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Investors pour into liquid assets

The returns on Château Lafite and Château Latour have outpaced the FTSE 100 over the past 12 months, prompting wine aficionados to add more bottles to their cellars instead of buying shares.

With just an estimated $3bn invested either directly or through listed and unlisted funds, fine wine remains a niche play. But it is attracting considerable attention from wealthy investors in Singapore, Hong Kong and Shanghai as well as the UK

Since May, the price of 2008 Château Lafite – a Bordeaux fine wine – has jumped 56 per cent from £2,240 a case to £3,500, while the 2000 now trades at more than £11,000 a case, up from £8,500 in January, according to Stacy-Lea Golding, investments director with Premier Cru, a wine investment company.

“I think it’s a prime opportunity to buy in,” she says. “Prices have been affected by the financial crisis – and we’re seeing sharp adjustments over short periods of time.”

Between January and June, Livex, the index of the top 100 investable wines, rose 3.3 per cent while the FTSE 100 returned 1.6 per cent. Long-term returns are even more impressive, with Livex gaining 115.5 per cent over the past five years compared with a 1.9 per cent return by the UK’s largest 100 companies.

“Demand from Asia has been sustaining the wine market,” reports Justin Gibbs, a director with Livex. “Certain wines are now hitting the pricing levels they saw in 2007, so people are comfortable buying in.”

Last month, Beijing saw its first fine wine auction, where two bottles of Château Lafite were sold for four times their estimate – at a 70 per cent premium to many UK merchants’ prices.

In Europe, prices have inched up steadily since October when Livex lost more than 12 per cent of its value in the wake of the collapse of Lehman Brothers. This may signal that the market has reached its bottom, say the industry bulls.

The size of the wine market has ballooned from $1bn to $3bn over the last decade, says Gibbs, with 20 funds springing up in response to growing demand.

Buying largely in Bordeaux, fund managers store investment-grade wine in bonded warehouses. Older vintages “nearing the end of their drinkable life” are avoided as are the riskier “primeur wines”, usually purchased before bottling and after fermentation. The recent rise of sterling against the euro has helped funds based in London to buy at favourable prices.

Andrew della Casa, director of The Wine Investment fund, said: “Although July and August are typically quiet in the wine trade, improving conditions should provide a base for a return in the longer run. I’d expect a 1 to 1.2 per cent per month growth rate by the end of the year.”

This month, della Casa’s fund opened a 17th tranche to investors. With a minimum investment of £10,000, the wine investment fund aims to generate double-digit annualised returns.

Wine funds appeal to novice investors who are more comfortable investing with the help of managers. The “unit trust” model also helps investors to spread their risks. But hefty fees, large investment minimums and the threat of redemption notices pose concern.

As a result, many investors prefer to stock their own cellars by buying directly from merchants.

“Investing in a cellar is just a lot more fun,” says Joss Fowler, a fine wine specialist with Berry Bros & Rudd, the London merchant. “Doing the research to buy your own wine is far more interesting and if everything goes terribly wrong, you still have a tangible asset which you own.”

Fowler says investors should focus on two factors when buying wine: quality and the label.

“You have to aim at the top and buy the very best,” he says. “In the past five years or so, we’ve seen this market open up and certain bottles are improving as they are aging and becoming scarcer, which makes them more valuable.” A case of Château Latour or Château Lafite could yield 10 to 15 per cent in a year, by Fowler’s estimates, but some periods can be slow.

About 18,000 cases of Château Lafite and 10,000 to 13,000 cases of Château Latour are bottled each year and the limited supply adds to their cachet, says Fowler.

“You can build more yachts and Rolls-Royces and dig more swimming pools, but it’s difficult to bottle certain Bordeaux vintages,” he says.

But while the number of funds has multiplied, their early success has been tempered. Within three years of its inception in 2003, the Vintage Wine fund was up 49.51 per cent. By the beginning of 2008, that figure had risen to 85 per cent. But now the Vintage Wine fund is up 23 per cent compared with 2003, while its value has shrunk from a high of €115m to €50m. Likewise, the Arch Fine Wine fund, launched at the start of last year, is down 23.8 per cent.

Falling values have been accompanied by redemptions, as a number of investors have made cash calls on their liquid assets to shore up their investment portfolios.

Last year, for example, Wine Asset Managers, which runs two funds for private and institutional investors, saw about 35 per cent of the portfolio redeemed.

While enthusiasm is growing, a clutch of advisers are still discouraging investors who are not oenophiles from buying into the sector. They say the costs of storage and insurance damp returns to a point where they are usually uneconomical.

“Wine is one of those things [like art and antiques] that requires a ‘greater fool’ to pay more for it than you paid, as it has no inherent return mechanism,” concludes Robert Lockie, an investment manager with Bloomsbury Financial Planning. “That’s not to say you can’t make money from it but it is hard to value. Its liquidity as an investment is variable and the costs of trading are relatively high.”

By Ellen Kelleher
FT.com
Published: July 17 2009
http://www.ft.com/cms/s/2/031ce4a2-72e8-11de-ad98-00144feabdc0.html