Previously I have written about the need to accumulate assets or funds on a regular basis, in order to ensure that you are well provided for upon retirement. Now, I’m not going to try and teach you to make money on the stock markets, there are far more experienced professionals than I who’ll do that for you. Besides, after the past couple of weeks on the markets I’d end up venting my frustrations, rather than imparting any useful advice.
No, I’m going to introduce an asset class which you can enjoy even if it doesn’t make you a handsome profit and it is Investment Grade Wine (IGW). An asset class that I got into a little by accident, but which gave me a cash to cash net return of 40% over 15 months, from September 2009.
Before you all go rushing off to Tesco to buy most of the wine on the shelves, let’s put a broad definition on what is classed as an investment grade wine. The IGW market is 90% French Bordeaux and even then it’s concentrated into a few Chateaux and their selective first and second growths. You can’t buy these wines in the shops; it is usually done via specialist brokers and auction houses, and it is here we come across the first real risk. Wine, as an asset class, is not a regulated market and because of the amounts of money involved it can attract some very rum characters. Caveat emptor applies: buyer beware.
The first danger point is the broker and to understand this I’ll explain where you are in the food chain as a wine investor. A case of IGW can cost between £1,000gbp and £20,000 for a wine that is less than 10 years old. Brokers can’t afford to hold the inventory and that’s your role until it is ultimately sold on to a consumer.
The brokers invariably require you to pay up front and don’t forget you will not take physical possession (more on this later) so you might not know if you have got what you pay for until you try and sell it. Sadly there have been several cases over the past few years of brokers not actually buying wine, but simply teeming and lading between clients.
Yes they do get prosecuted, but you get nothing. I recommend that you subscribe to one of the few high-end wine magazines; I take Decanter, and read the news pages. Their web sites and the various wine forums are also a good source of research on reputable brokers.
The second area of risk is counterfeiting; there are even stories of some high-end restaurants selling their empty bottles to counterfeiters in order to make the scam easier. Another reason for using a good broker.
The third risk is storage. Wine is literally a living product where condition can improve or deteriorate, depending on how it’s kept. Professional in bond (IB) storage is only around £7-10 per case, per year and insurance is usually included by the reputable vinoteques. Professional storage also maintains the wines’ provenance, because you can prove that the wine has been kept properly, and, therefore, there is a reduced risk of deterioration, when you sell it on.
So, how do you pick your wines? Step one is to subscribe to Liv-ex, an auction monitoring service for IGWs, that tracks all the auction prices. At £25 per year, for the non- professional service option, you get access to their databases of wines and performance, one virtual cellar and a monthly report on its value. Money well spent.
Having picked your broker you then let him know your budget, and for starters you do need at least £10,000 and he will tell you what he has available. Then you check the charts on Liv-ex, read Parker’s review notes (Parker is the industry scoring standard) and look it up on whatever wine forums you use. You have 3-5 days to make up your mind and don’t be disappointed if it is sold when you get back to the broker. Like I said IGWs do not come by the truck load. The broker reserves it for you and when he gets your cheque it goes into bonded storage in your name.
Fees are another interesting subject. One broker I used charged a 5% management fee, which included 5 years’ storage and his selling commission when I exited. My current broker doesn’t charge a fee, but marks up the product as he passes it through. Similarly, he doesn’t charge sales commission but makes me an offer when I want to sell. Of course, I’m comparing this to the latest price data on Liv-ex, so I can see what sort of margin he’s making. For me, not having commissions, makes the calculations of returns more transparent.
So far, this seems to lack the passion normally associated with premier wines. I’ll make no apologies; I’m actually a beer man myself, but there’s hope. The way I’m adding intangible value is buying vintages mainly based around the years of birth of my four children, which could get expensive. What I observed with the two Chateaux I bought into, was that the cheaper case gave me a greater percentage return. So now, rather than buy one case at say £8,000, I’ll buy five cases for the same amount. One to give as a coming of age present. three for my retirement and, depending on the return, the fifth goes on the table for a party.
So where’s the market going? For me, the biggest opportunity and greatest risk, comes from the Far East and especially China. It was Chinese demand that gives me the annualized 50% return on my 2003 Lafite Rothschild but as those of you who’ve studied economics know, over time shifting demand curves lead to either shifting supply curves, as new entrants join the market and correcting demand curves as markets move.
On the supply side we are already seeing Chinese enterprises starting to buy French Chateaux, not just so they can take all production to China, but also to acquire the knowledge to grow these calibre wines in China. So far only one major Chateau has been bought; maybe the French will step in and declare them an asset of strategic national importance. A claim that will carry more credibility than their previous claim over yogurt. Against this, I suspect the Chinese will still prefer to buy the real deal, rather than the locally produced replica because of the importance of kudos, but we’ll see.
Another risk is the disenfranchisement of western markets. There was a report out in June, by Robert Parker, saying the French were getting carried away with the rise in values and that they were declaring too many vintages. There have been eight declared in the past 10 years.
Parker’s view, is that rapidly rising entry points for vintage IGW will encourage the traditional buyer to look elsewhere. This may be the case for consumers, but I think, from an investment point of view, it need not matter in the medium term. Long term, if Chinese buying habits shift towards their own domestically produced wines, of the same quality, then you’ve got an issue, as by this time, the point-of-sale price for the consumer will have become too high for western wallets.
So fancy a tipple? I’m sticking with it for the next 10 years; my kids will be over 18 by then and I think that’s as long as the market has got before the China risk really crystallizes. You’ll get some good second growth labels for less than £1000 in bond so, if you can, try a few cases.