Fine wine investment: Buying smart
From time to time we get irate investors ranting on about some of their wines. What happens in the world of private investment is that people buy certain wines either because it seemed like a good idea at the time or because they were the victim of a potent sales pitch. When these punts, for that is essentially what they are, go wrong it is usually the fault of the market.
It’s not just fine wine, by the way. It’s anything, and without being patronising it tends to be because it is hard for amateurs (because that is what most people are) to do two key things: firstly, to adopt an investor’s psyche; secondly, to find out enough about what they are investing in. That is precisely why we go to such pains to try and educate about the fine wine market place, to make sure everyone’s expectations are to some degree rational, and to keep people in touch with what is going on.
Every day’s a school day of course and the professionals are learning too, hopefully. In our own case it’s taken us a while to understand as much as we now do about Penfolds Grange and Château d’Yquem, and wines from Australia and Sauternes are regular subjects of investor rant, albeit for somewhat different reasons.
Australian wines are the fine wine market equivalent of PPI, and I’m afraid we are now about to enter the dark world of mis-selling. Over the years we have had many people get in touch asking for bids for portfolios of Australian ‘investment grade’ wines which they had been sold by people who seem no longer to be answering the phone. To some degree this is actually quite a plausible ‘sell’, because the wines in question are at least ‘fine wines’, in so far as they improve over time as they age in the bottle.
There would be absolutely no issue at all should these wines have been sold for consumption, because stored appropriately they would indeed be wines for the connoisseur. The difficulty arises from an investment perspective at the point of potential sale: there is simply no secondary market worth the name. Let’s be clear. You can sell these wines, but you have to accept such derisory bids as 25 pence to 30p in the £. Those are not misprints.
The mantra is: if you can’t sell it (at a recognisable price), it’s NOT an investment.
But what have we here? One of the features accompanying the barren secondary market was the additional absence of anything even resembling a bid, and regular readers will remember our general caution in respect of many of the Burgundies whose last trade might have been about six years ago. Well now the Australian bid column is positively littered with numbers, but before we get too carried away it has to be acknowledged that these numbers are not recognisably competitive. Yet.
And this is the thing. We all know that the fine wine market is broadening out and has been on such a tack since the Bordeaux correction in 2011. Hundreds of clients ask us what we think the next breakthrough might be, and of course any answer has to be accompanied by a health warning because it is totally speculative. There are clues, however, from time to time, and a pretty big clue is getting action in the bid column even if, for the moment, the likelihood of any of them being hit is remote.
The reason the secondary market for wines from Burgundy is so sketchy is that there is such low production that they are scarce from the outset. If production were sufficient to give rise to the reasonable expectation of a secondary market in the right circumstances, one of the impediments is clearly removed. There are still obstacles ahead though, because the evidence is that it does not follow that the possibility of a secondary market makes it inevitable, even in time. Were that the case the jury would no longer be out for the expansion of the Australian sector.
We will be looking at this very closely in the coming weeks because any broadening of the tradable market is beneficial, and because there are likely to be bargains available along the way. Let us return briefly to Château d’Yquem. d’Yquem raises the hackles for a different reason to anything Australian. Here it is:
I think you could have been reasonably well excused for investing in Yquem 1996 back in 2011. Bordeaux had gone through the roof and Yquem 1996 had consolidated its rise up to 2009, more moderate a rise than red Bordeaux. Unfortunately it suffered too, although much less so on a relative basis but as it happens it fully participated in the recovery even reaching for an extra rung more recently. Here it is relative to the Liv-ex 1000:
‘What is the matter with that?’ went the cry. Well the fact is that there has been one single driver of price performance for Château d’Yquem over the last five years: relative value. Quality, as represented by critical appreciation, in and of itself has been irrelevant. And the problem with that is that a lot of investors bought the 100 pointers on the erstwhile sage and now discredited advice that you buy the best wines from the best producers. You don’t. You buy those offering the best relative value. As we are constantly at pains to stress.
Château d’Yquem doesn’t get much airtime because it stands somewhat alone in its sector. In a diversified portfolio there is a place for it, but it can be a frustratingly slow burn. The top pick right now is 2003.
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.