Wine has been an investment asset class for as long as humanity has known to produce it. Unlike Whiskey, where you let it mature for equity gains, wine’s value grows even when stored in bottles, as the vintage and provenance matter in pricing (more about this can be found on our blog about whiskey investments).
Wine has done well against the backdrop of the pandemic and has given a shaded sanctuary from the volatility of the secondary markets. As per the Knight Frank Luxury Investment Index, Wine gave an average 13% return in 2020.
Source : https://www.knightfrank.com/
The Knight Frank Fine Wine Icons Index, up by 13%, outperformed the broader wine market such as Bordeaux first growths (+5.8%) in 2020, but lost of bit of ground to the older vintages of super-Tuscans that saw annual growth of 18%. Back vintages of Champagne (+14%) and Burgundy was up 11.5%.
In the era of unprecedented volatility, while the extended period of Pandemic has not done any good but added more uncertainty, alternative assets are growing in prominence as they offer diversification, hedges against traditional market risks and provides enhanced return opportunities.
- Real assets can be particularly attractive amid expensive equity, volatile bond and tepid rare metal markets; that are susceptible to shifts in government and central bank policies.
- Fine wine’s track record of low volatility and low correlation to equity markets make it a suitable option for an alternative asset allocation.
- The supply-demand dynamics, accessible entry points, and ongoing growth of the fine wine market support its credentials as an alternative investment for the long haul.
Buying top-quality wine that you’re willing to store and not consume, is a great way for investors to insulate their investment portfolio from market volatility. Add to this, global warming and unprecedented disruption in climate, could make significant impact on the overall wine supply chain, leading to irreparable and permanent changes to wine making processes and even the quality of the output, making certain low value vintages today excellent hedges for future.
If you’ve not known of alternate real asset investment or have been a sceptic about all things alternate, including luxury collectibles, it’s time to take note of all the recent changes that have made it easier to get started. Today, there are investment funds that focus only on Whiskey or Art and of course, wine. This is beside all the hoopla on digital currency, NFT or precisely, Art NFT’s. We are focused on physical assets here. There are also wine stock exchanges where you can invest in traded fractions of volumes. There are infrastructure and services to protect your wine assets while they build equity, like dozens of professional storage solutions for long-term aging, professionally managed and backed with insurance, near to farming or bottling locations, so that you don’t incur huge transportation costs.
Wine investing is not dissimilar to stock picking, you need to research, understand bottom-up valuation levers, or go with an index fund to spread the risks. Also, you will never probably touch the wine. Unless you are a superrich investor who can afford to bottle and consume the invested inventory; in which case, this blog note is anyways not meant for you!Let’s find out what are the typical prerequisites there are to wine investing, including how you may need to spread the investment through the investment and asset management lifecycle.
- Wine, like most Real Assets, is not typically a fast turnaround investment. Once you invest, expect to wait a minimum of 5 years before selling.
- Most wine auction sites prefer to sell wine in set bottles.
- By buying into bottles of 3 or more, you also give yourself the opportunity to start collecting verticals of single wines.
- Some wine exchanges require full cases of wine to list and trade.
- Professional storage is recommended for the bottles as the humidity, temperature and overall storage climate can impact the wine while in storage, for which you pay for the time.
Storing wine in an insured, temperature-controlled facility is almost a guarantee that your wine has storage history, documentation and will therefore, easily sell. You cannot figure out what has happened to the wine in a bottle unless you open, so the value is kind of linked to how it was stored! Wine storage starts at about $18/month for a locker that will hold 7-9 cases of wine. Brokers and merchants in the UK prefer a wine that is “In Bond” which means it’s purchased and stored in a bonded warehouse that avoids the costly 20% excise tax. Most wine growing regions have their own storage infrastructure which is also aligned to tax regimes that are favourable for investments.
As mentioned earlier, this note is not meant for the UHNI’s, so we will not be covering things like how to buy a vineyard directly, or to building a collection of the finest wines purchased at auctions or directly from producers. We will focus on funding and fractional ownership vehicles that operate similarly to private equity funds, where investors pool their money into a single special purpose (SPV) for the purposes of buying investment grade wine. These SPV’s typically have terms of, 3 -5 years, and charge a management fee of about 1.5% of the AUM, along with a performance fee of 10 - 20% linked to IRR hurdles.
Investing in wine bottles
It’s possible to buy individual wine bottles on your own. You can do this through secondary markets and wine auctions. It’s also possible to buy direct from producers in some cases, but you have to keep an eye on the ball and do your research on which vintage and which producer to buy from. If you go the route of investing in individual wine bottles, you will need a place to store the wine properly. This means having a wine cellar where you can store the bottles out of the sunlight and at the correct temperature to preserve them. Further, you might need to purchase additional insurance to protect your investments, which might not be easy or cheap in some markets where Wine as an investment itself hasn’t matured, like India.
Investing in wine futures
Another way to invest in wine is to purchase wine futures, also called “en primeur”. This means you purchase the wine before it’s even bottled. When you make your purchase, you do so while the wine is still in the barrel, maturing, and therefore can hope to get good bargains on the same.
