Fine wine investment: Risk-weighting
Liv-ex recently undertook its annual flagellation of esteemed members, under the banner: ‘Fine wine prices in 2019: merchants’ predictions vs reality’.
It is to be hoped anyone not in need of a giggle looked no further than the headline. Why do this to themselves, you might ask?
Well they do exactly the same in mainstream markets, with exactly the same results. No matter how much an investment bank pays its global strategist there always seems to be a copious amount of egg on faces.
Nor are we at Amphora about to argue that we would do any better, because it is an impossible task. The trouble is, some people do actually take notice of it all. Investors have their favourite pundits, and the better of those pundits stick to simple explanations of what has just happened, and why, and what the variety of outlooks might look like, and the strategies you might use to play them. It is seldom wise to bet the farm on a forecast, which is why we advocate a risk-weighted approach.
Some advisers plug the ‘dog of the previous year’, an approach which has a decent record of success, provided the dog in question has underperformed for market reasons, as opposed to malfeasance.
This policy might be seen as the direct opposite of that taken by Liv-ex members in the above survey who forecast that Burgundy would be the best performing sector last year, when it turned out to be the worst.
You might think that this is why we are currently warming towards Bordeaux, which has had a quiet couple of years following its rally from the end of 2015, and up to a point you would be right.
The picture in the fine wine market is somewhat more complex though, because the market has had a decade of almost constant evolution, and this has come at a cost to Bordeaux.
The reason is that up until about 2010/2011 there was little else to invest in. Bordeaux wines had a grip on the market as a result both of familiarity and marketability. A lot of the US and Italian producers, for example, had insufficient history and established pedigree prior to that.
The skyrocketing prices for Bordeaux wines up to June 2011 helped establish both the concept of fine wine as an investable, and the possibility that what held for Bordeaux might also hold for Tuscany, Napa Valley, and most extravagantly over the last five years, Burgundy.
As the market evolves in this way there is always the temptation to wonder where the spotlight might fall next, a topic we have explored in some detail in the past, and which is never far from our attention, but what does this all mean for Bordeaux? Is it now destined to be the perennial bridesmaid as the market pursues its expansionary phase?
Let’s consider the expansionary phase first. The thing about these new kids on the block is that they simply haven’t been produced in sufficient quantities to absorb all the potential interest. Masseto’s production levels are on a par with Petrus, as are the Monfortinos. There is a crucial difference, however, in so far as Bordeaux wines are effectively restricted by statute from producing any more. In Italy there are only restrictions on DOC accredited wines.
This is different from the Super Tuscans, which are IGT apart from Sassicaia (granted its own subzone in 1994 and DOC in 2013), indeed from most wines made outside of Bordeaux. The only thing which restricts non-Bordeaux wine production, in theory, is the size of the vineyard.
There are restrictions as to grape and geography but that’s basically it. Obviously the winemakers aren’t going to use inferior grapes or cut corners on production techniques, but all other things being equal there is nothing to prohibit an increase in availability.
Fine wine investors are very well aware that diminishing availability accompanied by increasing desirability as the wine improves as it ages are the cornerstones of the investment dynamic. It is a distinguishing feature of Bordeaux wines that production levels cannot be increased, and we believe this singular fact is likely to bring the spotlight back round to that region in due course.
The consequence of these ruminations is the consideration of weightings. For the last couple of years you would have outperformed had you underweighted Bordeaux, but you would have wanted to be overweight in the two years prior to that. Yet no-one can safely argue that this is a trader’s paradise, because transactions costs are high as a result of the underlying asset being physical.
How, therefore, to play it? In a mainstream market most investors are advised to keep dealing costs to a minimum, and most advisers advocate regular tailoring but irregular major surgery. At Amphora we would suggest that you can happily forget the tailoring, and to make major portfolio switches only when there is high conviction. Currently we are warming towards Bordeaux, but think there is still mileage elsewhere. As we move into 2020 we expect to be able to signal a more major move back towards the Right and Left banks.
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.