Heady prices require a stomach for risk

One of the flimsiest justifications for investing in wine is the phrase “if it all goes wrong, you can always drink it”. It’s about as intelligent as saying “if your shares go down in price, you can always sell them and spend the money”. It’s true, but it doesn’t make financial sense.

Like shareholdings, wine investments can be profitable, and pleasurable – but, like the stock market, the wine trade brings with it a range of risk factors.

Price volatility is just one of them. In fact, in recent years, fine wine prices have behaved in a very similar way to shares, experiencing a sharp drop in late 2008 and a spirited recovery thereafter. Price indices compiled by Liv-ex – see www.liv-ex.co.uk, an electronic wine market used by wine merchants – show ‘investable’ wine more than tripling in value over the past decade. Price performance in other categories is more nuanced.

One reason is the predilection of investment bankers for ploughing their bonuses into wine, as a form of portfolio diversification. Unfortunately, this has occurred to such an extent that fine wine prices now offer little or no hedge against the stock market – and are becoming increasingly correlated with the trend in bank bonus payments.

Other risk factors are similar to those found in equity markets, too.

Among the top 25 châteaux in Bordeaux – the only ones that really count in investment terms – there are glamour stocks such as Château Petrus and Château Lafite, whose valuations can be driven by concerted buying. But, at the same time, there are solid and worthy blue-chips, such as Château Haut-Brion and Château Margaux.

There is also the ‘en primeur’ market – in effect, a wine futures market for speculative, or short-term, plays. ‘En primeur’ wine is sold after it has been made but before bottling, on the strength of the opinions of professional tasters of the new vintage’s quality and durability. Here, the additional risks are that these opinions may sometimes prove fallible, and what was deemed to a high quality vintage at the outset may not mature into one – or vice versa.

En primeur prices of the 2009 vintage rose by as much as 50 per cent last year, as investors were attracted by the growing popularity of fine wines in Asia, and hoped to cash in on Chinese interest, in particular. However, with 2009 prices quickly reaching such heady levels, shippers and customers have been reluctant to splash out 20 per cent more for the 2010 vintage, despite it being judged of exceptional quality. Last month, the FT reported that en primeur sales of the 2010 vintage through London merchants were running at half the volume of last year, due to growing fears of a “Bordeaux bubble”.

Then, as with equity investments, there are the additional costs and charges. Storage costs, typically £10-15 per case per year, generally have to be paid as valuable Bordeaux vintages need to be stored in optimal conditions to maintain their value – and these conditions can rarely be replicated in the average home. Keeping wine in bonded storage means that duty and VAT do not need to be paid. But it pays to establish at the outset exactly what charges will be levied.

Among other problems bedevilling wine investors have been sharp practice and outright fraud. To be avoided are seemingly ‘get-rich-quick’ schemes promising spectacular returns. In line with most other tangible assets, long-term returns from fine wine are unlikely to be much above 10 per cent a year, and may be less if you buy at the wrong time.

Other scams include customers buying wine that doesn’t exist and is never shipped, problems establishing title to wine in storage, vintage wine bottles filled with ‘plonk’ and passed off as the real thing, wines from obscure châteaux passed off as hidden gems, and good vintages sold at way above the market price. Drinks industry journalist Jim Budd’s website at www.investdrinks.org and offers a good guide on the wine investments to avoid.

For new wine investors, the best safeguards are to deal solely through a reputable merchant, pay for wine only against invoice, and have written confirmation that it is stored – with their names on the cases – in an independent warehouse.

Finally, for wine investment to work properly, it needs to be made with an eye to a specific time horizon – as with any long-term investment plan. This period should be based on how long a wine portfolio’s constituents might take to reach full maturity – which may need to be calculated with professional advice. Many of the best known merchants run ‘cellar plans’, which can include investment grade wine and come with a modicum of guidance on structuring a wine ‘portfolio’.