By Charles B. Rubinstein
Never invest your money in anything that eats or needs repairing.
– Billy Rose
If one considers the purchase of wine as an investment in future drinking enjoyment, the answer is definitely yes. But what about the use of wine as an investment class like stock, bonds or commodities? The answer to that is also yes.
For me wine is a drink that should be enjoyed, but there are people who treat it successfully as an investment. Most wine lovers have at least a passing familiarity with commercial wine auctions where rare and old wines are sold to the highest bidder. That is one outlet for wine investors, particularly in the United States. There are other outlets of which the most important is the London International Vintners Exchange (Liv-ex), which is the global marketplace for professional buyers and sellers of fine wine. Liv-ex runs an Internet and phone-based trading and settlement platform. Nonprofessionals can take advantage of Liv-ex’s collector offering, Cellar Watch.
The advent of the Liv-ex 100 Fine Wine Index in 2001 gave wine investors a tool to obtain market information about investment grade wine compared to other investment classes. The value of the index, which is calculated monthly, represents the price movement of 100 of the most sought-after fine wines. These wines have a strong secondary market. Not surprisingly, the majority of the wines in the index are red Bordeaux, which is a reflection of the overall market. Some wines from Burgundy, the Rhone, Champagne and Italy are also included. The index is calculated using Liv-ex midpoint prices from their trading platform, and the prices are then weighted to account for original production levels and increasing scarcity as the wine ages. For those investors seeking diversification the index has a very low correlation to the S&P 500, gold and the Dow Jones-UBS Commodities Index. That means adding wine to a portfolio may help insulate the portfolio from downturns that broadly affect those other markets.
There are a few rules of thumb from the stock market that don’t appear to apply to the fine wine market. The Wall Street adage of “sell in May and go away” is one case in point. An analysis of the results for over 20 years shows that price peaks in June, particularly for Bordeaux, at the height of the futures campaign when the latest vintage is purchased for delivery about two years later. Price then declines in the second half of the year and the market is at its weakest from September to December.
From its inception in July 2001 to the end of the year in 2011, the period for which the data is available, the performance of the Liv-ex 100 Index compares very favorably to that of all major non-fixed income asset classes. The annualized return for the Liv-ex 100 Index for that period is 11.3 percent, S&P 500 Index is 0.4 percent, S&P Small Cap 600 Index is 5.9 percent, MCFI-EAFE is 1.3 percent, MSCI-Emerging Markets Index is 11.3 percent, DJ-UBS Commodities Index is 12.9, gold (London PM Fix) is 18.3 percent, NARIT Equity REIT Index is 4.6 and DJ-CS Hedge Fund Index is 6.4 percent.
Recently, the Liv-ex 100 is only up 5.9 percent YTD as of April 30, 2013, compared to the S&P 500, which is up 12.1 percent.
If you are going to invest in wine as an asset class, do not follow your own taste. Invest in wines that have recognized quality and prestige. The wine must have a well-documented history of price appreciation over the last decade or so and be able to age at least a few decades.
Do not expect to turn a quick profit. Investment-grade wines appreciate in value as they age. First Growth Bordeaux, Châteaux Lafite Rothschild, Mouton Rothschild, Latour, Margaux and Haut Brion have provided good returns for centuries. Buy only in original wooden cases or original cardboard cartons. Of course, buying investment-grade wine is limited by the size of your budget. A sample of such wines is shown in the inset.
Whether the most sought after wines will remain relatively immune from a sharp downturn is not at all clear. Fine wines have not had the same high volatility as other investment classes. However, as is often stated in the financial markets, past performance is not necessarily a guide to future performance. Look before you leap. If things do not pan out, you can always drink the wine for enjoyment. That’s more than you can do with other investments that go sour.
If you have questions or comments about wine write to me at The Two River Times™ or email me at firstname.lastname@example.org.
Pick of the Bunch
2009 Château Margaux, Margaux ($1,200)
2009 Château Haut Brion, Pessac Léognan ($1,300)
2009 Château Mouton Rothschild, Pauillac ($1,300)
2009 Château Lafite Rothschild, Pauillac ($1,600)
2009 Château Cheval Blanc, Saint Emillion ($1,500)
2009 Château Pétrus, Pomerol ($3,500)