Is wine worth investing in? Neil Martin speaks to Andrew della Casa, a founding director of London-based The Wine Investment Fund, who knows a thing or two about wine, but also knows how to see wine as a viable investment.
For those on the search for asset classes other than the usual equities, or property, investing in wine should be at the top of the list.
However, potential investors in wine need to tread the grapes very carefully, otherwise they could end up with a very bad hangover.
But, for those looking for a decent return of their money, the time might now be ripe for a decent tipple. According to Andrew della Casa (left), a founding director of The Wine Investment Fund, the wine investment market could be set for some vintage years. He believes that wine is an ideal investment offering risk reducing portfolio diversification to high net worth individuals.
The Wine Investment Fund (TWIF), which is based in Mayfair London and began life in 2003, is only one of two funds which has an ‘indirect’ approach to making investments in wine. It is not a wine merchant; they are not laying down wine you might choose to buy, store in a warehouse, and hope the price might rise, and if not, you can always drink it!
della Casa explained their approach: “The thing that excites us about wine, as investment managers, is that we’ve identified certain wines that have specific characteristics that allow us to create low risk portfolios (in other words, portfolios with low volatility), but which also generate high returns. No-one really treated wine as a serious investment class until we came along. “
He went on to explain how it works: “What we class as investment grade wine is very specific. We are very conservative in defining the universe of wines from which we stock pick for our portfolios; if you ask other players in this market what they consider to be investment grade wine, they’ll probably give you a broader definition than ours.”
“For us it’s very simple, we’re investment managers, therefore effectively risk managers. We analyse risk and build processes to mitigate risk as much as possible. One major risk in this market, for example, is liquidity risk. We have to be able to get in and out of the market when we want to and at the price that we determine, so we only consider wines that are produced in quantities sufficient to generate active secondary markets.
“Our whole investment philosophy is centred on a very specific objective: to create low risk portfolios which generate above average returns. It is very much research and analysis driven; the wines we have in our universe, that we stock pick from, in fact end up being the top 1% of Bordeaux production.” TWIF’s ‘universe’ is made up of 350 lines of stock, worth around £6 billion at today’s prices.
The reason for this, continued della Casa, is that “…these wines are the most liquid wines in the market – and I mean this in terms of the depth of the secondary market for these wines rather than in terms of drinkability.”
You Don’t Buy Wine
Crucially, when you invest in TWIF, you don’t buy wine, but buy into a long established fund which invests in the top Bordeaux production: “You won’t actually own a case of bottles. You own shares in the Fund which owns the wines. All our wines are stored in UK government bonded warehousing and are insured at replacement value. The Fund invests in wines from a universe of 360 wines, which is made up of 35 chateaux and their ten best vintages.”
As for the cost, della Casa said: “The average price of a case of the wine in our Fund is about £3,000, but if you want to buy the more expensive Bordeaux, I would point to one of the top Petrus vintages, that can go for up to £25,000 per case of 12.”
As for the future of the sector, the last five months have all seen positive returns on the Liv-ex 100, the main fine wine index (slightly more interesting than the FTSE100, or the Dow). Importantly, this is the first time that this has happened since the end of the 2011-2014 correction in the wine market. In total, these five months have delivered a plus 7% return.
della Casa points to other encouraging signs: “First, the market continued to move upwards after the Chinese New Year, unlike in 2015 when a strong January was followed by a weak February. Second, we have been concerned for a while that the rebound may have had more to do with exchange rate movements, and sterling’s weakness in particular, than with improved underlying conditions.
“However, March, the strongest month, actually saw sterling rise quite sharply against the yen, dollar and renminbi, with just a small fall against the euro. Third, the ratio of bids to offers on Liv-ex, the fine wine exchange, has risen to 131%, compared with just 54% a year ago – a key indicator of strengthening demand. Finally, Bordeaux is back in the spotlight, taking a high 78% market share of the index in March, and with Bordeaux-only indices showing the strongest year-on-year performance.”
This has been happening against a turbulent backdrop for most asset markets. della Casa again: “The upturn in fine wine prices is now very noticeable, as the graph below shows: and it also demonstrates the potential for growth, given the extent to which prices are still below their long-run trend level.”
The next few months, said della Casa, will be an interesting period for the fine wine market. This is mainly because the 2015 vintage is now being released ‘en primeur’ and, for the first time since 2010, it appears to be a very good vintage. But, as ever, the success of the en primeur ‘campaign’, and hence whether there is any benefit to the wider market, will depend on prices. Furthermore, the ‘primeurs’ will be followed by the UK’s EU referendum in June. Although this is unlikely to impact directly on fine wine prices, any accompanying exchange rate movements in the run-up and afterwards could be significant.
della Casa finishes with: “So while it is difficult to predict the near-term path of wine prices, underlying conditions are stronger than they have been for several years. The market is likely to be relatively robust to any adverse events, such as an appreciation of sterling following the referendum, but well placed to benefit from any positive developments, such as a successful en primeur season.”
So, for those who enjoy fine wines and are looking for an asset class promising good returns with low volatility and low correlation to the main asset classes, as well as a large slice of history and culture, this could be the one.