Investing In Vintage

The case for fine wine in client portfolios

by Nick King

For years, Ultra High Net Worth (UHNW) investors have allocated roughly 5 percent of their portfolios to collectible assets like fine wine to efficiently diversify their holdings. The challenge for those not in the UHNW category and their advisors has been inaccessibility given high prices, difficulty in storing and trading, and a general lack of clarity around how the industry market functions. New tech-enabled investment platforms are emerging to solve these common problems and level the playing field so that everyone can add wine to their portfolios in a simple, trusted, and transparent manner. And they can do so for around $50 a share.

Why Wine?

Fine wine has been one of the strongest returning assets over the past 121 years, as supported by a Cambridge study.^[1] Over this period, fine wine has returned roughly 9% annually with relatively low volatility over the long term.

Fine wine is tangible, consumable and historically stable. Its extremely low correlation to equities, bonds, real estate, and other assets provides true diversification and risk-mitigation, often difficult to find in traditional financial products. During the 2008 market crash, wine lost only 1% versus the -37% loss the S&P 500 incurred, proving itself uncorrelated to market swings and providing improved risk-adjusted returns.

Downside market strength and long-term stability, coupled with ever-decreasing supply of wine makes the asset class an intriguing option for investors looking for diversification or a potential safe-haven during periods of economic turbulence.

Why Now?

While the recent market sell-off has brought equity valuations back down to Earth, the S&P 500 price-to-earnings ratio was far above its historical average for most of 2020 and 2021. At present, the ratio is around 18-times earnings, in line with the average over the past seven years. However, if the past two years have shown us anything, what goes up generally tends to come down, and vice versa. As an asset class, wine has shown to be a strong hedge against equity market volatility in portfolios.

Another timely concern for investors and advisors is rising inflation. Inflation grew at 8.5 percent annually in March, a 40-year high, driven by continuing surges in prices of gasoline, food, commodities, and rents. To combat rising inflation, the Federal Reserve has already implemented a 0.5% interest rate hike in May, with many analysts expecting more to come.

Higher rates can have a negative impact on the stock market, as the cost of doing business rises for companies. Over time, higher costs and less business can mean lower revenues and earnings for public companies, potentially impacting their growth rate and their stock values. This reality bolsters the case for looking at assets that can dampen the impact of both stock market volatility and rising inflation in portfolios.

Lastly, while rates are expected to rise, they are still near record lows. What about that 40% of portfolios that are supposed to be in fixed income? Not only are rates historically low, although higher than in the past year or so, but as rates rise current bondholders see the fair value of their investment decrease. As a result, some investors are reallocating as much as 20% of their portfolios from fixed income to alternative investments, including wine.

Increasing Accessibility

Over the past few years, new digital investment platforms have been formed to offer fine wine (and spirits) to investors, making wine investment accessible for all. While each varies in terms of its approach, in general they remove many of the barriers that have stood in the way of investing in this asset class.

One such barrier is the price of entry. When investing in wine, like other assets, it is important to diversify with different vintages, and often with product from more than one winemaker. Owning a diversified collection of fine wine can become cost prohibitive for many investors. By offering shares in a collection, investors can build a diversified position in fine wine.

Another barrier is wine curation. Not all wines produce excellent returns, and it is important to identify wines that have a strong possibility of increasing in value. Certain platforms utilize a combination of proprietary data sets and fundamental analysis, along with insights from their teams of wine experts, to create collections that increase investors’ chances of earning the best returns in the wine market.

Authenticity and logistics are other important considerations. The best platforms work with well-vetted sourcing partners to ensure the provenance of each bottle in a collection. It is critical that wine is adequately insured and stored in temperature and humidity-controlled conditions and is transported safely and securely from the winery to the storage facility. These platforms generally handle all aspects of confirming authenticity, insurance, safe storage, and logistics.

Different Ways to Invest

Each platform is unique and has its own offerings, however there are some common threads when it comes to how investments are structured.

Collections are assembled and offered to investors, allowing them to purchase a slice of the overall wine portfolio. The wines are insured, stored, and then sold, generally in 3-7 years. When the wines are sold, shareholders receive their pro rata share of the proceeds.

Investing in wine futures is less common, but also an interesting way to diversify portfolios with an allocation to wine. Wine futures allow prospective buyers to purchase wines that have not yet been released, allowing producers to realize revenue they would not see otherwise for 18 – 24 months. This concept dates back centuries but was only made famous by the châteaux of Bordeaux in the decades following WWII as they struggled with cash flow issues following the war.

Initially pushed out of necessity, the “En Primeur” system as it is known has become a permanent fixture in Bordeaux, and the sales through La Place de Bordeaux, where the futures are listed and sold, make up a sizable portion of sales each year. Outside of Bordeaux, wine futures have been slower to take hold due to a lack of infrastructure to sell them. Some producers have tried to sell wine futures directly, and others have listed them on La Place de Bordeaux. However, it is challenging for those other than top global producers to get listed on La Place and most producers have extreme difficulty implementing a futures system of their own. Certain investment platforms are leaning into wine futures, offering the opportunity for investors to access wines not only produced in Bordeaux, but in other areas such as California. By doing so they are also offering a new way for wine producers of all sizes to manage cash flows and grow their business with non-dilutive capital.

There are wine investment platforms that offer SEC-qualified collections. Shares in these collections can be held in a self-directed IRA, offering similar tax benefits as traditional retirement planning vehicles.

Summing Up

Wine has been produced for thousands of years, with evidence of ancient wine production in Georgia dating back to 6,000 BC. While it has been enjoyed for millennia, it is only within the last decade or so that tech-enabled, venture-backed, entrepreneurial companies have come along to make investing in fine wine accessible to the masses. Investing in fine wine offers many potential benefits to investors, especially given current economic conditions. Each wine investment platform is different and has its own unique characteristics. Advisors should consider looking at each side-by-side to determine which is right for their clients.

[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2321573