Unusual Investments

Alternative Investments | 150 ways to invest your money

An Introduction to Fine Wine Investing

Every year, an astonishing 23 billion liters of wine gets consumed around the world (!) The vast majority of that wine gets drunk immediately, but at the top end of the market wine is more than just a drink – it can be an investment.

While perhaps not the most “unusual” investment around, fine wine and wine investing has traditionally been exclusively available to the wealthy. Today, new platforms and technologies are providing more transparency and new ways for investors with any budget to access the fine wine market.

History of Fine Wine

What we today consider fine wine mostly started in the Bordeaux region of France. Early wine production in Bordeaux dates back as far as 60BC – the Roman era – but the official Bordeaux wine classification introduced in 1855 is what kicked off and shaped today’s fine wine market. From 1855 to the early 2000s, Bordeaux continued to dominate the fine wine market by a large margin. According to fine wine trade marketplace Liv-ex, in 2008 more than 90% of its secondary market trade volume involved Bordeaux wines. The fine wine market has grown rapidly, however, and today it’s become more diverse, with Bordeaux accounting for a little over half of trade share.

Famous early wine collectors include kings and presidents, including the likes of Thomas Jefferson and King Charles II. The chateaux most beloved by these famous early admirers, are still amongst the most prominent fine wine producers today.

Why buy fine wine?

Many wealthy individuals and wine lovers buy fine wine for consumption, but it is also worth considering adding wine to your investment portfolio. According to the Knight Frank Wealth Index, fine wine has appreciated in value by 127% over the past 10 years. Price appreciation is therefore a key reason to invest in fine wine. Moreover, wine is an asset that can help diversify an investment portfolio. Historically, fine wine has proven to have a low correlation to the stock market, meaning that when the stock market goes down, it has little to no effect on the price of fine wine.

Why does wine go up in value?

There are various reasons that explain why fine wine goes up in value over time:

1) Scarcity‍

Aside from needing expert wine makers, there are many factors that go into making fine wine. You might know that climate and soil are extremely important, and there are only limited places in the world where wines of specific quality can be produced. Top Bordeaux producers, such as Chateau Latour and Mouton Rothschild have a finite amount of land and can only produce a limited amount of cases of wine a year (appr. 20,000-30,000). Pair that with the fact that bottles of wine get consumed over the years and it means an already scarce asset naturally gets scarcer over time.

2) Wine gets better with age

While most ordinary wine gets drunk within 24 hours of purchase, fine wine is often stored for decades. It will improve over time up to it’s optimal drinking window, which will vary depending on the wine.. Restaurants or wine lovers can’t always afford or don’t always want to purchase and store a large number of wines years in advance, and may decide to purchase it from investors when the specific wines are ready to be consumed.

3) Growing global demand

Whereas traditionally fine wine was mostly a European affair, demand from the US started to grow in the 70s and in more recent times, Asia has been a huge new driver of demand. Wine consumption in China is still far lower than it is in Western countries and this might be a strong indicator that there is more room for growth. In addition, over recent years the number of billionaires has almost tripled and the number of millionaires is booming too, and with a rise in wealthy people comes a rise in demand for luxury goods. As a result, prices of these goods seem likely to increase, which is good news for investors.

How to Spot Investment-Grade Wines

The vast majority of wines aren’t suitable for investment, and there are several factors that determine whether a wine has potential to be an investment-grade wine.

Type of wine

When it comes to red versus white, the simple answer is that red wine is more suitable for investment purposes. This is mainly because “wine getting better with age” applies to red wines more than white wines. There are some exceptions, with some types of white dessert wines being able to make excellent investments. However, most of the investment-grade wine is red and when starting an investment portfolio this is what most investors would usually turn to.

Region‍

The majority of fine wine comes from France, mostly Bordeaux with Burgundy being a strong runner-up. There are other regions that produce investment-grade wines, such as Champagne, or countries like Spain and Italy as well as new world wines. Prices outside of the traditional investment regions have, however, been more volatile and it’s hard to predict which (new) producers will appreciate over time.

