December 11, 2012
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For many investors, an ideal asset class would combine superior long-term absolute and risk-adjusted returns with a hedge against inflation and stock market volatility. There’s a way to get all of that, in an asset class you might never have thought of until now: fine wine. Investment-grade wine deserves careful consideration, particularly now that – unlike other collectibles, such as art and rare books – it can be traded on a regulated exchange.
People have been purchasing fine wine for investment for more than 150 years. The practice originated with the British, Dutch and the French. Only recently, however, has it become possible to do an in-depth comparative analysis of the investment-grade wine market versus other asset classes – sufficient market information only became available after the creation of the London International Vintner’s Exchange (“Liv-ex”) in 1999 and the subsequent publication of the Liv-ex Fine Wine Investables and Liv-ex 100 indices in 2001.
I’ll review what we’ve learned about the advantages and risks of fine-wine investing over the last two decades, but first it’s helpful to understand the basics of what is – and isn’t – a part of the investment-grade wine market.
The wine market: An overview
When examining fine wine as an investment, there are two threshold questions that an investor must answer: “What constitutes an investment-grade wine?” and “How do you define the investment-grade wine market?”
The vast majority of the world’s wine is not suitable for investment. Short longevity, poor quality, and large production volume makes meaningful price appreciation impossible. Investment-grade wines make up less than 1% of the global wine market, with approximately 80% coming from Bordeaux. The remaining 20% comes from the top producers in Burgundy, the Rhone Valley, Champagne, and from Tuscany and Piedmont in northern Italy.
The characteristics that define an investment-grade wine are:
Pedigree – The wine must be produced by a chateau, domaine or a producer whose name is synonymous with quality and prestige.
Longevity – The wine must be able to age for at least 25 years, with maturity (peak value) occurring no earlier than the 10th year.
Price appreciation – The wine must have a consistent and documented history of substantial price appreciation, spanning a decade or more.
Liquidity – The wine must be made in sufficient quantities so that it can be bought and sold on the secondary market.
High critical acclaim – The wine typically must have been given an excellent review by one or more of the principal worldwide wine critics, such as Robert Parker, Wine Spectator, James Suckling or Jancis Robinson.
Drivers of investment-grade wine prices
The main driver of prices is a persistent imbalance between supply and demand within the investment-grade wine market. This imbalance makes investment-grade wine a good investment and it arises from the following factors:
- The supply of investment-grade wine is severely constrained by limited production. This constraint is primarily a result of a restrictive classification system and zoning laws imposed on the top producers in Bordeaux and Burgundy.
- Worldwide demand for the top investment-grade wines has significantly increased over the last decade, thanks to the emergence of the “new wealthy” who want to own theses wines in China, Russia and other emerging markets.
- Fine wine improves with age, thereby becoming more attractive and valuable as it matures.
- As fine wine ages, it begins to be consumed, which increases both its scarcity and demand.
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