News

Careful storage will ensure your liquid assets bear fruit

By Ella Lister 
FT.com
Feb 2011

Over the last decade fine wine has categorically staked its claim as a commodity worth investing in.

Its benchmark index, the Liv-ex 100, has grown 260 per cent since its launch in 2001. 2010 was a record-smashing year for fine wine, with the Liv-ex 50 index reaching 400 for the first time on December 29, and wine auction revenues almost double those of 2009. The numerous disenchanted bankers who have set up wine funds in recent years will not have been disappointed. In the world of wine investment, though, provenance is growing in importance, and anyone hoping for a return on their liquid assets should bear storage conditions in mind.

The much-hyped 2009 Bordeaux vintage was a major contributor to the unparalleled results of merchants and auction houses alike last year. Bordeaux still overwhelmingly dominates the fine wine industry, representing 95 per cent of trade on Liv-ex (compared with 89 per cent in 2009). With chateâux releasing their wines at prices which were, on average, more than 200 per cent higher than those of 2008, the investor has not seen the returns usually expected from en primeur purchases. Many wines are currently trading below their release prices, with only a handful having risen by more than 15 per cent (Carruades de Lafite by an astonishing 165 per cent). The astronomical release prices may not have served the end consumer well, but they have led to price hikes in back-vintages, the subject of much speculation by funds.

A limited supply

In a recently published IMF working paper entitled ‘A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?’, Serhan Cevik and Tahsin Saadi Sedik compared the demand patterns of these two very different commodities, placing wine firmly within the ranks of the world’s most sought after assets. Fine wine, like oil, is limited in supply, and like oil, once consumed, is worthless. While prospectors can seek out new territory, there is a finite area of classed Bordeaux vineyards and Burgundy Grands Crus. Furthermore, producers can manipulate pricing by further restricting supply, as many in Bordeaux and Champagne are known to do.

Add to limited supply the increase in demand from the mushrooming number of oenophiles in Asia, and you have a simple economic recipe for price escalation. Mr Cevik and Mr Sedik found that “while advanced economies account for more than half of global crude oil and wine consumption, emerging market economies make up the bulk of the incremental change in aggregate demand and therefore have a greater significance in determining price fluctuations”. With Hong Kong having overtaken New York in terms of wine auction revenues last year, achieving around £104m, the city has cemented its role as the Asian wine hub and, moreover, as the real underlying driver of the market.

Every one of Liv-ex’s indices rose to new highs in December 2010, and new records were achieved by auction houses throughout the last quarter. This unapologetic, unrelenting ascendancy has caused many a market commentator to warn of a bubble, with Liv-ex referring to 2010 price rises as “clearly unsustainable.” It is true that the last two years’ growth of the Liv-ex 100 has born little resemblance to the more sustainable 15 per cent CAGR (compound annual growth rate) of the last decade. Perhaps a correction is due, but with a population of 1.3bn potential Chinese wine drinkers waiting in the wings, there seems no reason to be overly fearful.

Mainland China is still a relatively underpenetrated market, whose burgeoning upper and middle classes look set to follow Hong Kong in wine appreciation terms. The Boston Consulting Group predicts that China’s “upper affluent” households will reach 12m by 2020 (from 1m in 2010) with the number of “middle” or “affluent” class households almost tripling in this time.

As a greater number of wines come to possess the same cachet as a must-have handbag or a pampered poodle, brand will increasingly dictate wine sales. Producers recognise this and are already exploiting the trend in China. Lafite Rothschild is to feature the lucky Mandarin symbol for eight on its 2008 bottling, while Mouton Rothschild commissioned Chinese artist Xu Lei to design its labels for this vintage, the announcements of which sparked 19 and 15 per cent price jumps respectively.

The canny wine investor will not only follow brands but will be a stickler for fine provenance. A wine’s value resides in the liquid asset, the prestige and, importantly, its condition. It is all very well to serve a first growth at a dinner party, but far from gratifying if the wine does not live up to expectations because it tastes like cardboard or worse. Research by ETS Laboratories found that exposure to a temperature of 30¢ªC or more for over 18 hours, or indeed high temperature volatility for a series of shorter periods, can be detrimental to the wine’s colour, clarity and taste. Low humidity, vibration and UV light can also adversely affect wine. It is, therefore, vital for an investor to ensure the careful shipment and storage of his wine, and, what is more, to be able to prove impeccable provenance when selling.

However, proving a wine’s historic treatment is nigh on impossible, absent such signs as seepage, ullage and protruding corks. These may only occur in quite extreme conditions, leaving the buyer to rely on more subjective clues. A general rule of thumb for any wine investor should be to acquire wine as close to source as possible. A wine purchased en primeur or ex-château is less likely to have been exposed to excessively hot or cold temperatures than a wine coming to auction, whose previous owners might be unidentifiable. Changing hands can be particularly treacherous for wine given the unpredictable nature of travel.

Of a sample of shipments from Bordeaux to worldwide destinations, eProvenance, a company offering RFID temperature-tracking technology to the wine industry, found that 6.8 per cent were subjected to temperatures above 30¢ªC.

Provenance pays

Heightened awareness in the industry means that provenance really does pay. Analysis of Farr Vintners’ online price list over the last three months has shown that the implied good storage of ex-château wine adds an average of 6 percent to the list price, whereas potentially poor treatment in the past leads to more significant discounts.

Wine that has travelled to the US and back suffers an average 15 per cent price cut as a result of its import labels. Signs of less-than-perfect storage, such as soiled, torn or damp-stained labels, trigger discounts averaging 18 per cent, despite not necessarily reflecting the condition of the wine itself (high humidity protects the cork from drying out).

It is well worth, then, ensuring that your wine is looked after, whether in the name of pleasure seeking or, especially, if you intend to sell it on. There is no point betting on continued Chinese demand and gaining a theoretical 15 per cent on your wine portfolio only to lose the same again through physically deteriorated stock.

Investors should look carefully for indications of provenance when purchasing wine; levels and label conditions should be documented in an auction catalogue or merchant’s price list. And to make sure the provenance, and thus value, is maintained, wine should be stored in cool, dark and damp warren-like conditions. After all, the Chinese Year of the Rabbit is around the corner, auguring caution and endurance.

Disclosure

We believe that investing in wine should be both enjoyable and profitable, but like any traded commodity there are risks and wine can go down in value as well as up. Neither Albany Portfolio Management or the wine market in general is regulated by the Financial Services Authority.

Registered in England and Wales company number 06817017

Registered office 2 Purbeck Road, Cambridge, CB2 8PF

Contact

Tel

+44 (0)20 7148 0411

Fax

+44 (0)20 7851 5599

54 Poland Street, London, W1F 7NJ

Email us

• Terms & Conditions
• Wine Links
• Web Design Brighton