Quality

Simply looking at region and type of wine isn’t enough to determine whether a wine will make a good investment. Quality is of course of utmost importance and common ways that wine lovers will assess quality is by looking at critic scores, as well as official classification systems, such as the Bordeaux classification system. While the Bordeaux system dates back to the 19th century, the producers originally appointed as “First-Growths” (the highest possible status) continue to produce some of the world’s finest wines suitable for investment purposes.

Wine Investment Risks to Watch Out For

As with any investment, wine investing has its risks. Here are the main ones to look out for.

1) Price Volatility

While over the past 10 years, the fine wine market has been less volatile than the stock market, like any investment past performance is no guarantee for future results. Prices can go up and down and wine is typically most suitable as a long-term investment.

2) Liquidity

While fine wine has an active secondary market, with several established marketplaces, it is not comparable to the stock market where you can buy and sell in real-time. If you want to sell your wines, it can often take a few weeks to find a buyer. If you want to sell it as soon as possible you may have to accept a slightly larger spread and lower price.

3) Wine Fraud

Provenance, or the wine’s history, is one of the most important things to look out for when buying fine wine. Where does the wine come from, and how has it been stored? If this is unclear, there is a risk that you may be dealing with an unscrupulous dealer. The documentary Sour Grapes featured the most notorious fraud case, where one individual forged a large number of high-end wines. It’s important to conduct due diligence on companies you are thinking to source wine from to make sure they are reputable and you’re getting legitimate wines.

4) Spoilage

Lastly, a risk that comes with wine is that the quality can deteriorate if it is not stored correctly. It’s important that wine is stored in cellars that have the right climate, such as humidity and temperature. Typically, it is best if it’s stored in specialised storage facilities, such as Octavian or LCB’s Vinotheque.

How to invest in wine

Now that you know the basics of wine investing, let’s go over the various options you have for getting started.

1) Wine Investment Fund or Managed Portfolio

One way to invest in wine is to work with a wine investment fund or portfolio manager. You hand money over to the company and an expert manager then invests it in a pooled fund or creates a personalized portfolio for you.

The advantage is that this service is a great option if you don’t have time to do any research of your own and want to outsource the process of making investments. The downside is that these types of businesses typically only accept investors that have large sums of money to invest. Minimum investment amounts with some of the more well-known wine investment businesses such as Cult Wines typically start at $35,000.

2) Buy your own wines

On the other end of the spectrum, you can go for a fully self-managed portfolio and independently choose which wines you want to buy and buy them by the case. There are a number of established fine wine merchants that you can buy from, such as Bordeaux Index or Berry Brothers, and the experience is similar to online shopping.

The advantage with this option is that you have full control over what you want to buy and you can start buying cases of fine wine for a few hundred dollars. The disadvantage here is that you need to stay on top of the market, do your own research and make sure that the price you’re getting is a good price. Moreover, as you need to buy full cases it is not easy to build up a diversified portfolio of wines, unless you have $10,000+ to spend.

3) Fractional Wine Investing

Another more novel option is to start with fractional investing with platforms such as Koia. Koia is a platform that fractionalizes cases of fine wine, so you don’t have to buy and own the whole case but can buy pieces of a number of cases. This means that you need only small amounts of money to get started and can easily diversify by buying stakes in multiple cases.

The selection on platforms like Koia is curated, and contains clear information about the producers, critics scores, as well as price history. Moreover, storage and insurance is taken care of, which means that investing in wine becomes a fully digital experience akin to investing in stocks via a trading app. Fractional investing is a great option for investors who want an easy and accessible option to get started with wine investing.

Conclusion

Fine wine is an asset that appreciates in value and is uncorrelated to the stock market and can therefore make an excellent investment to your portfolio. Wine’s aging process, scarcity and growing demand provide the main reasons why wine goes up in value. To start investing in wine, there are various options available. Traditional options include buying your own cases of wine or investing in a wine fund, but new options such as fractional wine investing are opening up the world of wine investing to more investors around the world.

Comments

comments

Interested in alternative investments but don’t know where to start? Explore the world of investment options others aren’t talking about.