Unlike investing in a startup, an investment in wine is virtually guaranteed. Photo / 123RF
Buying rare wines is like investing in a startup: it takes 10 years of track to see significant returns. But unlike a startup, an investment in wine is virtually guaranteed.
If you had allocated $ 100,000 ($ 148,080) to Cult Wines, a UK-based wine portfolio manager, your money – that is, your wine – would have earned an average of 13% per year. In 2016, its index performance was actually 26%.
The secondary market for fine wines hovers around US $ 5 billion, a fraction of the global wine market of US $ 302 billion.
But Euromonitor predicts that if “the main luxury players face increasing risks in 2018”, the wines and champagnes category is expected to increase by around 7%.
When it comes to what private bank Coutts & Co. calls “the passion index,” wine does live up to luxury cars and rare pieces.
Due to the unique nature of wine, however, investors should hire a manager. Cult Wines, Farr Vintners and Berry Bros. & Rudd are just a few of a small network that will invest your money according to your level of risk, suggest purchases and monitor your portfolio.
Tom Gearing, co-founder of Cult Wines, said his more than 1,700 customers should keep their wine for at least 3 to 7 years before trying to sell it. The management fee, 15 percent of the total value of the investment, is prepaid and includes storage. Farr Vintners charges 10 percent commission on the purchase of wine and 10 percent on the sale.
These managers only buy from reliable sources so that they can confirm its authenticity. Cult Wines guarantees the wine, if opened, but that’s less than one percent of the total value of their annual trade. Most remain clogged.
Investment wine even has its own purse. The London International Vintners Exchange, which went online in 1999, shed light on what had been a very opaque market. It is now the industry standard for tracking luxury wine prices and includes the Liv-ex Fine Wine 100 index, which tracks the top 100 wines.
So what to buy? For anyone who knows wine, French is the must and French Bordeaux the absolute must. The summit is made up of the premiers crus, or premier cru wines, a classification system begun in 1855 which created a classification of importance still in place today. On the list are Haut-Brion, Lafite-Rothschild, Latour, Margaux and MoutonRothschild. Each castle can also have secondary tags, which may not be as valuable as the first.
The problem with the premier crus is that they are the very top of the range. Unless you get there early, your wine won’t see massive increases. Jamie Ritchie, global manager of Sotheby’s Wine, reports that diversification has started.
“Last year it was Bordeaux and Burgundy at 40% each,” he said. In the past, Burgundy accounted for 20 percent of the total investment in wine. “We have seen a huge and growing demand in Burgundy. The great Bordeaux sells well, but there are in fact too many.
Another French quirk is the futures market, which refers to the possibility of investing in wines still in barrels. It’s a risky business, however, given that the vintage could end up with poor ratings from critics.
But when the wine is doing well, there is more profit to be made. For investors who don’t mind risk, there is a chance for a 20-40% increase in value after just one or two years.
Knowing when to sell is the reason you entrust your bottles to someone else. “There is a huge market for mature wine. Restaurants and drinkers. People want mature wine – they’re not in the market for wine when it’s first marketed.
We buy the wine back from investor customers and sell it to drinking customers, ”said Stephen Browett, president of Farr Vintners, which opened in 1978.
With around 14,000 active customers, UK-based Farr manages around US $ 523 million worth of wine in bonded storage. “Individuals find it to be an incredibly effective investment,” said Browett.
Client portfolios generally hold 65% of their wines from Bordeaux and 15% from Burgundy. Wines from the Rhone Valley in France, Italy and even California follow, but bottles from Napa Valley or other places in the Golden State are only a tiny fraction of what is marketed. For many investors, the history of California winemaking is still considered young. Farr prefers Californian wines with French roots, such as Opus One and Dominus.
“When you look at the French producers, they’re the ones who have been doing it with this kind of intensity for quite some time. It’s reliable. It’s one of the things you need to have in a collector’s product,” said said Rob McMillan, executive vice president of Silicon Valley Bank, which invests heavily in West Coast wineries. Despite their success on American restaurant menus, only a small subset of California wineries draw investment attention.
Gearing co-founded Cult Wines in 2007, seeing it as a tool for diversification. “It’s a long-term record, it’s low volatility and it’s an asset that is not correlated to the financial market,” he said. “We didn’t want to be a broker or a wine merchant or have an inventory. We wanted to be an approach to the financial wine market.” Today, Cult Wines manages approximately $ 100 million in assets.
To date this year, Sotheby’s has sold $ 64 million worth of wine, of which about 80 percent to private collectors who plan to drink it someday and 20 percent to investors. Although Cult Wines buys at auction, bids are generally not closed there.
Despite this, Sotheby’s and Cult Wines are witnessing the same change: a boom in investment from Asia. In addition to Hong Kong, Cult Wines is opening an office in Singapore this fall.
According to Gearing, Cult Wines manages more than 800 unique brands. The major holdings, Lafite and Pavie, each account for six percent of its total, at an average bottle price of US $ 621 and US $ 304, respectively.
While “the vast majority are traded on a daily basis,” he said, there are areas of opportunity. “While Bordeaux and Burgundy may experience periods of higher growth in the short term, the long term stability of champagne adds important diversification benefits,” he said.
Chad Walsh, head sommelier at Michelin-starred restaurant Agern in New York City, signs up online for auctions where he bids for work and personal investment. “It’s one thing to hunt for top notch stuff at a good price,” he said. “But the best investments are when you find the thing everyone else is buying when they’re squeezed out of all that was the blue chip.”
Of course, in the world of collectibles there are risks. Famously, there was the cataclysm that struck WineCare, a storage company in New York that was flooded during Hurricane Sandy in 2012. A US bankruptcy judge ordered the owner to “wind up the business”. Bill Carmody, a general practitioner in New York who used WineCare for his small collection, said, “It was a total loss. At the end of the day, there was no insurance.”
Lesson? Check out the insurance plan before you start investing, remembering to pay attention to where your bottles are kept.
All assets of Cult Wines customers are stored in a sophisticated, static, temperature-controlled facility inside a bonded warehouse (which keeps wine free of taxes and duties) and includes an insurance policy that covers up to 110% of market value.
Each bottle has a “passport”, like a barcode, which is recognized in the fine wine trade and guarantees that they have been verified for provenance and condition.
Cult Wines said it only accepts ex-chateau stocks (wine bought directly from a vineyard) or SIB, both in the original wooden case, which is the most valuable. Buying and storing wine in a bonded warehouse comes with an audit trail for each case and a reliable method to trace its origin.
Sophie Skarbek-Borowska started investing with Cult Wines in 2014. The marketing manager knows her wine (she has a certificate from the Wine & Spirit Education Trust), but still wanted help.
“I understand wine better than cryptocurrency, microchips and even Coca-Cola,” she said.
“I would never be able to invest in wine on my own.” She only invested a small amount, and while all profits were quickly reinvested, overall her account grew by 41%, not excluding fees.
One of the most popular wines is Domaine La Romaine Conti. A bottle of the most recent vintage, 2015, would cost you US $ 17,000, if you were ahead of other bidders. For Skarbek-Borowska, it was the opportunity of a lifetime.
“I had no way of getting it, but because this poor person was doing a clearance sale, Cult Wines got it and sold it to me,” Skarbek-Borowska said. She bought it for US $ 8,510 in 2015. Today it is worth US $ 15,210.