Wine: a liquid alternative?
The fine wine market benefits from two features that are critical for investors: healthy demand and limited supply. These characteristics give it stability in times of crisis.
Covid’s abrupt economic shock and the ensuing actions of central banks impacted asset classes across the globe. But while most equity markets saw double-digit losses before resurging to all-time highs, fine wine appeared less volatile, suffering only a brief dip at the onset of the pandemic.
The Liv-ex 1000 Index, a measure of 1,000 fine wines from around the world, only declined by 4% at its 2020 low on 21 March.
Things looked similar during the financial crisis in 2008-2009. The Liv-ex 1000 dropped roughly 10% from its peak in August 2008 to a low in December. At this point, it began a steady recovery, recouping all its losses by the end of 2009. These are two examples of fine wine’s comparative stability during crises, giving rise to lower volatility over the long term.
Liv-ex 1000 has returned around 285% since its inception in 2004. This compares favourably to other asset classes, especially on a risk-adjusted basis.
Here, we highlight of a few other potential benefits and unique characteristics of fine wine as an alternative asset to consider in a diversified investment portfolio.
|12 months||3 years||5 years||Since inception (Jan 2004)|
Source: Liv-ex. Past performance is no guarantee of future performance.
Fine wine’s favourable returns stem from its internal supply-demand dynamics. Only specific vineyards in certain wine-growing regions have the necessary qualities and recognition to produce top quality wines. Fine wine also has an inverse supply curve, meaning available supply shrinks with time as wine is consumed. This creates scarcity, meaning that demand typically outstrips supply, driving up prices over time.
An attractive diversifier
Comparison of annualised return and volatility across financial assets (2007 – Mar 2021)
Source: S&P, Bloomberg, Liv-ex, ishares. Data as of 31 July 2021
Collectible assets such as fine wine are typically characterized by lower liquidity than mainstream markets or even other alternatives. This means they can be harder to quickly buy or sell. While this has downsides, reduced liquidity can also insulate assets from panic selling. While a piece of news can alarm investors to such an extent that a stock or even a whole market can lose a significant portion of its value in a single day, less liquid assets may not be affected at the same speed or to the same extent.
Since fine wine prices are primarily driven by internal factors, they have historically shown a low correlation to equity and other major financial markets. This means wine can add a healthy element of diversification to investment assets. Amid the current unprecedented market conditions, diversification is more important than ever. Expectations of higher inflation could also form a positive for fine wine as investors seek out real assets as a potential hedge.
Accessible and flexible
Fine wine’s entry point is accessible when compared with many other alternative asset investments. Investors can gain access to fine wine markets from as little as a few thousand pounds or even less to begin. Other alternatives such as direct property investments usually require a much larger initial investment. Even other “collectibles” such as art or classic cars come with larger increments of investment.
Fine wine can also bring flexibility. Many other real assets must be sold at once, whereas wine investments can easily be sold in variable size at different times. Fine wine transactions are typically by cases of six or 12 bottles (75cl) but can also sometimes come in individual bottles or magnum-sized bottles (150cl).
Fine wine markets are also benefiting from increased transparency and more reliable data in recent years. Liv-ex (The London International Vintners Exchange) is a global marketplace where participants price, buy and sell wine. Liv-ex establishes and verifies a mid-price for each wine that is used to create indices that track market performance. The Liv-ex 1000 is the broadest measure of the 1,000 most traded wines and is calculated monthly along with several constituent regional sub-indices such as the Bordeaux 500, Burgundy 150, and Italy 100.
Fine wine markets can continue to deliver long-term growth. Helped by improving technology, new producers and regions are gaining the attention of global buyers. In 2020, the best performing regions within the Liv-ex 1000 were Italy, Rhone and Champagne rather than Bordeaux or Burgundy, the traditional heavyweights. Many corners of the global fine wine market are just now getting discovered by a global audience, indicating there is plenty more growth to come.
In the near term, the global economic recovery should support demand from consumers and investors. The US recently suspended a 25% import tariff on many European wines, which adds another tailwind to the market.
Another growing theme in fine wine markets is climate change and sustainability. Extreme and unusual weather in recent years, such as late frosts in France or wildfires in Australia and California, has impacted production levels and wine quality. The industry is also making efforts to improve sustainability from the vineyard through to the end bottle. Big name winemakers in both old and new world regions are converting to organic and biodynamic production methods and many are using more sustainable packaging, such as lighter bottles. There is still a long way to go but astute wine investors increasingly take these issues into account when assessing the outlook for a region or a specific wine.
Periods of strong price growth, particularly if they are concentrated in wines from a certain region, can give way to temporary slowdowns as prices consolidate and buyers look for value elsewhere. This emphasizes the need for a selective, research-based approach to fine wine investing. Looking at relative value and quality comparisons across the entire fine wine map is the best way to find new wines that can contribute to a diverse investment portfolio as much as a dinner party.
What we’re investing in (or drinking) next
We are excited about autumn releases from several standout vintages from “new world” regions. Top echelon Chilean wines, including Sena and Clos Apalta, are pulling in rave reviews, especially the 2018 vintage which is regarded as one of the best ever. California 2018 and 2019 wines are also impressing with several, including Maya Dalla Valle 2018, receiving perfect 100-point scores. These types of scores alongside low production levels create a recipe for onward price appreciation as bottles of these standout wines are slowly drunk.
Find out more at cultwines.com
The views expressed above are those of the author and/or Cult Wines and do not represent the opinion of Cazenove Capital. Past performance is not a guide to future performance and investors may not get back the amount originally invested. This article is intended to be for information purposes only and should not be relied on as investment advice.
Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.