Investing in fine wine

On March 20th a wine sale held by Christie’s, a British auction house, featured so many lots that the voluble auctioneer lost count at number 36. “Thanks for keeping me on my toes,” he told the observant attendee who had noted his error. That hiccup aside, the auction was a success. Nine out of ten lots found a buyer. The most valuable—a 12-bottle case of Domaine de la Romanée-Conti 1988, from Burgundy—fetched £232,750 ($305,135). The entire sale raked in £1.3m.

Yet the room itself was almost empty: fewer than 20 people watched on as the sale reached its climax. Instead many offers came from remote bidders, with a small army of Christie’s staff acting as conduits. Screens converted sterling bids into American and Hong Kong dollars for the benefit of this far-flung audience. A third of lots attracted online interest, with bidders spread over five continents. Tim Triptree, Christie’s’ international wine director, says 41% of new clients are drawn in via the internet. That means a different, younger crowd: 61% of the company’s wine buyers are aged between 35 and 55.

Most of these new converts regard their purchases as financial investments. Simon Staples, head of sales at Berry Bros & Rudd (BBR), a centuries-old merchant in London, estimates that 85% of people who buy fine wine off the internet are less interested in consuming it than making a profit. The value of wine exchanged each year on the secondary market is estimated to have quadrupled since 2000, to $4bn. That is not a large figure—some $800bn of private-equity deals closed globally last year and £1.46trn of equities were traded in Britain alone. But the growth is what stands out. The wine-investment market is fast becoming more transparent, more diverse and more mainstream.

Less gout, more buy-out

The underlying rationale for investing in fine wine is straightforward enough. Good vintages of top estates usually taste better as they age; they also grow scarcer as fancy restaurants buy them up to put on their wine lists and wealthy amateur enthusiasts drink the rest. So prices tend to rise over time. That certainly seems true of the best estates. Eight years ago Christie’s sold that same case of DRC 1988 for £86,000—£103,000 in today’s money. In other words, last week’s winning bid marked a 126% rise in its price. The prices of the world's top 1,000 crus rose by 264% in the 15 years to end-February, according to Liv-ex, a wine-trading platform, beating both the FTSE 100 (61%) and S&P 500 (144%) equities indices.

Proponents of wine investment also argue that it displays little correlation with equities, making it a good way to diversify a portfolio. In a crisis, though, almost everything becomes connected. The Liv-ex 100 index, an industry benchmark, fell by 15% in the month of September 2008 (see chart 1). But Philippe Masset and Jean-Philippe Weisskopf, two academics at the Swiss Hospitality Management School in Lausanne, agree that the inclusion of fine wine in an investment portfolio tends to increase returns while lowering risk—as long as you are prepared to sit out the downturns. During recessions, wine is “one of the last things that goes and one of the first things that come back,” Mr Staples concurs.

These arguments are not new. What has changed, however, is the way the market operates. For investors, top crus are difficult to price: they do not generate cash flows, so their intrinsic value largely comes down to taste. And until recently, the market followed the taste buds of only one man—Robert Parker, the dominant wine critic of the past three decades. His ratings on a 100-point scale would cause prices to jump or dive, distorting markets (see chart 2). But Mr Parker has taken a back seat since 2013, and no single critic enjoys the same clout. The role of wine buffs now resembles that of equities analysts: prices generally move only when consensus exists.

That consensus is much easier to forge in the digital world. Auction houses are not the only ones to have migrated online. Merchants like BBR now promote £1,000 bottles on Twitter and Instagram. Apps such as Vivino, which boasts 32m users, display reviews and ratings at the scan of a label. Web aggregators compare prices across the planet. Such transparency creates “a virtuous circle”, says Mr Masset. Buyers and sellers gain trust in prices, attracting more wine and more money to the market.

In tandem, the wine-investment world has developed an infrastructure that echoes other financial markets. It now has its own exchanges, like Liv-ex or Cav-ex, offering instant quotes, indexes and settlement services. Various firms specialise in managing wine investors’ cellars, often referred to as “portfolios”. Brokers help buyers find the rarest stocks. Asset managers now offer to “educate” neophytes by providing tailored advice.

The need for such advice has gone up as the market has matured. To fit in the investment-grade category, specific crus must meet three criteria: they must be durable, scarce and, most important, desirable. That means a high starting price. Investors rarely consider any cuvée retailing for less than £1,000 for a dozen bottles. (Britain’s central role in the industry means that fine wine is often priced in sterling; many London merchants had their biggest-ever trading day when the pound collapsed after the 2016 Brexit referendum.) Buying at least three or five cases is also advisable: merchants then find it easier to place decent volumes when it comes to sell.

