CFA Institute
Investing in Fine Wine: How to Put a Price on Passion Assets
Overview
Few investments invoke the kind of passion that accompanies fine wine. But whether buyers are motivated by status, long-term returns – or even by their own consumption – they can benefit from understanding the value of the bottles they purchase.
Unlike stocks, bonds and other traditional assets, passion assets hold personal or emotional value beyond their monetary worth. Several passion assets are considered capable of providing an investment return: art, antiques, vintage cars, jewellery, and luxury handbags and watches. But arguably the most investable is fine wine, thanks to the rich stream of data surrounding it that can now be accessed easily online, from tasting notes, reviews and ratings to weather patterns and harvest volumes in the coveted producing regions of Bordeaux and Burgundy in France.
Investing in fine wine has become much more accessible since the arrival of search engines and online marketplaces like Wine-Searcher and Liv-ex (the London International Vintners Exchange) during the 1999-2000 dotcom era, providing transparent, real-time, standardized price information for the first time. Online platforms also provide a new way to trade on the secondary market, supplementing the traditional avenues provided by auctions, brokers and merchants.
“Twenty-five years ago, if you were investing in wine, it was probably because you liked it and could absorb the inefficiencies associated with it,” said Joe Alim, Managing Director – Asia at wine investment platform Cult Wines. “Part of the appeal may have been that it was difficult to access and not necessarily always available to everyone. Fast forward to today, and it is available to everyone.”
How Does a Good Wine Become a Great Investment?
Fine wine, like other passion assets, can behave as a Veblen good. That is, demand for it can increase as its price rises.
Arguably above all else in determining the value of passion assets is exclusivity and rarity. The most expensive bottle of wine ever sold, a bottle of 1945 Romanée-Conti sold at a Sotheby’s sale in 2018, fetched USD558,000. It was one of only 600 bottles produced that year, of which hardly any are left. That year’s supply was curtailed by hail and frost, though overall hot conditions made the wine super-concentrated. And because the vineyard was replanted after the harvest, the next vintage of Romanée-Conti was 1952.
“As fine wine ages, it tends to become more desirable,” said Alim. “But people start consuming it as soon as it is released to the market, meaning that as it becomes more desirable, it also becomes more scarce.”
Over time, the bitter tannins in red wine tend to soften, polymerizing to form a more silky texture. Higher tannin levels are associated with higher quality wine, which become more complex as they age. By holding onto a fine wine, an investor could thereby see its value appreciate over time.
In any case, “the finer the wine, the longer it usually takes before it's ready to drink,” pointed out Nick Pegna, Global Head of Wine & Spirits at Sotheby’s. The best returns are generally achieved by buying such wine early and storing it – known as “laying down” – until it is considered ready to drink.
Better With Age – Up to a Point
Even the finest wine will eventually go bad. The interval between when a wine is ready to drink and when it starts to go downhill is known as its drinking window (see Figure 1). Fine wine not only tends to have much longer drinking windows than cheaper wine, but it also generally takes considerably longer to reach its optimum drinking stage. Bordeaux wine, for example, usually needs to be aged at least 10 years until it is ready to drink, after which time the best ones can even be stored for more than 100 years, though most will start to decline after 50.
In addition to scarcity, exclusivity, age and maturation, there are five other main factors the can help evaluate and predict a fine wine’s price trends:
- Quality and reputation of the region and vineyard the wine is from – identifying emerging fine wine regions early can be rewarding for collectors.
- Prestige and track record of the wine producer.
- Variation in vintage, such as weather conditions and harvest timing, which influence taste and quality.
- Critic ratings and reviews, especially from authoritative sources like Wine Spectator or Wine Advocate.
- Market demand and trends, including macroeconomic factors, shifting consumer preferences and emergence of new markets such as China.
From Taking a Sip to Taking a Punt
According to Pegna, most wine investors start out as avid consumers. When they see how the wine they bought to lay down may have appreciated, many get a taste for wine investing.
There are, however, people who are drawn to wine investing purely in search of investment returns, according to Hilary Green, Director at Curated Wine Collections. “I do have people who don't know their Cabernet Sauvignon from their Sauvignon Blanc,” she said.
The most sought-after investment assets can produce high percentage returns over time. But their rarity value also makes them harder to buy.
“You need to have a relationship with the merchant who is tasked by the producer to offer the wine to the market. Those relationships are earned over years and hundreds of thousands of pounds spent,” said Green. “You can't just buy Domaine de la Romanée-Conti from Corney & Barrow en primeur just because you read about it in the Financial Times.”
En primeur essentially refers to the system of purchasing wine before it is bottled, while it is being aged for 18-24 months in oak barrels. “Historically, the chateaux were family-owned and would sell their wine at a discount to the market before it was finished to generate cash flow while they were waiting for it to age,” said Alim.
“That system still exists today, even though things are very different now, with a lot of the chateaux owned by conglomerates like LVMH and wealthy billionaire families, making that cash flow no longer necessary.”
Once bottled, Pegna recommends that investors purchase wine through reputable brokers and keep it in bonded warehouses. This is usually more tax efficient and also provides a paper trail proving the wine has been stored in optimum conditions. The alternative is for collectors to start their own wine cellars, which can typically cost up to USD15,000, with additional insurance and running costs.
Tempering Expectations
As with all investment assets, returns on wine are far from guaranteed. After all, media reports highlighting wine’s appeal as a lucrative investment with low correlation to traditional assets are based on a rather limited data set. Most rely on the Liv-ex 100 Index of the 100 most sought-after wines on the secondary market, which was only launched in 2004 (See Figure 2).
Since October 2022, fine wine indices are no longer outperforming financial indices (see Figure 3). Therefore, whether wine is seen as outperforming equities depends largely on when the comparison is made. And it is difficult to test the performance or hedging properties of wine in the period prior to Liv-ex because there was no accepted benchmark for prices.
One of the best attempts to study wine’s long-term performance against other asset classes uses – admittedly non-standardized – sales data from 1900 to 2012 provided by leading wine merchant Berry Bros. & Rudd and auction house Christie's.
The study found that wine underperformed UK equities during the period (see Figure 4), and that wine appreciation was positively correlated with stock market returns.
Know Your Exit
Fine wine's recent price performance is easier to stomach if people are holding wine that they are happy to drink themselves, said Pegna.
“If you love wine, and you're buying things you're interested in and prepared to drink, it gives you that exit route,” he said.
At the same time, Pegna stressed the need for investors to exercise discipline in avoiding the temptation to consume the wine they plan to sell. “By dint of collecting and owning them for so long, they often end up not wanting to sell them,” he said.
For those that do plan to sell, it is important to note that fine wine remains a decidedly illiquid asset, so they should be willing to wait several months to get a good price.
As wine investing spreads, however, it could well become easier to exit.
“When I started in the business, it was mainly – I sort of hate saying it – older white men. It was quite a closed group, with exclusive, invite-only tastings,” said Green.
“Now you can see the market has become much more open, inclusive and sociable than it was 15 years ago. The arrival of bricks-and-mortar wine clubs and wine oriented restaurants where people can socialise are changing the way wine lovers and professionals gather and network – not to mention the breaking down of barriers in wine on social media platforms such as Instagram.”
At the end of the day, wine is much more than an investment product. It is a social lubricant which facilitates discourse and development of social relationships. “Bottles are for sharing. It's a passion that promotes conviviality,” said Pegna.
Those looking to dive headfirst into the asset class would do well to think about passion before profit. “If you’re really going to get into wine, I think that there has to be an element of falling in love with it at the same time,” said Green.
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