It’s important to note, though, that the wine doesn’t usually ship until the third year after harvest and being put into the barrel. So, a vintage of 2020 will not ship until 2023; and therefore, will not get a price discovery linked to market demand driven by consumption. However, depending on the wine, vineyard, region and vintage, you could potentially buy wine futures at value much lesser than the eventual bottle. You can buy wine futures through Sotheby’s and Wine.com, as well as similar websites, if you want to make direct purchases.
Investing in Global wine stocks
Rather than buying wine bottles, you can also choose to invest in the overall wine industry itself by purchasing stocks of companies that are part of the Wine making and marketing value chain. When investing in wine stocks, you don’t have to worry about whether a bottle contains investment-grade wine. Instead, you’re betting on the fact that people are increasingly interested in purchasing alcoholic beverages, and global demand is only increasing. Some global wine stocks that offer you the chance to invest in wine (through global investment and brokerage platforms) include;
- Constellation Brands Inc, a fortune 500 company (STZ : NYSE), is a distributor of a wide variety of alcoholic beverages, including spirits and beer, in addition to wine, in the USA.
- The Duckhorn Portfolio Inc (NAPA)is a California based producer of wines under brands such as Duckhorn Vineyards, Decoy, Kosta Browne, Goldeneye, Paraduxx, Calera, Migration, Canvasback, Greenwing, and Postmark. It sells to retailers, restaurants, and agents both domestically, in the USA and internationally.
- Of course, there is LVMH, a 200 year old organisation that has grown in strength and is currently trading at Paris EPA, which has one of the exalted portfolio of wine and alcobev brands.
- While there aren’t wine-specific ETFs available for investment directly, you could invest in food and beverage or alcohol ETFs that include wine stocks and related companies. For example, the Advisor Shares Restaurant ETF (EATZ) and the Advisor Shares Vice ETF (VICE) include wine-related companies.
Investing in wine through a dedicated investment and trading platform
Another option to invest is through a dedicated platform that combines the ability to invest in bottles of wine while enjoying the benefits for fund management, which is deep knowledge backed research and economies of scale driven buying power. For example, Vinovest is a platform that specializes in wine investing, in the US and mostly from anywhere else. You can buy and sell bottles of wine, but you don’t have to store them yourself. On top of that, you can take advantage of the fact that wine experts handle most of the curation. It’s possible to start investing with as little as $1,000 with Vinovest, allowing you to build a wine portfolio without the need to seek out or store individual bottles of wine at your cost.
Lets Deep Dive - Historically, Wine Is a great Investment
Fine wine’s stability stems from the overall consumption driven supply-demand dynamics. As a real ‘passion’ asset, demand for fine wine goes beyond its immediate benefit as a financial instrument. This does not mean fine wine is immune to downward price pressure but demand from consumption itself, rather than just the financial value, can balance price fluctuations.
Fine wine returns have displayed stability compared to a range of other asset classes during market downturns. When the COVID-19 pandemic hit in early 2020, fine wine’s downturn was less severe than most mainstream financial assets. At its 2020 low on 21 March, the Liv-ex Fine Wine 100 Index (the industry leading benchmark, that represents the price movement of 100 of the most sought-after fine wines on the secondary market) had only declined by 4% compared with double-digit losses in most equity markets. The impact was similar during the Global Financial Crisis (GFC) of 2008-2009. Fine wine’s more consistent recovery from a shallower low means it posted a higher total return over the full breadth of the last 10 years. The result, illustrated in the figure below, demonstrates fine wine’s lower long-term volatility compared to mainstream financial assets and even with other alternative assets, commodities and gold. Limited and stable supply levels also influence the market of fine wine like a steadying hand. Only specific vineyards in certain wine growing geographies have the necessary natural qualities and industry recognition to consistently produce top quality wines.
Comparison of volatility and annualised return across financial assets (2007 – Mar 2021)
Fine wine also has an inverse supply curve, meaning supply shrinks with time as wine in consumed. This trait distinguishes fine wine from both traditional assets as well as many other alternatives and enhances its stability over long time periods, much akin to rare whiskey. The fine wine market has outperformed most global equities and exchange-traded funds (ETFs) and is less volatile than real estate or gold. More importantly, it has delivered 13.6% annualized returns over the past 15 years in the global markets. That means people would double their money roughly every six or seven years. Observe the Liv-ex fine wine indices since 2003. Nearly all of them have tripled in value. Add to that foreign exchange gains as the holdings are generally in USD or GBP, makes the overall gain extremely competitive to any other long term investment products out there.
The Dow Jones has registered a 7.8% annualized return over the last 15 years or 10.47% for people that reinvested their dividends. The S&P 500 didn’t fare much better at 8.58% and 10.66%, respectively.
Fine wine doesn’t just outpace global equities, it also stacks up well against other physical real-asset investments. As per Knight Frank Luxury Investment Index (KFLII), an index that measures various investment-grade assets, in 2020, five of nine asset classes (that this index tracks) had a negative return on investment. Fine Wine on the other hand returned 13% for the year, second only, to the performance of Hermès handbags!
