There’s no doubt that the big wine investment story of the moment is the frenzied futures campaign for the much vaunted Bordeaux 2005 vintage. As this supplement goes to press, the wine world is watching and waiting as the carefully choreographed en primeur catwalk nears its nail-biting climax. And the key question in everyone’s mind is at what stratospheric price will Bordeaux’s A-list châteaux release their “grands vins”?
To date, many of the less glamorous estates much lower down the Bordeaux pecking order have offered their wines at very modest increases of 5 to 15 per cent on last year. However, such a form guide is useless in a vintage like 2005, not least because the same rules of engagement simply don’t apply to the top tier of 10-15 “supermodel” châteaux. For months, rumours have been circulating that the likes of Latour, Cheval Blanc and Cos d’Estournel could hike their prices by as much as 100 per cent on their 2003s (and 300 per cent on their 2004s).
Certainly, collectors, investors and drinkers are bracing themselves for the most expensive en primeur prices in history on the back of what has been touted as potentially the greatest ever Bordeaux vintage. Following the trade tastings in April, merchants and critics alike have been running out of superlatives to praise the vast majority of wines across the region’s appellations. Some have even compared its quality to past legends such as the 1928, 1949, 1961 and 1982 vintages. Others though have simply declared it a “one-off”, beyond comparison.
Crucially, the overly influential, market-making American critic Robert Parker has also come out strongly behind the 2005s. “I have never tasted so many extraordinarily rich, concentrated, massive wines so high in tannin and extract, yet with such precision, definition and freshness,” he wrote in April. “It is clearly a singular vintage and one that should evolve into one of the great vintages of Bordeaux.”
There is a small degree of dissonance amid all the hype and hoopla, however. In particular, Parker has anointed just eight wines with scores of a perfect 100 points. Not only that, critics such as the FT’s Jancis Robinson have advised care and caution with regard to a small number of well-known right-bank châteaux, including some favoured by Parker. To a British palate, it would appear that a number have been over-wrought and overrated.
Of course, quality and “Parker points” are only part of the equation when the first-growth proprietors come to price their wines. What is arguably just as important is the state of the market. In 2006, the fine wine business finds itself in the midst of a rampant bull run as worldwide demand is at its strongest for five years.
After last year’s lacklustre campaign, this vintage couldn’t have come at a better time for the Bordelais. By the beginning of May, Berry Bros & Rudd had already received more than 5,000 en primeur enquiries – a figure five times bigger than for the famous Millennium vintage. Other UK suppliers, such as Lay & Wheeler, Armits, Bibendum and Montrachet Fine Wine Merchants, have also reported unprecedented interest in Bordeaux’s latest crop.
Moreover, the Americans will be buying with a vengeance this year irrespective of the strength of the dollar or the state of the US stock market. “Believe me, it will be a very big campaign in the US,” says the New York wine merchant Peter Morrell. Meanwhile, massive orders for cru classe wines are pouring in from new super-rich buyers in the Asia and India. “We’ve had huge orders from Taiwan of people wanting 100 cases of first or second growths,” says Simon Staples of Berry Bros & Rudd. “We’ll be lucky to get them a case.”
As if this wasn’t enough to push prices through the roof, supply in 2005 is also down by around 25 per cent. Château Margaux, for instance, has only produced about 13,000 cases – about 3,000 shy of its usual output.
Everyone has urged restraint on pricing but in the prevailing conditions nobody is seriously expecting the likes of Latour and Margaux to take the slightest bit of notice. The châteaux know they can effectively name their price, secure in the knowledge and that the global elite of high-net-worth collectors and investors will pay whatever it takes to have and to hold these legends in the making.
Nonetheless, leading members of the UK wine trade have been lobbying the Bordelais to pitch their prices well below the current values of their 2000 and 2003 wines. But in the case of Château Latour, its 2000 and 2003 are already trading at around £4,000 apiece. This gives Latour’s Frédéric Engerer considerable room for manoeuvre. Off the record, one London merchant suggests that if the first growths come out at £3,000 a case they wouldn’t look overpriced.
So what will this mean for investors in the short and medium term? “I am not at all sure,” says Serena Sutcliffe, head of Sotheby’s wine department. “If they come out at the kind of prices to which they seem to be hurtling, will there be any return or will they spend the next decade marking time? Better to pick them up later without financing them for years.” Alan Rayne of Magnum Fine Wines also fully expects the top châteaux to “squeeze every last euro out of it, which probably won’t leave any profit for investors”.
By contrast, Gary Boom at Bordeaux Index, believes that, “timing on buying will be everything”. His advice is to “buy on first release if you can, as there might be 20 per cent margin there, and then wait and look to how they are priced two years later when the wines become physical”.
