Seven reasons to invest in fine wine

Seven reasons to invest in fine wine
26 August 2012

A GROWING number of investors are looking to alternative asset classes for reduced volatility and risk through diversification into assets that are uncorrelated to traditional asset classes, like equities, bonds and property.

Investable fine wine is one such asset class. It currently constitutes less than 1% of all fine wine produced and is predominantly focused on the prodigious estates of Bordeaux.

Fine wine displays an imposing track record, having delivered compound annual growth of 10-20% over the long-term over the last 25 years.

While investing in fine wine is not a new phenomenon, both market liquidity and price transparency have developed to a point whereby investors at all levels can now profit from this market.

With minimum investment levels starting at around £5,000 ($7,900), this is a market that all investors should at least consider. cashy takes a closer look...

Market performance

Fine wine has outperformed almost every major financial index over the past two decades. During the last 20 years there have been periods during which wine has returned upwards of 20%, most notably 2009 and 2010, although returns of around 15% per year are more commonplace.

Between 1950 and 1985 the Vintage Claret index gave an average annual compound return of 15.2%, while between 2003 and 2007 the Liv-ex 100 has grown at an annual compound rate of 15.3%.

Between 2007 and 2012 the Liv-ex 100 has returned 65%, despite experiencing two economic downturns in that period.

Growing demand

Savvy collectors and fine wine enthusiasts have been investing in fine wine for years. By buying more cases than they wish to consume, the future sale of excess cases would fund further purchases.

Traditionally, the US and Europe have been the largest buyers of Bordeaux Grand Cru classés, but in recent times the Asian market, in particular Hong Kong and mainland China, has established itself as a major hub for fine wine.

The establishment of wine investment funds in the UK, China and most recently France highlights the investment demand for this asset class.

This influx of demand has put added pressure on an asset which is finite in its supply. Unlike any other tangible asset, fine wine has a perfectly inverse supply curve: no matter how good the vintage, once bottled, the number of bottles diminishes through consumption, and cannot be replaced.

It is also considered a Veblen good – a commodity for which people’s preference for buying increases as a direct function of its price, as greater price confers greater status, instead of decreasing according to the law of demand.

Seven reasons to invest in fine wine

There are compelling reasons to invest in fine wine...

1. Tangible asset

Wine is a real asset, which unlike a share or bond, has an intrinsic value. As an investor you will be the owner of the wines.

2. Inflation hedge

The price of fine wine tends to increase with inflation. This makes investing in fine wine a good way to preserve wealth in times of high inflation.

3. Flexibility

While it is advisable for investors to set a three to five-year horizon for their portfolios, wine investment can be liquidated or extended, according to individual requirements.

4. Developing asset

Fine wine quality improves with age and, although it is not an income-producing product, it is a tool for capital appreciation.

5. Finite product

Fine wine appellations are not extendable as strict laws govern the production of the majority of investment-grade wines.

With the emergence of new markets in Asia increasing global demand, the delicate balance of managing supply and demand has never been more acute, probably in the entire history of the fine wine market.

6. Diversification

Classed as an alternative investment, fine wine can add valuable non-correlated returns to a portfolio, while reducing overall risk.

It’s for this reason that fine wine has been proven to be a well-established asset class in times of financial turmoil, providing a safe haven for investors.

7. Passion or interest in wine

Fine wine is a fascinating subject matter and investment in the market allows enthusiasts to combine their interest with the potential for capital appreciation.

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Does investing in fine wine leave you giddy with excitement or green around the gills? Share your views with cashy!


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