For years this meant wine investing was mostly about buying Bordeaux, which is both well known to oenophiles and produced in decent quantities. Before the financial crisis, wine investment was largely offered through pooled funds that would demand a hefty fee simply for buying large volumes of the best-known Bordeaux. But as more capital has flowed into wine, the geography of investable wine has changed.

First, as a result of this influx of money, Bordeaux prices soared. That pushed amateur enthusiasts to explore new regions, gradually lifting prices for other wines. That in turn lured “those willing to speculate” on fresh consumer demand for new regions, says Simon Larkin of Atlas Fine Wines, a company that builds portfolios on behalf of private clients. This push-pull cycle has been repeated several times since the late 2000s.

At the same time consumer tastes have changed. Shunning the beefy style often associated with top Bordeaux, amateurs now favour lighter flavours and elegance. The growing importance of Asian buyers has helped. Burgundy’s pinot noirs are a good match with Japanese and Chinese cuisine. Since 2012 a Chinese government campaign against corruption and lavish spending has accelerated this trend. Officials and businessmen, used to offering bottles as gifts, have shied away from the best-known labels, preferring less conspicuous cuvées instead.

Bordeaux’s dominance has thus eroded. The region, which represented 95% of trades in 2010, now accounts for 59% of them, according to Liv-ex. Burgundy comes next, followed by Champagne, Tuscany, Piedmont and the Rhȏne valley. Burgundy prices have nearly doubled since 2015 (see chart 1). It has helped that these regions’ top estates usually have a tiny production, split into many different crus, which makes each of them incredibly scarce. Château Lafite Rothschild, a Bordeaux star, yields up to 20,000 cases of its best wine a year; Domaine de la Romanée-Conti, a Burgundy, puts out 450.

Does it have legs?

Even as wine becomes more like other financial asset classes, however, important differences remain. First, there is the motivation of the final buyer. Investors know that stellar prices are sustainable only if someone at the end of the chain is willing to disburse that much money simply to drink the stuff. But if prices keep spiralling, the number of buyers will eventually fall. “The thinner the air becomes, the fewer amateurs you’ll find,” says Justin Gibbs of Liv-ex. Investors may already be starting to sober up. Burgundy prices have fallen by 3% since December.

Second, fakes are a perennial problem in the fine-wine business. Traders are devoting serious effort to detecting them. Merchants track individual cases via unique identifiers; auction houses send investigators to visit vineyards. But that does not prevent outright scams, often targeted at the elderly, from proliferating. They could in time prompt financial regulators to step in (the British watchdog sounded the alarm in February).

Third, the wine market follows its own specific rhythms. Patience is a necessity. The market remains small, so individual sellers often rely on intermediaries to find ready buyers. And merchants’ margin—the difference between the price at which they buy and the price they sell at—is usually 10%, often implying a net loss for investors flipping cases in the hope of making a quick profit. Mr Staples of BBR reckons you should never plan to invest for less than five years.

And the way a given cuvée accrues value is not linear (see chart 3). Prices are driven by, among other things, waves of new investors, macroeconomic conditions (in emerging markets, notably) and vintage quality. The longest-lived wines, some of which last half a century, are particularly capricious. After initial excitement, some enter a long fallow period as amateurs remember they are 25 years away from being drinkable. During this time “they don’t do much from an economic point of view,” says Charles Lea of Lea & Sandeman, a British merchant. But a decade later someone might open a bottle and realise the wine is delicious—prompting its price to double overnight.

It is very rare for prices to collapse after that: fine wines tend to disappear (ie, be drunk) before they expire. But to be a sure store of value, they need to be well stored themselves. Wines deteriorate if they are not kept in dark, damp and cool locations. They also do not like being moved around very much. This is why most investment-grade wines are stored in huge cellars managed by specialist firms, where thousands of cases lie still as they wait to change owners. When they eventually do, they sometimes do not even move. Reallocating a reference code to a new custodian can be all it takes to change ownership. Yet convenience is costly: storage providers typically charge £10 per case a year.

As the market matures further, it will continue to broaden. Climate-conscious investors, worried about the effects of rising temperatures on Bordeaux and Burgundy, may pick cooler regions like Austria and Germany, which are also peppered with great estates. Mr Weisskopf says he is already seeing the price of Swiss wines rise in auctions. The wealthiest investors may also follow the direct route—by buying the vineyards themselves. These are both a form of property and a generator of cash flows, which makes their value less volatile and more durable than that of the wines they produce. And as older generations of winemakers hang up their boots, more of the estates they own are coming onto the block. Chinese tycoons and insurance firms have already snapped up wineries in the “Old World”, including France and Portugal. They could soon set their sights on “New World” regions, like South America. In time, some pundits reckon, they may even seek to close the loop—by buying vineyards in China.