HardAssetsInvestor

Written by Brad Zigler  |

April 22, 2009

Veni (Vinum) Vici

Details

HardAssetsInvestor.com's managing editor sifts through the potential liquidity of the nectar of the gods.

• Perception of worth + marketing hype = auction
• Benchmark vintages
• Stacking up against blue-chip equities

 

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.