Emma Boyd of the FT | Nov 15, 2014
Source: Financial Times
Is the market corked? Investors have gained over five years but lost over the past 12 months.
Investing in wine has always had its attractions. As with the art market, investors have the option of personally enjoying their purchases as well as the chance of making good returns.
However, there are some crucial differences between these two luxury investment markets. Art works may go out of fashion, but they do not have a finite lifespan – they do not “go off”. Also, as James Suckling points out, people do not generally consume works of art, and thereby increase their rarity.
Far from being a turn off, these variables seem to have encouraged, rather than discouraged, the global wine investment industry. Aided by websites such as CaveX, Liv-ex and Wine Owners it is even possible for inexperienced investors to try their hand. Liv-ex reports that the number of transactions has jumped over the past year.
Buying fine wines on the secondary market does carry risks, however.
Recent incidents have highlighted the danger of fraud. And, even if a bottle is genuine, its quality can be so influenced by its storage that serious investors might be best advised to leave the wine with a professional. These agents can ensure ideal temperature and humidity for the wine and then vouch for its provenance when the investor sells.
The intermediary may also be able to offer to hold the wine “in bond”. This means investors can avoid tax and customs duties.
Wines from the Bordeaux region continue to be the most popular with investors. Production has been regulated for 150 years, which means the market is transparent. There is, however, growing interest for portfolio investors in other regions, particularly Italy.
For investors who are solely focused on potential returns, the solution might appear to be a wine investment fund.
A quick check of the price performance of fine wine on an index produced by Liv-ex can explain the attraction. At the end of October 2014, the Liv-ex Fine Wine 1000, which tracks the price of 1,000 global wines, had shown an appreciation of 20.48 per cent over five years. But short-term investors will have been disappointed. In the 12 months to the end of October, the same index was down 5.61 per cent.
Even steeper price falls have been recorded in the past year on other Liv-ex indices. In the 12 months to the end of October, for example, the Liv-ex Fine Wine 50, an index of the most heavily traded commodities in the wine market, Bordeaux First Growths, had fallen 12.78 per cent. It is small wonder that Liv-ex’s October Cellar Watch report said Italy’s share of the fine wine market had risen to a record high.
With recent price falls, there is growing recognition of the risks that investors face.
In June last year, an FT report concluded that wine funds had a gloomy outlook, not helped by the UK’s Financial Conduct Authority ruling that wine funds should not be marketed to retail investors of limited means.