Investing in Wine
In her post on Monday, Kerith touched on the wild world of wine investments. As a purported "investment professional", I figured I needed to spend some time digging into the opportunity a little deeper. On the most basic level, wine investment is about supply and demand. There is only so much wine that Chateau Latour, for example, can produce for its first growth Bordeaux bottling - it only has so much land, growing so many tons of grapes, and fermenting and pressing those grapes into so many bottles of marketable wine. This limited supply runs up against a level of demand that fluctuates based on macro-economic factors and the marketing/scoring machines of Robert Parker and Wine Spectator. With the 2000 and 2005 Bordeaux vintages declared "Vintages of the Century," the demand instantly increased and sent prices for those vintages skyrocketing.
Much of that buyside demand in recent years has come from the so-called BRIC countries: Brazil, Russia, India, and China. The BRIC countries, until the recent market meltdown, were flying high on commodity prices (oil, natural gas, and metals predominantly) that enabled them to generate huge amounts of cash. That cash funneled into a number of asset classes outside their borders, including wine - specifically "trophy" wines like the first growth Bordeaux, grand cru Burgundies, and a few California cult cabs (although it is interesting to note that California cult cabs are apparently much lower down the international investment totem pole than the top tier French wines).
As an individual, there are a number of ways to invest in wine:
The most basic is the direct investment. You buy a bottle of wine, hold it, and sell it for more money at some point in the future. If you are fortunate enough to get first growth futures for a hot vintage or are on the mailing list for a California cult cab, you can basically flip your investment for an immediate gain. The rest of us need to buy wines of pedigree once they are brought to market and hope that others will be willing to pay more for those wines in the future. This type of investing is similar to buying an individual stock. You can buy a share of Google, GE, Home Depot, etc. Hopefully it appreciates over time and when you sell it, you can sell it for a higher price and take a profit. Like buying an individual stock you need to be able to understand the risk/reward profile of each wine. Some of the considerations include whether you are buying at a good price, is there a reasonable possibility that the wine will appreciate over time, is supply limited, can you store the wine in a way so as to preserve value during aging. The direct investing method also has one additional inherent risk and reward. The risk is that your willpower will shrink and you will open the bottle. The reward is that if you aren't able to sell the bottle at a reasonable profit you can drink away your sorrows with a fine aged bottle of premium wine. To that end, I came across a very amusing video from Gary Vaynerchuk featuring Jim Cramer from CNBC where they talk about direct wine investments. It's on the long side, but very entertaining. Click here for the video. As a side note, this is particularly funny since it was filmed right before the market crash and Gary's view on wine and Jim's view on the stock market are both unabashedly bullish...
The second method to invest in wine is through an actively managed fund. Like mutual funds and hedge funds, the managed wine funds enable individuals to participate in wine investments without necessarily having the knowledge, access, or facilities needed for successful direct wine investments. Most of these funds are structured more like hedge funds. They advertise as alternative asset class funds, require investors to meet accredited investor status (basically, a representation that you are a knowledgeable investor with sufficient assets to afford to lose your shirt if things go badly), require minimum investment amounts and lock-up provisions, and the managers of the fund are paid based on a percentage of the investment returns. Most of these funds are domiciled and managed overseas for a variety of legal issues. One fund I came across was the Wine Investment Fund whose motto is "Fine Returns from Fine Wines". And, in fact, their returns do seem "fine", as you can see here. While investing in an actively managed wine investment fund does take some of the guesswork out of the process, it is far from riskless. In addition to the same supply and demand issues that affect the direct investment model is the relative illiquidity that a managed fund presents. Most require a long lock-up period and, even when adhered to, I'd be somewhat concerned with ultimate liquidity. After all, the fund takes your money and buys wine. It then needs to sell that wine to provide you a cash-out return. As many hedge funds have realized over the past year, selling assets (wine, in this case) at a price near their perceived value is often difficult, especially if the selling is taking place under time pressure or in a down market.
A third way to invest in wine is through index futures. Yes, just as we've seen an explosion in index funds and their cousins, the ETFs, there is now an index investment mechanism for wine. The Liv-ex 100 Fine Wine Index represents "the price movement of 100 of the most sought after fine wines". It only includes wines of 95-points or better that have a strong history of secondary market sales. The index is weighted heavily towards red Bordeaux, although also includes smaller allocations of other French and Italian wines. The advantage of index investing in wine is the same as index investing in the equity markets - you get a broader market approach which, in theory, creates less volatility and steadier returns, all with lower fees than a managed fund. In this case, you also have the added benefit of greater liquidity as you are investing in an exchange traded index rather than a single bottle of wine or a portfolio of wine managed by a fund.
So, where does this leave those of you who might want to invest in wine as an asset class? Frankly, I have no idea. The concept is so foreign to me that I'm not sure I can render any useful advice. I can logically understand the argument that wine, as an asset class, is sufficiently uncorrelated to the equity markets as to provide a true alternative investment opportunity.
But, in order to properly view any asset as an investment vehicle, you have to be able to remove emotions from the buying and selling decisions. That's hard enough to do with a stock or bond. How in the world can you do that with wine, whose value is often derived specifically from the emotional connection that you have to it?
As a purported "investment professional" I simply have no idea.