How to invest in wine

Three years of declining fine wine prices could spell an opportunity for investors. Julian Knight outlines what to look for, potential pitfalls, how much to invest and how to make money

As far as wine investment goes, the global financial crash of 2008 was nothing more than a minor hiccup. By chance, 2009 and 2010 proved to be two of the most highly rated vintages, by the critics, of the past century.

In addition, sudden interest from China and the Far East in all things wine and its use as both an investment and a status symbol led to prices reaching a record high when the 2010 vintages came to market in 2011.

Since then, a combination of bang average vintages and overproduction of investment wine has led to a marked fall in investment wine prices. Some vintages have come down in price by up to 50 per cent since 2011; bad news for those who bought at the top of the market but a potential opportunity for others.

Bordeaux Index, a company which buys and sells investment wines for clients, reckons that lower prices and renewed interest from the Far East market is beginning to buoy prices.

Gary Bloom, managing director of Bordeaux Index, says: “Our latest data gives genuine hope that this long-suffering market is ready for a turnaround. Our data, coupled with sentiment from our clients, highlights a clear message that mature and maturing stock is where the main action is.

“We’re talking about the great vintages of the 1980s and 1990s that drinkers actually want to put on their tables today.”

The wine market

The investment market in fine wine is very limited. Barely one per cent of global wines are considered of investment grade and very few of these come from outside France.

The most well-developed markets are in classic Bordeaux red wines. But not all Bordeaux reds are worth a punt. In fact, much of the trade is concentrated on the five first growth wines from Lafite, Margaux, Latour, Haut-Brion and Mouton Rothschild, as well as great producers in the Pomerol and Saint-Emilion appellations of Bordeaux such as Petrus (often regarded as the finest wine in the world), and its near neighbours Cheval Blanc Le Pin and Ausone.

The ‘first growth’ moniker dates way back to 1855 when the Bordeaux wine classification was decided – with the exception of Mouton Rothschild which was added in the 1970s, when the Rothschild family in effect bailed out many vineyards in return for inclusion in the first growth category.

Below this are a host of second, third, fourth and fifth growths. These classifications were based on prices in the mid-19th century, so you can find that some second growths have declined sharply in quality since to make them a poor investment while some third, fourth and even fifth growths have improved immeasurably, meaning that they may be worth a punt.

How wine prices are set

The fortunes of many wines as an investment are decided by the ratings they are given by critics, in particular the American critic Robert Parker. Mr Parker made his reputation declaring the 1982 vintage a classic when others had their doubts, and his system of scoring wines on a scale of 0 up to 100 is watched by the whole investment industry.

These scores are regularly reassessed, so a positive upwards move in the Parker score up to the magic 100 can mean considerable interest from investors and rising prices for that wine.

But where such complexity lies so does danger for the unwary investors. Scams are commonplace in wine investment, playing on investors’ lack of knowledge in order to pass off so-called vintage wines at massively inflated prices.

In addition, it can be easy (through incorrect storage, for example) to make even an expensive wine worthless on the open market.

There is also a trade in fakes emanating from the Far East, because by the time the bottle is opened and the contents found to not be up to the mark the fraudster is long gone.

Three rules for wine investment

So if you are interested in adding a little liquidity into your investment portfolio, here are three key rules you should follow, courtesy of the Wine Investment Fund:

▪ Investors should make sure their wines are stored in a UK government-bonded warehouse. Buyers have to be sure the wine has been kept in good condition. The wine should be fully insured at replacement value.

▪ Avoid falling for any cold calling and unsolicited mail. Not only is this bad practice, it is also very likely to be illegal and there are many cases of scam firm promising get-rich-quick wine investment schemes.

▪ You will almost certainly have to use a brokerage firm to buy your wine. Ensure there is a genuine physical office, not a ‘virtual’ address with only mail forwarding and call answering services. Visit the office if possible. Investors should make sure there is physical possession of all wines purchased.

If you don’t fancy actually owning the wine you can invest in a fund that in turn invests in wine. This has the advantage that the managers should know what they are doing. There will be charges which should not exceed the industry norm of 5 per cent upfront plus a 1.5 per cent annual management fee. Do ensure that any wine fund is regulated by the Financial Conduct Authority.

How much can you invest in wine?

The Wine Investment Fund seeks a minimum investment of £10,000, while Bordeaux index will put together a wine portfolio from £3,000-£5,000 which will buy a couple of cases. Most usually clients invest £20,000, £50,000 or more.

Wine investment can be quite a volatile investment so most independent financial advisers recommend that you should invest no more than five to ten per cent of your total portfolio in alternative investments such as wine. The bulk of your money should still be directed at shares, bonds, property and cash savings.

The past three years has seen probably the worst trading conditions for wine in a generation but longer-term returns tend to match those of other investments, such as shares and property. There can be quite substantial profits to be had – even in the past three years – if you are able to buy a vintage that becomes recognised as a classic.

Profits can also be had over time as there is only finite supply of investment-grade wine. Investing in wines that are seen as close to ready to drink – which can be any length of time from, say, 10 to 25 years – can also be the way to go, rather than buying en primeur (which means the wine is still in the barrel) as over time more and more of the wine will be drunk, meaning that scarcity should help drive up prices.

And that ultimately is the beauty of wine investment: you can make money from it through selling on,  and if you don’t you can always choose to drink your investment. 

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