Fine wine investment: Risk and reward

Back in November we highlighted several Bordeaux wines from 2014 as well worth a second look, and because the market has been consolidating over this time, some of these bargains are still around.

One of the questions that came back to us last time focused on the prior outperformance of some of the recommendations: “If Margaux is up 40% over two years against the Liv-ex 100 rise of 23%, then surely it isn’t a buy at this point?” for example.

What happens in most markets is that rising asset prices tend to lead to bouts of profit-taking, but those taking short term profits are often short term investors. They will bag their gain and move on to the next ‘bargain’, assuming they can find it. This answers the seeming contradiction between investors who allow their profits to run, and those who pocket them. The investment approach merely differs as to term.

Very few investments go up in a straight line, and the activity described above is often the reason why. The fact is, however, that you have to be incredibly on the ball to undertake the shorter term approach, and the market you are trading in has to allow for it, in respect of trading volumes and volatility. You can’t make money diving in and out of a market that moves relatively slowly, and on thin-ish volumes.

There is another vital factor to take account of and it concerns spreads. If spreads are tiny, as they often are in markets which trade enormous volumes, a short term approach is facilitated. If volumes are light, the result is wider spreads, because market-makers are less comfortable with the risk of being left with the stock, and this brings us to the fine wine market.

Here the merchants are de facto market-makers, although there are others like BI which fulfil the role too, and what you find is that they are all much happier to take on risk when the market is moving ahead nicely. Under these circumstances spreads narrow, but are rarely less than 5%, and often nearer 10%, and this all but prohibits the short term trading approach.

In a period like 2012 to 2014, for example, there is such a reluctance to take on risk that spreads balloon out to 20% and more, and this even inhibits longer term players, as a result of which the market drifts aimlessly on decreasing volumes. It is worth noting that higher spreads at all times affect that current darling of the market, Burgundy, but at least with Burgundy the buyers are out there. It is just a matter of finding them.

The same cannot be said, unfortunately, for a lot of fine wines which qualify admirably on quality but fail miserably on marketability. At Amphora we field plenty of queries about wines like Astralis, for example, which have been sold to unsuspecting buyers as fabulous investments, when they aren’t investments at all. A wine for which you would be lucky to get a bid of around 50p in the pound simply can’t populate an investment portfolio.

We also receive endless enquiries from market participants wondering whether such and such wine might be the next big thing, and unfortunately the answer is always the same. Yes, it might, but what if it isn’t? The risk/reward dilemma in a nutshell.

What we favour as investment advisers is proof of marketability. If there weren’t relative value bargains galore we might change our approach, but as it happens there are, and this brings us back to the 2014 vintage.

With the exception of the Pomerol appellation there are good wines at attractive prices to be found on both sides of the river. Some of these, like Margaux and Haut-Brion at the first growth end, and Ducru Beaucaillou among the Super Seconds, have appreciated 40% or so from en primeur. To our way of thinking that is wonderful for people who bought at that time, but these guys have had a year of physically available secondary market activity now in which to sell should they have chosen to do so.

We strongly argue that just because a wine has appreciated 40% in two years that does not, in itself, make it a sell. It may simply have turned out to be an amazing deal first up. We have remarked on the en primeur market many times in the past, and will do so again shortly when more producers reveal their hand, so we will leave the whys and wherefores of initial pricing for the moment.

A wine is good or bad value in this market place relative both to other vintages from the same producer, and to all other readily available wines in the market. It is more complicated to compare prices across the whole piece, which is precisely what the Amphora proprietary algorithm does. It is much easier to spot good deals relative to ‘sister wines’ (same producer, different vintage).

The following 2014s are great buys however you choose to view it:

Haut-Brion; Margaux; Mission Haut Brion; Ducru Beaucaillou; Lynch Bages; Cos d’Estournel; Cheval Blanc; Pavie.

Go buy them.

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.

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