Wine investment: how to avoid the pitfalls
Investing in fine wine has recently hit the headlines for the wrong reasons, with some so-called wine investment managers proving to be at best incompetent and at worst corrupt, writes Rodney Birrell, director of The Wine Investment Fund (TWIF).
To help investors avoid the pitfalls in this market and to benefit from the positive characteristics of investing in this asset class, TWIF has developed an investor checklist and recommends that investors ensure that, whichever way they access the market (whether directly or through a fund), all these boxes are ticked.
TWIF is the pioneer of independent fine wine investment and is the market’s longest established fund, with average annualised net payouts of 8.9% since launch in 2003. TWIF’s managers also manage The Wine Enterprise Investment Scheme Limited, an enterprise investment scheme (EIS), with all its attendant fiscal benefits.
Follow TWIF’s investor checklist to avoid the market’s less scrupulous operators and uncork some fine returns….
1. Valuations of holdings are critical
Most of the recent problems in the market stem from over-ambitious valuations. Whoever is managing your wine should secure regular independent valuations from Liv-ex, the fine wine industry exchange, which is currently the only source of truly reliable pricing information.
2. Take physical possession
Make sure there is physical possession of all wines purchased and that the wines are stored in a UK government bonded warehouse. If in doubt, ask to visit the warehouse to view the wines. The wine should be fully insured at replacement value.
3. There should be no conflicts of interest
The interests of the investment manager or investment adviser should be aligned with those of the investor. This would not be the case if wines are purchased through a merchant, for example, as a merchant’s interest lies in making as large a margin as possible on the trading of their wine stock – to the obvious disadvantage of an investor. The manager/adviser should have no business other than that of managing wine investments.
The manager/adviser should also have an experienced team, not just one or two individuals – which creates key-person risk. The adviser should have a published track record of at least five years (the minimum required by institutional investors), and a complete record – not merely examples of isolated wines which have performed well. Finally, the manager should have a clearly defined investment process – not simply an investment approach with a “fun” or “if all goes wrong we can drink the assets” attitude.
5. Invest in “liquid” wines
In other words, wines with sufficient liquidity and volume of supply, and wines with well-established track records. The risk profile of an investment can rise considerably if the wine portfolio contains less liquid wines (i.e. those outside the top châteaux of Bordeaux), very young or en primeur wines, wines older than around 25 years, and wines not in standard size bottles (75cl or 150cl).
6. Check the premises
Check that the adviser has a genuine physical office – not a ‘virtual’/serviced address with only mail forwarding and call answering services. Visit the office if possible.
7. Avoid any cold calling and unsolicited mail
Not only is this bad practice, but it is also very likely to be illegal. For instance, in the UK, there are regulations preventing the promotion of an investment in fine wine to the general public. Avoid any firms making promises of guaranteed returns.
8. Check costs
All costs associated with the investment, including the costs of buying and selling the wines and the redemption and management of the holdings, should be clear and transparent from the outset of any investment period. Charges should not exceed the industry norm of 5% up front or subscription fee, plus 1.5% annual management fee and 20% performance fee on net returns above the high watermark.
9. Check whatever documentation is provided.
If looking at a fund, there should be an information memorandum issued by a firm authorised and regulated by the Financial Conduct Authority (FCA) in the UK (or similar regulatory body operating in other jurisdictions). There must be a transparent legal structure, with recognised lawyers and auditors named in the information memorandum and all costs and expenses (including management and performance fees) should be clearly set out.
Marketing should concentrate on the benefits of fine wine providing diversification to an investment portfolio. If investing through an enterprise investment scheme (EIS), although there may be attractive fiscal benefits, the fiscal “tail” should not wag the investment “dog”. Fine wine has the attractive historical properties of high average returns, relatively low volatility and very low correlation to equities under most conditions – so that many portfolios would benefit from the inclusion of a wine holding. However, without care in approaching the market, any holdings may be doomed to underperform from the outset.