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11/10/2018

Fine Wine Investment: Getting Technical (City AM Column)

by Matthew O'Connell (Head of Wine Investment)

The composition of a fine wine investment portfolio is key to its performance and the breadth and diversity it can offer in the context of a larger investment portfolio.  Our challenge as investment managers is to ensure that the portfolio best aligns with clients’ broad investment goals.

Hold period is the first key element of the equation.  It is generally accepted that the optimum period of investment is 5 years or more, but 2-3 years is possible. However, if a relatively shorter time horizon is desired, it may be best to focus on specific opportunities rather than a broad portfolio.

This brings us onto the second element: the significance of the composition of the portfolio in terms of different regions.  For example, Champagne tends to see a jump in price after 4-5 years, but can be quite static in the interim; so young Champagne is less suitable for a 3 year hold portfolio than, for example, young Burgundy, where price gains can be faster.  There is of course an element of increased risk when one is investing in higher “beta” wines (ie those likely to see larger gains, but potentially also larger downwards movements) and this may or may not suit a particular investor’s requirements.

The final key element is liquidity, a matter of great importance on entry and exit from a fine wine portfolio.  Wine enjoys the highest liquidity of any collectible asset (and compares well to many alternative asset classes more broadly), but it is still the case that a significant part of value appreciation depends on a thoughtful approach to buying and selling.

Large merchants such as BI, with a global presence (e.g. Hong Kong, Singapore, US) obviously have high-quality sourcing and distribution capability which is important in this context; but BI’s LiveTrade market-making platform – offering guaranteed bids and offers on over 500 top wines – has been particularly revolutionary for market liquidity and transparency, and therefore has a powerful role to play in wine investment.  Our investment portfolios tend to be comprised of a majority of LiveTrade wines; for other wines, in particular those at the rarer end of the spectrum, careful thought is given to the optimal route and timing for sale in order to maximise value.

Robust valuations are of key importance to any alternative asset class. In the fine wine market transparency has improved significantly over the last 10-15 years, with BI for example having a proprietary valuation algorithm, able to provide high-quality “mark to market” type levels on full investment portfolios on a real-time basis.  

A final frontier is having the ability to put together bespoke wine portfolios to have specific lack of, or inverse correlation with, one or more other asset classes, effectively harnessing - with a more technical approach - something which is already a significant attractive feature of wine as an investment.  There is interesting potential on this front, taking advantage of complex analytical techniques to deliver a further element to an already compelling investment proposition.

Next week we will conclude our wine investment focus series of articles with a summary reminder of key considerations relating to the asset, and how one can go about accessing it as an investment.