Wine Investment Friday thoughts
After a very rosy start to 2013, with the Liv-Ex 100 adding 10% to its value, the market has paused for breath in Q2 and consolidated those gains. This sedate period, with little movement in price is an opportunity to take stock, and consider how wine fits into a portfolio and what your timescales should be.
The chart below highlights the Compound Annual Growth Return for fine wine over various periods – from two to ten years. The oft quoted truism when investing in wine is to consider a minimum of three years as the time needed to make be fairly sure of seeing a profit. Five years is a more realistic timeframe however, as all wine pricing data shows that there has never been a five year period when fine wine has been worth less than the price paid at the outset.
The key colours to focus on are green and blue. Even talking into account the substantial bear market that ran from June ’11 until October ’12, you can see that returns are almost entirely positive over any three or five year period you’d care to mention. It is only when investors look at a two year hold that volatility is such that returns are difficult to predict safely. This chart should provide enormous comfort to investors who currently hold wines valued at less than the price they paid for them, as history points to the fact that wine inexorably moves up in price over the medium to long term, meaning paper losses are extremely likely to become actual profits, as long as you can add a year or two on to your investment horizon.
So, returning to the initial point that the market is flat, the question is how can we at APM help investors to out-perform the wine investment market and enter positive territory. This is our raison d’etre, after all – to out-perform the fine wine indices, and specifically the benchmark Liv-ex 100. A great deal of our time and analysis has, of late, focussed on comparisons of various regions, and not just the traditional stronghold of left bank Bordeaux. Over the last decade the main engine of growth for wine investment portfolios has been cru classé claret, but over the last 18 months there has been a definite increase in interest of the great wines of Burgundy, the Rhone, Champagne and Italy. This is a function of the market for investment grade wine growing, and as new agents enter the fray demand has increased in regions other than Bordeaux. The fine wine market, just as nature does, abhors a vacuum it seems, and the voids left by rapidly increasing Bordeaux prices have been filled by Super Tuscans, Cote Roties and vintage champagnes, amongst others.
It could be also argued that the drivers of price movements on the left bank of Bordeaux – home to Latour, Lafite Rothschild, Haut-Brion and Margaux etc. – are different not only from other regions, but also from the right bank of Bordeaux. The right bank, dominated by the small appellations of St Emillion (home of Cheval Blanc, Angelus and Pavie) and Pomerol (where Petrus, Le Pin and La Conseillante, amongst others, are produced) tends to have much smaller production levels, and an almost boutique approach compared to the vast properties of the Medoc. This scarcity means that collectors are willing to pay extraordinary prices for the right wines, and in the last twelve months right bank average prices have increased dramatically, increasing on average by around 12% compared to low single digit growth on the left bank.
So, in conclusion, it seems there is a new and evolving paradigm for the serious wine investor, with three easy rules to understand.
Firstly, whilst the Left Bank of Bordeaux remains the key region, there is definite evidence to suggest that other Old World regions have ridden on the coat-tails of this success, and these are now seeing price increases.
Secondly, a truly well risk managed and balanced portfolio must keep up with trends in the market. Active management such as is provided by APM is the key to a profitable fine wine portfolio.
And finally, set targets for what you want your portfolio to achieve, and have the discipline to take profit when you can. And make sure your broker is working for you, not just adding wines willy-nilly to your cellar…
James Sowden
APM
26.07.13