Boom may turn out to right on the money. Many commentators wrote off the similarly hyped and lauded 2000s as being far too expensive. Yet they confounded the critics and provided investors with handsome early gains.
What is clear, in vintages like 2000, 2003 and 2005, is that the en primeur market is becoming increasingly polarised in terms of price as the first growths and super second châteaux continue to break away from the pack to perform in a league of their own. Even so, it is hard to imagine that in 25 years these long-lived wines will not provide extremely healthy profits to investors.
Meanwhile, the majority will be unable either to acquire or afford these wines. In which case, where should the “small cap” investor look for value in Bordeaux 2005? Farr Vintners’ Stephen Browett advises looking at cheaper, more middle-ranking châteaux such as Pontet-Canet, Grand-Puy-Lacoste, Leoville-Poyferre, Talbot and Lagrange, all of which have made excellent wines. “Historically, labels like these have often provided investors with stunning returns and often outperformed their first growth neighbours – even in vintages like 2000,” says Browett.
In the past, en primeur campaigns have tended to work in a vacuum. But this year many are predicting that high prices for the 2005s will make more recent Bordeaux vintages look very good value. Boom points to plenty of arbitrage opportunities for canny investors, including some 1998s and the underrated and undervalued 2004s. The 2004 Margaux has already moved up by 15 per cent as a number of merchants have taken a position on the best 2004s. Moreover, the vintage is also due to be rerated by Parker this month. If, as predicted, the top 2004s are upgraded, rapid price movements are all but racing certainties.
“What is also new and interesting is the way in which the market has broadened in recent months to include the top wines in unfashionable vintages,” says James Miles of Liv-ex, the global fine wine exchange. “First-growth 1997s and 1999s, for example, are up 10 per cent and 15 per cent respectively since December. These are unlikely to outperform the best wines over long periods but there are some relative bargains that are difficult to overlook.”
Undoubtedly, though, many regard the 1996 first growths as one of the strongest contenders in the short term. Even though the 1996 Latour shot up last year from £2,000 a case to £2,700 it still looks underpriced compared to the 2000 and 2003.
“There’s no doubt that the gap between where the 1996 first growths are trading now and where they should be is closing rapidly,” says Andrew Davison of the Vintage Wine Fund. “But I still think they’ve got another 25-30 per cent of upside in the next 12 months before they come into line.”
Older vintages such as the 1986s, 1988s and 1989s have seen good if unspectacular improvements in price over the last year and should continue to make steady progress in the short term. However, the most dramatic growth has come from the 1982s, some of which are now trading at £8,000 a case and still rising. Anyone who put their money into the 1982 Lafite a year ago will have reaped handsome rewards. It was up by a thumping 68 per cent.
Arguably, though, the biggest wine investment story of last year was the self-invested personal pensions (Sipps) debacle. During the autumn, the financial pages were chock-full of headlines about surging wine prices on the back of new pensions legislation that would allow investors to siphon their wine portfolios into a Sipp and thereby pick up a 40 per cent tax break.
It wasn’t to be as Gordon Brown, UK chancellor of the exchequer, pulled the plug on it in his pre-Budget statement in December. There were some fears that the market would slow or possibly even stumble as a result. But not according to John Derrick, who recently returned to investment banking from Bibendum. “The underlying fundamentals are extremely sound,” he said at the time, “largely because the demand for investment-grade wine isn’t just domestic, it’s completely global with huge and growing demand from emerging markets like Russia and China.” In other words, the UK Sipps saga was only part of the increase in prices.
Fortunately for investors, this prognosis proved to be correct. Since then the wine market has continued to show sustained positive growth. Liv-ex’s most recent 12-month figures (see chart) show that its 100 Index is up by 30 per cent, which means that it has easily outperformed the FTSE 100, UK Gilts, the US stock market and the FT House Price Index. Moreover, these figures were taken before last month’s stock market correction.
So could this also suggest that the market is overheating? Not according to Christopher Burr, who manages Uvine.com and the Amphora wine fund. He believes that after a much longer period of sideways movement since 1998, prices are “only coming into line with where they should be”.
No doubt the recent volatility in the financial markets may make some Bordeaux châteaux owners and investors a little bit nervous as the en primeur campaign enters the final straight. But those in the wine investment game remain stridently bullish about the future. “Before the recent wobbles, the Vintage Wine Fund had a lot of interest from private investors who were concerned about equities,” says Davison. “Now that we have seen that they are rather fragile, those investors can only be more interested in pursuing alternative, diversified investments like wine. I can only see more money coming into this market and prices moving up still further. I think there’s plenty more upside still to come.”
