Over the past few years there has been a surge in mainstream interest surrounding wine as tangible asset. With volatility of the stock market, high levels of sovereign debt and a lack of confidence in governments, both foreign and domestic, more and more people are looking to non-financial assets for a portion of their portfolio.
During a CNBC Squawk Box interview, Scott Minerd, CIO of Guggenheim Partners, was discussing the viability of non-financial assets at a time when structural issues cast a massive shadow over the U.S. and Europe. Albeit he was speaking of these assets as a hedge, it strengthens this arena’s appeal as a viable investment. Whether it is antiques, art, diamonds, or wine, there is something comforting about investing in something tangible.
This comfort should not be the only reason that you invest in these assets, there must be the potential to make money as well. When looking at the Liv-Ex 500, a region-weighted index based on current best price, in comparison to the S&P 500 or any other major equity index, one can quickly see the value that wine can add to your portfolio.
The potential for big returns is all well and good; however one should always consider the risks involved in investing in non-financials. When investing in wine, there are three primary risks that one should clearly understand:
Liquidity Risk: the risk that you will not be able to convert your asset quickly into cash. Although a liquid, wine is a highly illiquid asset, as it may take weeks and potentially longer to find buyers for your collection.
Principal Risk: the risk that the wine you selected will depreciate in value causing you to lose principal. This is why the selection of viable investment wines is so important.
Storage Risk: as with any physical investment, storage is always something that needs to be considered. Improper storage can lead to spoilage, theft or damaged goods. To prevent against theft or damage, be sure to contact your homeowner’s insurance provider. Conversely, wine when properly stored can increase in value significantly.
With the key risks covered, there are rules that will help you create an appreciating investment cellar.
Rule 1: Create a plan!
This seems intuitive; however the importance of having a plan can’t be stressed enough. You’d be shocked by how many investors purchase wines on impulse. Everything, from what, to how much, to when to buy and when to sell should be plotted out well in advance. If not, you run the risk of misappropriating your funds on the wrong wines. Think of your wine portfolio in the same manner as your investment portfolio.
Rule 2: “Blue Chips” are your best friends
Auction houses and other investors are rarely interested in what cool, esoteric wines you have discovered. Although there is a niche market for obscure wines, “Blue Chips” are the way to go. These wines are your iconic names in the auction market that will have heavy demand many years from now. Since liquidity is always a risk, these wines should make up a majority of your cellar because of the activity they generate. Remember, when dealing with any region, the prestige of the vineyard is as important as the producer.
Rule 3: Buy cases when possible
If you have the means to purchase wines by the case do so. This simple act could increase the value of those wines. Lots maintained in their original case typically garner 10-15% more than broken cases at auction.
Collectors, especially the Chinese, love when wines have been aged in their original cases, especially if they are top tier wines in wooden cases. What the cases ensure is that the wines have not been handled or tampered with, which typically indicates better provenance (history of the conditions of storage). Considering the Chinese are currently driving demand, it is best to know what they prefer.
Rule 4: You break it, you bought it!
If you are purchasing wine as an investment, do not disturb the bottles. Besides the potential to drop your investment and render it worthless, wine also ages best if undisturbed. Although inanimate objects, there are very few things more interesting to a wine collector then a great bottle of wine.
Beyond that, there is always the temptation to pop the cork on a great bottle. One way to fight the urge is to purchase a loose bottle or two for your enjoyment along the way and leave the investments in their cases.
Rule 5: Storage
If you do not have a proper place to store your wine (i.e. – a cool basement with steady year-round temperature, a temperature controlled cellar or professional storage facility) then it may not be the best idea to start collecting just yet. Without appropriate cellar conditions, your wines could possibly depreciate. Auction houses and websites look for telltale signs of poor storage: abnormal ullage levels, seepage, mold, discoloration, etc. At the point of sale, these imperfections are brought to the attention of would-be bidders, potentially limiting your wine’s upside if not rendering it unsold.
Rule 6: Provenance
Provenance is the most important word in the world of wine collecting, as we are in an era of increased awareness and skepticism towards rare or high-valued wines. Provenance is not a concept just for the big investors either. There’s increased demand that you can prove where your wines came from and how they have been stored.
These rules should provide you with a good starting point. The keys to investing in wine, as with investing in anything else: appreciate the risks, have a well thought out plan, reduce your marginal costs where possible, adhere to that plan with strict discipline and finally, revisit that plan regularly. Remember that the wine market is similar to the stock market in that it is ever evolving, so your active participation is a must in order to be successful.
Categories: Wine & Spirits