Is wine a corking investment? Or is the scene too complex?

Jun 7, 2013
Jane Lewis

Despite the boom and bust of 2012, wine investment can provide a rich flavour to your assets

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THE Great Elysee Cellar Sell-off last month infuriated many French oenophiles, who viewed President Francois Hollande's budget-conscious move as a gratuitous act of national sabotage. But the successful disposal of a tenth of the presidential collection (some 1,200 bottles for €718,000, more than double pre-sale estimates) has been a fillip to the wine trade which, after a decidedly groggy two-year hangover, has been pinning its hopes on a return to form in 2013. 

Fine wine has traditionally been a fairly stable, low-risk investment class, reliably delivering non-spectacular annual returns. There were good and bad years; but the market had evolved a natural rhythm that smoothed them out.

Then, an explosion of interest from deep-pocketed Asian buyers put fine wine prices on speed. By 2010, prices of the five great "premier cru" (first growth) red wines of the Bordeaux – Châteaux Lafite, Mouton, Latour, Margaux and Haut-Brion – had risen by twelvefold in a decade. Having achieved near-mythical status in China, Lafite in particular went through the roof

Wine experts still ponder what it was about Lafite that drove the Chinese wild. Sotheby's head of fine wines in Asia, Robert Sleigh, speculates it may have had more to do with tongues than palates – Chinese speakers simply found "Lafite" easier to pronounce. Whatever the reason, the euphoria ended in tears. When Lafite fell out of fashion, it dragged the whole market down with it. The Liv-Ex 100 index (the industry's major benchmark comprised of the 100 top wines) plunged 19 per cent in the year to September 2012.

It wasn't just connoisseurs and big collectors who saw their profits swept away. Hordes of small-scale wine investment funds – some genuine, others blatant scams – collapsed in the bust. According to a BBC Money Box investigation, over 50 UK-based funds went down from 2008-2012, causing losses to small investors running to the tens of millions.

The trade has stabilised – the Liv-Ex is up by around six per cent this year – but some think that a lasting effect of the boom has been to up-end established tenets.

Wine investment used to be relatively straightforward: the easiest profits were always to be had from buying the best Bordeaux and Burgundy reds (which still comprise 95 per cent of the fine wine market) "en primeur" – ie when still in the cask – and then sitting on it. Basic laws of supply and demand dictated that, unless the vintage was a real dog, prices invariably rose as more was drunk and the quality improved.

But many in the trade think that the Bordelais producers are still charging too much for their "en primeurs". The 2009 vintage, although of unequivocally good quality, was sold at such wildly over-inflated values that prices have actually fallen since release. And London buyers attending this year's en primeur campaigns maintain the chateaux are still setting release prices too high.

Bordeaux wines are classified into five ranks. Many now believe there may be more mileage in those at the next level down – the so-called "super seconds" – or in older bottles. "Back vintages look well-priced compared with recent releases," noted Berry Bros & Rudd in December.

Some have also detected an outbreak of democracy in the market, with wines other than Bordeaux creeping into investment portfolios. Burgundies (produced in even more microscopic quantities) are having a moment, stretching beyond the charms of their most high-profile member, Chateau Petrus. So too are some champagnes. In time – sacre bleu! – a classical investment portfolio might even include wines produced beyond France. Let's hear it for the "super-Tuscans".

The scene, then, is fairly complicated. A loosely regulated market, apparently at the mercy of such wildcards as Chinese linguistics, the vanity of Bordelais producers and the pronouncements of one American wine guru – Robert Parker – whose word and ratings are taken as law in the trade (any wine bearing a Parker score of 90-plus out of 100 is deemed an investment worth considering). No wonder many investors conclude it is best left in the hands of experts.

On the other hand, if you have latent oenophile tendencies, you might think it is worthwhile taking a DIY approach. You'll save big-time on fees (the hedge fund "two-and-twenty" rule applies in most wine funds), you'll learn a lot, and you'll certainly have more fun. This isn't exactly an unpleasant industry to research in the field. And you cannot drink a share certificate.

What's more, wine is fairly tax efficient – it's categorised as "a wasting asset" and thus isn't liable for Capital Gains. And even if you don't have your own cellar space, the storage costs will almost certainly have less impact on profits than fund fees.

Perhaps the golden rule is not to treat wine too seriously, at least as a money-spinner. It's a difficult commodity to sell in a hurry, so you can't rely on it for liquidity, and you should probably think twice before investing more than you can afford to lose (or drink).

Still, taking a punt is an interesting exercise in gaming instincts. "Wines sit on price plateaus of varying lengths during their period of maturation, interrupted by ‘step' increases in price when they hit windows of optimal drinking," says Andrew della Casa, director of the Wine Investment Fund. The trick is to spot those windows.

As you uncork a sample bottle or two on a long June evening – just to check how your investment is progressing – you might consider there are worse ways of spending a summer.

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Petrus - not from Burgundy !