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Page 1 of 2 If there's one characteristic most desirable about a collectible, it's liquidity. Of course, you've got to be careful in the way you define the word "liquidity." There's "liquid" in its literal sense, meaning "fluid," and there's "liquid" in its financial context, meaning "readily convertible to cash." Wine is one, but not necessarily the other. It's certainly fluid (or it ought to be), but making it pay, well, that's another story. As an investment, wine's track record is spotty. But then, what investment hasn't turned dodgy at times? Wine's value is largely dependent upon its quality, an oft-ethereal quotient of climate, soil, genetics and - no surprise here - winemaker skill. Each of these variables contributes to a perception of a vintage's worth. Add to that some marketing hype and hoopla and you've got yourself the makings of an auction. The vast bulk of investment-grade wine - if that doesn't seem like an oxymoron - is sold at auction, and the world's long-standing auction hub is London (in the United States, wine auctions take place almost exclusively in Chicago). Collecting price points from these seasonal events is a more-than-daunting task. A transparent market wine ain't. Even if you can find a reliable price database, massaging the files into a useful form to gauge investment returns won't be easy. After all, you've got to ask yourself what vintages to use as bellwethers. A 1961 Chateau Latour? Well, this classic Bordeaux could have been purchased in 1963 dollars (a couple of years of aging before release is typical) for three bucks a bottle. It sold for $500 in a recent auction, yielding an 11.3% annual compound rate of return. Using only this vintage as your benchmark, though, you'd grossly overstate the appreciation potential of wines in general. It's like using Google as a yardstick to measure the performance of a regional bank stock. Some wines soar, some plod. Others actually lose ground. Wine Benchmark Luckily, there's an index that meters the value of a fine wine portfolio. The Liv-ex 100 Fine Wine Index tracks the price movement of a hundred vintages for which strong secondary markets have developed. Mostly comprising Bordeaux wines, the index is calculated monthly and is weighted to account for original production levels and increasing scarcity as the wines age. To be included in the Liv-ex portfolio, a wine must have been scored at 95 points or higher (on a 100-point scale) by a leading wine critic and be immediately available for delivery. In other words, no futures (we'll touch on futures in a moment). Wines are removed from the index when they attain 25 years of age. Liv-ex 100 Fine Wine Index Component Categories | Red Bordeaux | 91.3% | | White Bordeaux | 1.1% | | Red Burgundy | 3.5% | | Champagne | 3.3% | | Italian | 0.6% | | Rhone | 0.2% | With a benchmark portfolio, we can gauge the investment performance of fine wines against other asset classes. The gauge seems to tip in wine's favor, at least with respect to equities. Over the past eight years, a fine wine portfolio appreciated at a compound annual rate of 10.9%, while the S&P 500 gave up an average 5.1% per year.
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Dear Sir, Thank you for using our index in your well thought out piece on wine as an investment. I thought I should just correct you on a few points:
1/ Outside of the USA the auction market accounts for a very small portion of the wine market. It is now far more common for collectors to buy and sell fine to and from their wine merchant, because it is more convenient and the costs of dealng are much lower than at auction. In London for example the merchant market is 20x larger than the auction market. Due to a multi-tiered distribution system in the USA, however, auction is one of the few legitimate routes to market for collectors (for the most part you cannot sell liquor without a license). As such the auction market in the US (only legal since 1994) is much larger than anywhere else in the world. I would also suggest that New York is the capital of the wine auction world - even if London continues to be the largest centre for fine wine trading by some margin. To my knowledge Acker Merral and Zachy's are the largest auction houses in the US and both are based in NY. I would guess NY was much bigger than Chicago.
2/ Most of what you say about the en primeur market is correct but I was unsure what to make of your second paragraph. I am not aware of the practice of offering "strings of futures contracts each at better and better prices" amounting to several 100%. It is correct that some producers will release a second and third tranche at a higher price than the previous one if demand proves to be particularly strong, but I have never seen a chateau drop their price (unfortunately) at en primeur. This, of course, does not mean that the price may fall later once the wine becomes deliverable, but as you rightly point out fine wine investment is no panacea.
Thank you again for using our index. best regards James Miles. Director Liv-ex.com