Right Bank ‘bargains’ to be had

Moving as we are towards the first anniversary of the most recent bottom in the Liv-ex indices we are being asked a lot of perfectly understandable questions about both the longevity of the current run, and the way to play it from here. Do investors take their profits or increase the weighting of their “winners”? Are there any bargains still around?

Let us be very clear about this: Amphora believes that there is still a lot of energy behind this market. The indices will continue to go up, and participation in this bull phase is crucial after living through the consolidation, but we must all be alert to the switches within a portfolio which engineer returns over and above those enjoyed by the indices.

It is at times precisely like this that the algorithm we highlighted a couple of weeks ago comes into its own. Without a clear picture of relative value it almost becomes a game of chicken. “Can I hold on long enough to squeeze out the last vestige of the rally, and sell at the top?”

Sadly, of course, the investment graveyard is littered by people who tried to buy at the bottom and sell at the top. The reason for this is largely down to emotion. The investment game should be as devoid of emotion as you can make it, otherwise the decision-making process becomes cloudy. Not a good thing!

It is quite hard not to fall in love with your winners, although not as hard as not to despise your losers. Nobel prize winners have written screeds on this engaging topic, and one of the conclusions is that we humans are hard-wired such that the pain of losing is psychologically twice as powerful as the pleasure of winning. And into this synaptic maelstrom we throw the hope of making a few bob!

The best way to address this is to buy wines which represent good relative value then sell them when they reach a point at which you would no longer buy them. This is very different from avoiding wines which have gone up already.

Let’s take Angelus as an example. There is no reason not to have exposure to the Right Bank at this point, indeed we are probably still in a phase where we would be overweight in Bordeaux, and are therefore on the lookout for bargains, but what constitutes a bargain in this market?

The answer is not necessarily whatever is left unloved and unmoved on the shelf! Losers are usually losers for as reason. If we look at a few Angelus vintages from this century, for example, we find that the poorest performers since the referendum are 2004 and 2012, having risen only 6% and 7% respectively. That doesn’t necessarily make them bargains.

Even if we allow as an explanation for the 2012 recent underperformance the fact that it rose quite dramatically at the end of 2014 (and thus has already ‘done it’), we find that it is still underperforming against the 2011 on a two-year view:

So, the best performer over those three time scales is the 2011, yet it is still the vintage favoured by the algorithm.

Nor it is simply a case that the absolute price is the crucial determinant. One of the most expensive vintages this century is the 2010. It offers the best algorithmic score of all from this Chateau, despite having risen 18% over 6 months and 26% over a year, and despite being near the top of the scale in terms of absolute price.

The point of all of this is to reinforce the view that the appliance of a little bit of science when judging which wines to buy at particular times is likely to lead to improved performance.

Staying with St Emilion, then, which wines are currently most favoured by the algorithm? We have illustrated Angelus 2010 and 2011 already, but what of Pavie, Ausone and Cheval Blanc?

Pavie has three 100-pointers to its credit this century but the best relative value lies elsewhere. The 2003 scored 96 points and the 2008 scored 94+. Decent vintage scores, good individual wine scores, cheap in absolute terms, and one or two other vital ingredients combine to make these two the best bargains from this producer.

We have talked a lot in the past about Ausone, and what it is that prevents the market appreciating it more. Recent months have seen a big price move in vintages like 2000 and 2010, but according to our analysis the best value lies in the 2006 and the 2012. In fact anyone owning the 2010 would be well advised to sell it right now!

When Robert Parker last tasted the 2012 in April 2015 he accorded it 96+, calling it “one of the profound 2012s” and “a candidate for wine of the vintage”. At £4,100 it is cheaper in absolute terms than all but the 94 pointers from 2004 and 2007, and would be a top St Emilion recommendation for a recent vintage in a balanced portfolio.

Finally for the moment we come to Cheval Blanc, and what we find here is a good expression of why there have to be qualitative inputs to complement the quants. On the face of it the best score is again the 2012, but on closer inspection we find that the life expectancy of this wine is much shorter than, say, the Ausone. There are a lot of low-scoring Cheval Blancs since the Millennium, so this makes it more difficult for any particular one to stand out.

At Amphora we would argue that an investment in Cheval Blanc would be better placed in the 2005 or the 2000, both 100-pointers, the latter enjoying no particular “millennium premium”, and both at a sizeable discount to the also-perfect 2010. With many quantitative analyses it is as well to have this qualitative overlay, and the fine wine investment market is a good example of this. The algorithm does an enormous amount of screening for us but we always double check the conclusions to make recommendations as watertight as possible.

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 at Amphora Portfolio Managementv