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26/09/2018

Fine Wine Prices: What Drives Performance? (City AM Column)

by Matthew O'Connell (Head of Wine Investment)

Having established the key wine producing regions which deliver investment opportunities, it is important to consider within the context of the wine market what drives market prices and outperformance (within the asset class).

As we have discussed previously, as a high level overview, positive price performance in fine wine is driven by a supply-demand imbalance which is both fundamental and secondary.

But clearly in an asset management context, a key part of an expert manager’s ability to add value is spotting the opportunities to generate “alpha”, i.e. outperformance vs. the broader wine market.  Here we look at examples of wines which have outperformed and why that has been the case, to give an idea of potential sources of this “alpha”:

Margaux 1990has been a wine scored 100 points by Robert Parker (the leading wine critic) since it was first bottled.  It is rare for a wine to be scored 100 points, but even rarer for this to be undisputed across multiple tastings over time. 

However, the performance of the wine was lacklustreover the last 5 years, trading at around £8,000-£9,500 per case, the same area as the 2000 and 1996, also 100 point and 99 point wines respectively, despite its extra age.  It was obvious that the market supply would be strained before long, while the more approachable nature of the vintage meant that consumption would continue to gather pace. 

Indeed, we saw the price move from £10,300 in January this year, to £14,200 currently, a tidy 35-40% return and one likely to increase further over the coming 12 months.

Clos des Goisses 2008was released last year at £1,200 per case.  2008 is a much fêted vintage in Champagne, so demand has been strong for new premium releases from all houses. 

However, with only around 2,000 cases of Clos des Goisses produced – much smaller than other premium cuvees – the impact on the supply-demand balance was very clear from the outset, and it is unsurprising to see the wine now trading at £1,780 per case, having delivered an almost 50% return in the last 12 months.

Burgundy prices have seen large upwards movements in the last 2-3 years.  The most attractive returns have tended to come from producers able to reposition their overall brand and/or vineyard(s).  Two interesting examples have been Clos des Lambrays and Lamarche’s La Grande Rue

The former is a monopole (solely owned vineyard), purchased from Mommessin by Bernard Arnault’s LVMH in 2014.  A rapid and entirely anticipated market re-positioning exercise turned a relative niche enthusiasts’ wine into much more of a flagship name and was accompanied by a price rise in the 2010 from £1,800 per case to over £3,000 per case in the last 2 years.

The latter is a vineyard bordered by the very pinnacles of Burgundy, DRC’s Romanée-Conti and La Tâche monopoles, but which had been perceived to be a significant underperformer in the past.  A clear step up in quality has been apparent for the last 5+ years, but has only more recently reaped the expected rewards in market price, with the 2010, for example, moving up from £3,800 per case to over £6,000 per case across the last 2 years.

The performance of wine as an asset class tends to be compelling across the board, but there can and will continue to be clear opportunities to generate significant outperformance for those who know where to look.