Fine wine investment: Taking pot shots

We have had an increasing number of people come through to us recently wondering whether they are doing it right. Maybe this is a consequence of the market being flat for a year or so, and there has been negligible movement in the valuations of their portfolios.

At this point it is important to say that no matter how ‘correctly’ you manage your money there will always be periods when you are disappointed by the lack of performance. That is because markets don’t go up in a straight line and because no-one has a crystal ball to identify sectoral ebbs and flows ahead of time.

The point of taking a coherent approach to investing is simply to give yourself the best chance of making a better return, but it is inevitably a game of winners and losers and most sensible advisers will be aiming simply to have more winners than losers. It is nigh on impossible to eradicate the losers completely, but it is very easy to end up with a lot of them if you don’t really know what you are doing. There is a good reason why people who buy wine end up with a lot of losers.

The key to it all is the set-up. Anyone who has ever tried to master the game of golf will have been told that without the right set-up they are destined for a life of frustration on the course, yet for reasons best known to themselves a lot of players fail to get to grips with how they should hold the club and address the ball; in consequence they decorate their game with all manner of unusual shots and their scorecard with endless colourful numbers, forever wondering what is going wrong.

Of course there is nothing wrong with having a game of crazy golf with the family but that is a far cry from doing yourself justice in the monthly medal, and some of the portfolios we see are far more akin to the former than the latter. It tends to result from how you embarked on your journey: how you approached your ‘set-up’.

There is no shame in having drifted into fine wine investment because that is how many people end up with a portfolio. Typically someone will read or hear about how well fine wine prices are doing and will take the ‘safe option’ of embarking on a relationship with one of the larger merchants. In the immortal words of Paul McCartney, “that was your first mistake”.

Merchants do a wonderful job and have been doing so for years. They lubricate the market, if you’ll pardon the pun, but their market is not the investor’s market. It is the consumer’s market. It isn’t even the collector’s market, and the reason is perfectly simple: they are ‘on risk’. Everything a merchant buys is bought for the sole purpose of being sold on, and their solvency depends on their being able to sell at a higher price than they paid.

Amphora clients and regular readers will be very familiar with what follows and we hope will forgive the repetition, but as long as we receive portfolios which are inappropriate for investment because they originate from a merchant’s advice I’m afraid we will have to continue to beat this drum.

Merchants’ warehouses are full of wine which will not stay on the shelf for too long. Imagine it was bought with money borrowed from a bank. Most businesses operate off the back of money which they don’t own, and this is why banks exist. If you took out a loan to buy something you have two objectives: to repay the loan, and to make money by selling what you bought with the loan at a higher price. Businesses tend not to be charities, so the more money they make in the process the happier they are.

Thus merchants have a conflict of interest when dealing with investors, with which as the owners of all the portfolios we’ve seen recently have become acutely aware, they seem perfectly comfortable. They tend to cloud the issue by, at best, educating their customers about the delights of excellent wines, and having lovely dinners in oak-panelled rooms. At worst they just tell people they are offering investment advice, which of course they aren’t.

It does not constitute investment advice to tell someone to buy fine wine and lay it down for years in the hope of making a few bob. That is just telling people that fine wine tends to appreciate in value as it ages, so we’ll sell you a case for £300 (which we bought for £250) and charge you £15 a year storage* while it ‘appreciates in value’. Hey presto! Over 10 years the value has gone up to, let’s say £500. In effect after paying £150 storage you’ve turned £450 into £500.

But no you haven’t. Because you now want to sell it. You’ve forgotten that the merchant is ‘on risk’ and therefore has to make his turn (so he can repay the bank and make a few bob as he does so), as a result although the ‘value’ is £500, that is what the merchant can get for it, so he’s only going to give you £450, and now your return is down to £0. It’s great for him of course. You’ve stored the wine on his behalf for 10 years while it has improved with age, and you’ve paid him storage charges for the privilege!

The fact that you are not out of pocket at all is entirely down to the market, and the underlying dynamic as it pertains to fine wine. It is not because you have received good investment advice. Now there is an additional difficulty of which the above example fails to take account. A lot of the wines which constitute merchant-inspired ‘investment portfolios’ struggle in secondary market terms. They are fabulous drinking wines, no doubt, but if the secondary market barely exists they will a) not rise so much in the first place, because demand is not driving up the price, and b) be harder to sell, so the price you will receive from the merchant when you want to sell will be even lower.

Let’s be clear: we are not having a go at merchants. They fulfil a vital function bringing wine to the market in the first place. We just believe that over time certain important boundaries have been obscured and the inherent conflict of interest when a merchant engages with a client on an investment basis is a pretty significant one. If you want to learn about wine and have your tummy tickled while not worrying too much about making money, head for as big a merchant as you can find; but if you are aiming for investment return as a priority, go back to your set-up.

* (N.B. Storage charges aren’t by any means fixed at £15 per annum. Occasionally less and mostly more.)

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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