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.