Channel: Personal Finance
The word ‘Wine’ conjures up images of beautiful vineyards, set in a plate of small hills peppered with sunshine, it stimulates the remembrance of the last fabulous wine tasted with its fruity core in perfect harmony with the embodied alcohol mmmm. But then, for some like me it also means a safe and robust investment.
The humble beginning of wine is debated whether from Iran, Greece, Egypt or even China. Wherever it was, it does seem to have its beginnings at least 5000 years ago. True commercial wine production though dates to the Roman Empire where it was compulsory to have all wine of the Italian origin. Not until 6AD was the French landscape dotted with vineyards. This grew further with strong demand from lucrative English market in 1100s. By mid 19th century, it became necessary in France to classify the wine production areas to ensure that quality of the produce is controlled. Since then the grape wine production has spread from Europe to California, South America, Australia, China, South Africa and lately the wine bug has spread in India.
Global wine consumption is around 26 billion litres growing at 1.5% per annum. This is serviced by production around the world with Italy, France, China, US and Spain being the leading 5. Although wines are produced all over the world, only less than 1% of this production qualify as Investment Grade wines. Investment Grade wines are wines from top class wine producers, from outstanding to exceptional vintages, that are able to generate steady returns over a medium term because of extremely limited supply and consistently increasing global demand.
They are primarily the very best wines from Bordeaux, France and have been around for centuries. These wines last for decades, improve with the passage of time and are produced in very limited quantities. Top Bordeaux wines have a lifespan of 30 to 100+ years. Over time, consumption cuts down on available supply, mainly for an exceptional vintage. This demand and supply imbalance results in inevitable escalation of prices.
Moreover, the largest, most liquid secondary wine market in the world is in Bordeaux wines, with prices determined by auction houses, chateaux and wine trading houses. The ratings given by wine journalists and experts such as Robert Parker Jr., Jancis Robinson also influence prices. Quality of a vintage is influenced by climate - diurnal temperatures, rainfall, and terroir (soil type). Quantity too is influenced by grading, climate and other factors, therefore, each vintage is unique. Pricing for a particular wine type can vary dramatically not only by the vintage but also by the time along its lifecycle.
Since 1999, liv-ex is has firmly established itself as a wine exchange, thus creating even more liquidity for wine as such. They have been tracking the movement of wine prices over past decade. Trends in wine valuation are captured by Liv-ex fine wine index also referred as Liv-ex 100 (see www.liv-ex.com for more details). It represents the price movement of 100 of the most sought-after fine wines for which there is a strong secondary market and is calculated monthly.
But then, you may say, with all this infrastructure of transparency, liquidity etc. which firmly sets wine as an investment class, why should I invest in wine vs. plenty of other opportunities available. We, at Winetage Investments highlight 4 main factors that make this an attractive class.
1. Strong Track record: Wine investment as defined by Liv-ex 100 has grown only next to gold over the last decade, returning a CAGR of 12% over the period 2000-2009.
2. Lower Risk: Additionally, this growth has been achieved with a lower volatility e.g. for $1 million investment, the Value at Risk (VaR) is significantly lower for Liv-ex 100 compared to S&P 500 based on historical data for period Jan-05 until Dec-09. Monthly VaR (1%) for Wine Investments stand at 67,000$ vs. 266,000$.
3. True diversification: Also, wine has demonstrated true diversification potential. Past trends highlight low and even negative correlation to other asset classes such as Gold, Crude oil, Property and equity indices.
4. Strong underlying demand-supply fundamentals: To service the global consumption of +26 billion litres of wine, fine wine makes 0.001 billion litres. With growing GDP in emerging markets, the consumption trend is increasing for wine and that too for fine wine. In China, per capita consumption of wine grew from 0.3 liters in 2006 to 0.5 litres in 2009, a CAGR of @20%. Despite this impressive increase on a base of 1.2 billion inhabitants, this is far short of US (7 litres) and Europe (30 litres) and highlights further potential for growth. In the other BRIC market, India, it is noted that the per capita consumption is growing at +25% per annum. With stretched supply of quality wine, it is inevitable that the price escalation will follow.
As a company that lives with the motto of “Diversify to Solidify”, we do not recommend that you bet only on wine, but yes, we do suggest that wine should form part of any mid to large sized portfolio. So goodbye to portfolio returns that look like ECG graphs, and cheers to a good night’s sleep and investment in wine.
Author is Director at London and Paris based Winetage Investments Ltd. (www.winetageinvestments.com) and can be contacted at firstname.lastname@example.org
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