypocrisy comes from. Understanding the attractiveness of wine as an asset class is not typically in the skill-set of a wine critic.
Of course, the opinion of a wine critic about the quality of wine is a crucial element, but as the guys at Albany Portfolio Management will tell you, it is possible to analyse wine’s investment potential in a quantitative as well as qualitative way. Maybe it is that fear that drives the hedonist’s snobbishness?
This is the second in a serialisation of extracts from the new book, SWAG: Alternative Investments for the Coming Decade. See also www.swaginvestor.co.uk or to purchase the book go to http://www.swaginvestor.co.uk/read_guestbook.html
Joe Roseman is the founder of BMO Economic Strategy and a former economist at Moore Capital Management.