In search of the Burgomeister

18.04.2018 – Wine Investment –

One of the accepted wisdoms over the last couple of years holds that the fine wine market went up as Sterling went down, and it is difficult to argue against some degree of correlation. Fine wine prices in the secondary market are denominated in Sterling, so as the currency weakens it makes the wine cheaper for a foreign investor.

Post the Brexit referendum the decline in Sterling was quite significant, and although the fine wine indices were already rallying they received a shot in the arm from the currency markets. The question is, is Sterling’s rally the cause of the fine wine market’s current consolidation/mini correction, or at least an influence, and if so, what might a stronger pound portend?

In a nutshell, the pound might strengthen from here because it feared the worst, yet the worst has not come to pass since the referendum; because the economy in the UK has benefitted from the heightened competitiveness resulting from the weaker pound; because the resultant stronger economy might force interest rates higher. So, we should be alert to possible ramifications.

There is also a suggestion at present, incidentally, that buyers might be keeping their powder dry ahead of the 2017 en primeur campaign, and whilst there may be some validity to this it is also worth remembering that not everyone pays 100% up front for EP purchases, so not all their powder is used up anyway. Notwithstanding, there is likely some contributory impact overall.

How should an investor in the fine wine market place play this set of circumstances? Firstly, the question is more applicable in respect of a short term approach than the medium to long term which we at Amphora believe is more appropriate here. Secondly, it might not happen, so we wouldn’t advocate putting all your eggs in the stronger Sterling basket.

Typically a Hedge Fund might make a high conviction bet, having convinced itself that it knows exactly what is round the corner, but its investors would themselves have to be on board for this strategy, because it is high risk and might not come to pass. Famously George Soros made a fortune out of Sterling when Britain came out of the ERM in the early 90s, but quite frankly most participants in the fine wine market aren’t set up to take such a level of risk.

Having decided to allocate a % of an investment portfolio to fine wine, it is usually more sensible to remain fully invested and allow the passage of time to do its work. Concentrate simply on owning wines which represent good relative value, rather than worrying about dipping into and out of the market.

Meanwhile, let’s say Sterling does rise and the Liv-ex 100 does decline, what will happen to Burgundy, whose outperformance in index terms over the last few years has been well documented? Over the last year the Liv-ex 50 and 100 are both up 2% whereas the Burgundy sub-index is up 21%. No slowdown there as Sterling has ceased to decline. It posted a little hiccup recently after a particularly strong November, but has since resumed trend.

DRC vinesThe composition of the Burgundy sub-index was originally determined by the volume of trade, the number of merchants listing and the market price of the wine.  Alongside the 6 DRCs we have the now extraordinarily illiquid Armand Rousseau Chambertin and four producers of white whose longevity is somewhat shorter than their counterparts in red. Several of these whites’ drinking window close at the end of this decade, which is not optimal from an investment perspective.

There is a very wide price range within the index constituents, from DRC’s over £12,000 per bottle down to Lambrays Clos des Lambrays at around £175 per bottle. There is also considerable divergence in liquidity, from the Ponsots, Lambrays and Comte Vogues of this world where availability is good across most vintages, down to the aforementioned Rousseau Chambertin where you will be lucky to find much more than the odd single bottle available worldwide across most vintages. To our mind therefore the latter is uninvestible and best left to collectors.

There is also a sense when talking Burgundy that normal rules for valuing the wines don’t apply. The most fundamental dynamic of supply and demand clearly does, in so far as the lower production wines are immediately scarce and cost a fortune, but you read much about the importance of the maker over the vintage quality, and even over individual wine score. Evidence from certain producers seems to bear this out, but only on a very rough top line level, in our humble opinion.

What strikes us is that most producers seldom have an off year. Even from poor vintages like 2004 which scores only 83 with Robert Parker to the following year which is a fabulous 98, the individual wine scores cluster much more tightly. Since 2000 every DRC has scored between 95 and 97, every Tache 94-96, Echezeaux 92-93, Ponsot 91-95, Comte Vogue 93-96, Lambrays 90-95. These scores support the thesis about the importance of the maker. Give DRC a shocking vintage and it still makes a brilliant wine, whereas the “lesser” producers “only” manage a very good one.

Interestingly, beyond the DRC family, there does seem to be credit where it’s due. The order of performance (judged by average critics’ score) reads Comte de Vogue, Ponsot, and Lambrays, and the average price for each across post-2000 vintages respectively reads: £557 per bottle, £420, and £175.

This is incredibly helpful. Burgundy is undeniably complex. Allen Meadows of Burghound fame spends 5 months a year in Burgundy and tastes something like 75 wines a day. To our way of thinking this creates a knowledge base so profound it almost gets in the way. At Amphora we believe that there is a rationale for most price-related issues in all markets. 21st century communications technology means that most outliers get arbitraged away in efficient financial markets. Happily the fine wine market place is still relatively inefficient by comparison.

From what we have already observed, there is enough coherence of cost to justify the application of our algorithmic techniques, which we are in the process of expanding across a broader spectrum of Burgundy wines, beyond the DRCs. As a taster it has been encouraging to note that in the case of every DRC bar Saint Vivant the 2005 is comfortably the most expensive vintage since 2000. This is as it should be. 2005 was off-the-scale brilliant in Burgundy. The degree of extra cost is the key though. In the case of Echezeaux it seems nowhere near enough.

We start our voyage into Burgundy at this point by highlighting Domaine de la Romanee Conti Echezeaux Grand Cru 2005, with a lot more to follow. In addition our thanks are due to the Liv-ex without whose background work and indices matters such as disentangling Burgundy would be a very difficult challenge indeed.