You don’t need to be an investment genius to appreciate how much Bordeaux’s en primeur prices have gone up in recent years. No doubt they might have looked expensive 25 years ago. But with the benefit of hindsight, they now look ludicrously cheap. The 82 first growths, for instance, came out at about £275 a case and anyone who bought them has made money from day one, hand over fist. Now, some of them are selling for between £15,000 and £16,000 a case.
As prices and worldwide demand for great cru classé claret increased during the past 10 or 15 years, however, the Bordelais decided to indulge in a bit of profit-taking of their own. So, rather than letting investors have all the early upside, more and more of the top chateaux began to release their wines at prices approaching full market value. Of course, it hasn’t always worked out quite according to plan. A case in point was 1997 when they overpriced their crop with the result that the wines failed to sell through the market and subsequently fell back in value. But generally speaking, the highly commercial Bordelais have more or less been bang on the money ever since.
But for investors and collectors who had become used to some healthy windfall profits, this new tack has been about as welcome as a corked bottle of Cos d’Estournel. Not least because, from 1996 to 2004, the Bordeaux en primeur market produced some dismal short- to medium-term returns. The only significant exception was the great 2000 vintage.
As a result, some have begun to question whether the en primeur numbers add up if you look at them from a short-term investment perspective. “It’s too risky and simply doesn’t provide the absolute returns that it used to,” says Peter Lunzer of The Wine Investment Fund. Since 2003, the fund has offered a series of portfolio tranches – a series of closed-end wine portfolios that private investors can subscribe to.
“It’s our strategy to minimise risk in order to maximise our returns,” says Lunzer. “So that means avoiding controversial wines and never acquiring wines en primeur.”
However, it’s not just high en primeur prices per se that deter him from investing so early in the game. “The real problem is that a price plateau for such immature wines is almost inevitable.” Underpinning this investment approach is the fund’s empirically based price step theory, which proves that fine wine prices do not increase smoothly over time in a predictable linear way. “Instead, rapid upward movement often occurs when the wine starts to mature and be consumed, and pundits begin to write about it,” Lunzer says. “Clearly, that is the optimum time to invest, rather than two years before the wine is even bottled.”
The Fine Wine Fund has a similar investment philosophy. “We have a huge amount of historical data that argues against pitching in at the en primeur stage,” says Miles Davis, one of the fund’s partners. “So we avoid it at this early stage because stocks are high, corks aren’t being pulled and your money is likely to underperform the older investment-grade vintages in the short term to medium term. We trust market prices more than producer prices.”
Yet while the en primeurs have been in the doldrums due to some aggressive pricing on release, the back vintages have looked increasingly good value – especially in the strong market conditions that we are seeing right now. Certainly that is where a lot of the smart money is now focusing its attention. Lunzer is already on the look-out for his next opportunity.
“In the current environment of intense interest in the quality and pricing of the 2006 Bordeaux en primeur campaign, it is a good time for us to be buying – according to our investment philosophy – the wines that are not attracting media attention. My focus at present is on some great wines from 2003 and 2000, as well as looking back to undervalued 1995s and the best wines of 1990.”
It is perfectly true that buying en primeur usually offers the lowest entry level for a particular wine. But as William Beck of The Fine Wine Fund points out, that doesn’t necessarily make it the optimum point of entry in terms of maximising returns. “For instance, £100,000 invested in first- growth en primeur for the 2005 vintage would have easily underperformed the same amount invested at the same time in older first-growth investment-grade vintages. So what serious investors should be looking at are internal rates of return, not absolute price levels.”
According to Gary Boom of Bordeaux Index, a wine merchant, the problem is the product of so many new buyers coming into the market who all seem to think that the best investment potential is still to buy on release. Ironically, though, this has actually had the opposite effect. “First, it has forced up release prices even more,” he says. “And second, it has made the back vintages look much more attractive. Assuming that the first growths come out high again this year, I wouldn’t recommend anyone buying them en primeur as an investment.”
There are other attendant risks of buying en primeur for investors. One is that you often have to buy stable-mate wines as part of the deal to get your allocation of blue-chips. Almost invariably, these other lesser wines reduce your returns.
Another is the worry that a wine’s rating and reputation goes down rather than up once it’s in the bottle. Then there’s the issue of global warming. What if Bordeaux produces a run of four or five stunning vintages? In that scenario, the increased supply of great wine could drive down prices.
However, the wine-futures debate is not quite settled. Hot-off-the-press research from Liv-ex.com shows that the absolute returns from buying en primeur have improved quite significantly in the rising market of the past 18 months. In particular, this latest batch of figures shows that the returns for the very top wines are now looking much more attractive than they did in 2004.
Equally, there are a number of wine investment professionals who continue to buy en primeur in order to make money. One of them is Alan Rayne of Magnum Fine Wines who has been buying wine as an investment for his private client base for more than 20 years. “I still firmly believe in buying en primeur as an investment tool, provided you know what you are doing,” he says. “You need to pick the right chateaux in the right vintages and get in early at the right price.”
Yet even he concedes that it can take longer to see a return. “You are looking at a five- to 10-year investment with an optimum period of seven- to 10 years.”
Yet this trend is unlikely to dent or destroy the en primeur market, given the number of buyers around the world looking to secure their allocations of the top wines. There are, after all, plenty of other reasons to buy your favourite claret on release – especially if you’re planning to drink it.
