Fine wine investment: There’s something about Margaux

Every so often, in the staid old world of fine wine production, someone wakes up with a start. “I know,” they say. “Let’s put it in a different bottle this year.” Of course the unusual thing about Mouton is that they have a different label every year, and it is always quite exciting seeing what they are going to come up with next. Prince Charles has designed one, Picasso another, all manner of famous people in fact, but until very recently they had the monopoly on the egregiously priced ‘limited edition’.

I refer, you will not be surprised to learn, to the Mouton 2000. The millennium vintage was spectacular in Bordeaux, without a doubt, and there are a fair few 100-pointers, and the combination has engineered a tidy premium for many of these wines, but by a considerable margin Mouton Rothschild tops the lot. And it isn’t even a perfect wine. Scoring 96+ it lags behind several of its own stable (the 100-pointers from 1982 and 1986 for example, which cost a fraction of the price), but then it has ‘the bottle’.

In light of this it is moderately surprising that other producers haven’t pulled the same move more often. Angélus (and Pavie) celebrated its elevation to Grand Cru Classé A status by revealing a different bottle in 2012, but unfortunately it was such a disappointing vintage after 2009 and 2010 that it failed to attract a great deal of attention. That said it is the third least attractive buy on the Amphora proprietary algorithm behind the 2005 and the 2001 so it does actually trade slightly ahead of itself.

But now we have Margaux 2015. Widely considered the “wine of the vintage” it was released in June 2016 at just over £4,000 per case, and it participated in the warming sentiment towards the market rising to the £7,000 mark by November last year. Château Margaux then announced that it would be creating a different bottle when the wine becomes physical in early 2018, to celebrate the passing of distinguished winemaker and estate director Paul Pontallier, since which time it has skyrocketed to £12,800, leaving the 100 pointers from 1990 and 1996 in its wake.

It is important to point out that trading en primeur is not as straightforward as trading physical cases. When people buy en primeur they are effectively taking out a contract with the vendor, usually a négociant or merchant, obliging the latter to deliver, once the wine goes into bottle. This is all perfectly straightforward unless the vendor goes bust and fails to meet its obligations, or if the buyer wants to trade on their “rights”.

The owner of these en primeur rights can theoretically sell on to another party, but the audit trail must be kept reasonably short because it has to lead back as clearly as possible to the original vendor, who won’t want several “claimants” pitching up for the same case. Under most circumstances when trading in en primeur is active, it is people selling back to the merchant from whom they bought.

If a négociant has sold en primeur to a British merchant, let’s say, then it has a responsibility to that merchant to deliver the eventually bottled wine. Whatever happens after this initial “futures” transaction, it is in the merchant’s best interests to be able to control matters until they have taken physical delivery. If it sells to client A, for example, then buy back from client A (while the wine is still en primeur), and sell in turn to client B, they retain control. If, however, client A sells to some random party with whom the merchant has no relationship then it can become messy.

All of which makes what is happening to Margaux 2015 right now very interesting indeed.

Clearly someone in the market is very keen to lay their hands on the stuff, before it goes physical. From a market analyst’s perspective, to make a judgement on whether a move is sustainable or not, it is helpful to have a sense of the volumes being transacted, and if it is difficult to achieve this in the physical market it is nigh on impossible during the en primeur phase.

To return to Mouton 2000 for a moment, we can rant and rave as much as we like about how wrong we think the price might be, but it matters not a jot because there is an active market at the price. It has stood the test of time. We can even suggest that we think Domaine de la Romanée-Conti a tad toppy but there is usually someone happy to pay the price, provided you know where to look. In these cases there is a perfectly good argument that the market is always right, whether you happen to agree with it or not.

What is not yet clear about Margaux 2015 is whether the price it is trading at currently is a fair reflection of market forces at work, or something akin to 2011, when predominantly Asian-based speculators drove many prices up to unsustainable levels in the mistaken belief that buyers would always be there. What is also uncertain is what the critics will opine when it goes into bottle, in the next couple of months.

At present Neal Martin is sitting on a 98-100 point range. As we see from the chart above, Margaux 2015 at £12,800 is already way above even the 100 pointers of 1996 and 1990, in fact it is difficult to find a Margaux quite as expensive. It is hard to escape the conclusion that 100 points is the minimum that is priced in, so what might befall if it comes in at 98? Perhaps as with Mouton 2000 the critics’ score is irrelevant in this instance.

We await developments with baited breath, mindful of the cautionary tale of Lafite 2008. Lafite added an embossed Chinese figure of ‘8’ to its bottle that year, in deference to the new consumer on the block. It certainly acted as an inducement to buyers. Unfortunately it did not act as a deterrent to sellers:

We don’t yet know how all this turns out, obviously, but one of the options is that Margaux 2015 retains its premium, due to the market’s perception of the importance of Paul Pontallier. Another is that it “does a Lafite 2008”. Either way it will have the usual crowd moaning about the failings of fine wine as an investment, when in fact this is a perfect expression of market forces at work. We simply don’t know the exact nature of those forces at this juncture. If you can’t understand this we recommend you stay away, and leave the field to those of us who find it endlessly fascinating.

Philip Staveley is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition with Amphora.