Wine has proved to be a perfect risk hedge as an investment as the overall price and volatility risk is substantially lower than diversified equities.
Factors leading to Wine being a stable, low volatility investment product
The production of fine wines is very limited, and as the world’s leading vineyards are already fully planted and their land areas cannot possibly be extended, means that increased demand for those produce cannot be responded to by increased production, but only by higher prices; while replacement of the market with products from newer regions or newer vineyards will take significant time, and may never be comparable.
Increasing demand for established fine wines
Demand for expensive and exclusive wines is increasing significantly. This is due to the fact that the world is experiencing both strong growth in the number of wealthy people and a rising global interest in wine, in particular from the “new” economies, including the BRIC countries where a new generation of HNI’s are increasingly demanding luxury goods for consumption.
Rising costs of production leading to inflation hedge
Wine is an agricultural product, and when the production of wine cannot be outsourced and when the perception is that machines cannot replace the most skilful wine producers, the cost of production increases. Thus, the price of wine will, as a minimum economic principle, rise in line with general price movement and hence, investment in wine is secured against inflation.
Opening of newer consumption markets leading to overall demand for wine
The ‘emerging markets’ (EM), especially the wine growing and consuming regions, and the America’s offer some of the best opportunities to access great wines with compelling investment potential. Many areas of EM are enjoying a surge in interest from wine lovers due to growing disposable incomes, fuelled and supported by international wine publications and niche media alike. The US market, dominated by California wines & Oregon Pinot Noirs, is likely to maintain a favourable long-term trajectory due to quality, diversification and domestic demand.
The Australian fine wine market is experiencing a challenging period and price direction has been mixed over the past year due to the run in with the Chinese tariff since late 2020. Australian fine wine investment had returned ~9.1% in the preceding 12-months before Nov 2020, when the Chinese tariffs went up. This can be an actual opportunity to buy into some fine Australian wine selections, as the prices are lower than what they could have been, but for the Chinese market contraction.
The future for South American wine is bright thanks to improving quality, higher coverage from the media and critics alike, and technology to support market penetration. The improved quality is an outcome of consistent efforts and investments across producers with an aim to deliver world-class wines to the global market.
Even after the strong recent gains, South American wines still offer excellent value compared to global peers.
The Spanish wine investment market is adding new sources of
growth. They are adding new
wines and extending some of the regions. Similarly, German Riesling and
Spätbugunder (Pinot Noir) wines continue to grow in popularity with global
investment markets. In July, Liv-ex reported Germany made up 19% of the trade
by value of the Rest of World category, up from just 2.2% in 2019. It is
apparent form the data that German wines will continue to pull in a wider audience
for the investment category.
Fine wine is a tangible asset which, like other physical assets, have a different allure, when looked at from the perspective of macroeconomic shifts. Production of investment-grade wine is strictly controlled by various Appellations d’Origine Controlee (AOC) in France and their equivalent in other geographies. As mentioned earlier, wine investments can and will be impacted by sudden economic and geopolitical shifts, but their limited and fixed supply should assist in maintaining relative stability.
What is Upcide.com doing
Upcide.com is a platform that curates various alternate assets and brings them as investment opportunities for its members. Wine is growing in stature as a sought after alternate asset option, and at www.upcide.com we are starting to build the ecosystem that our platform members can use to buy into global trades, whether its Bottles in bulk or Casks to be stored under Bond, or even small exposure into funds that help spread the risks.
The typical opportunity would be to invest in a special purpose vehicle, that will be held offshore from India, which will then invest and hold the assets directly, through an exchange or an intermediary such that the SPV will have rights over the physical assets, while retaining the option to sell the bottles in a structured trade in any one or more exchanges, or through a strategic sale.
While at upcide.com the underlying philosophy is to always focus on products that are yield generating providing period returns, wine, as well as whisky and other collectibles are pure equity backed alternate assets, and as such, will need holding period to generate substantial returns. Given the fractional ownership structure that Upcide.com enables, it could be easy for small investors to take small and diversified exposures, which will be augmented by the alliances and partnerships that upcide.com will curate to enable access to significant knowledge during investment and professional monitoring of these investment assets till exists.
Any resident Indian can participate in these structured investments by making use of the liberalised remittance scheme (LRS) where a resident taxpayer can transfer up to 250,000 USD, outside of India for investments. The earnings on these investments will still be taxable in India if taxes are not paid in the geography where the asset linked income/ profits were made.
If you are interested to know more, please feel free to reach us at Deal@upcide.com
https://www.knightfrank.com/wealthreport/2020-03-03-the-luxury-investment-index-2020-discover-the-worlds-mostcoveted-items | https://www.wineinvestment.com | https://winefolly.com/tips/wine-investment-guide | https://www.barrons.com/articles/investing-in-fine-wine-as-a-safe-haven-1527189682 | https://financebuzz.com