Fine Wine Investment

Market Performance

Price Stability

Fine wine has proved itself to have low volatility over the medium to long-term; this stability is a key attraction of investment in fine wine. That price stability lies in the law of supply and demand.

Fine wine is produced in very limited quantities. There are currently only 250 or so investment grade wines globally. Each vintage is unique and fine wine increases in quality and complexity as it ages. Once drunk the wine can never be replaced. So values increase with reducing supply and increasing quality; this is the defining characteristic of fine wine.

This combination of diminishing supply, combined with increasing desirability leads to upward pressure on prices. The effect will be amplified as new collectors and investors come into the market, particularly in the increasingly affluent East.

Wine bottles

Prices over the last 15 years

The price of fine wine is based on an inverse supply curve; decreasing supply (wine is drunk) results in increasing demand (and prices), combined with a natural appreciation in value as wine improves with age in the bottle.

The returns on fine wine over the past decade-and-a-half can be illustrated by figures produced by Liv-ex (The London International Vintners Exchange). It was founded as an exchange for investment-grade wine and a source of market data.

Since July 2001 the return on two key Liv-ex indices reflecting prices of the top 50 and 1,000 wines respectively are:

Comparison

This compares very favourably with returns on equities and gold over the same period:

Another key index is the Wine Owners Bordeaux Index. Returns on the top wines of Bordeaux are 190% over the last 10 years.

The Wine Owners Blue Chip Burgundy Index

Blue Chip Burgundy Index

These indices illustrate two points. The first is that fine wine has performed very well against other indices in the medium to long-term. The second is that the 50 finest wines making up the Liv-ex 50 index have outperformed the wider fine wine market and a larger basket of top Bordeaux wines.

A store of value for “patient” capital

Modern portfolio theory suggests that the less an asset moves with the market, the smaller should be the expected return. In recent years, however, investments in fine wine have offered the best of both worlds: low correlations and high returns.

In August 2014, Forbes reported that in the 10 years to 2013, a diverse portfolio of investment grade wines would have returned 13.62%, more than double that of the S&P 500.25. In relation to returns though, the last ten years have shown that significant price corrections can occur, making fine wine not suited to short-term investors.

Wine prices, and those of Bordeaux in particular, were hit by substantial price corrections in 2008 and 2011. The first followed a price bubble over a two year bull run during which the Liv-ex 100 had increased by a staggering 76%. This was caused in part by easy money supply and low interest rates, but especially by rapidly increasing demand in China (particularly for Chateau Lafite) and the higher en primeur prices which followed. The second was a reaction to the downturn in the global economy.

Notwithstanding these particular factors, and unlike most stock exchange indices, the top fine wines never fell below the values quoted by Liv-ex when it launched in 2002. In fact over the longer-term, returns on fine wine investments have fared better than equities, and have offered a positive absolute return over every 5-year holding period since 2004.

The average 5 year forward performance of the Liv-ex 1000 since 2004 is approximately 74%. This outperforms the returns on equities over the same period by some 34% (based on the MSCI AC World index).

Fine wine therefore offers a chance for the high net worth individual (HNWI) to diversify into an asset class that offers mitigation of risk, particularly as price fluctuations of fine wine show a low correlation (15%) with the price movements in other markets, and in particular, equity and bond markets.

The opportunity to store value in a once niche investment market is becoming more significant. Globally annual activity in the fine wine market is now estimated at between $6–$8 billion.