Wine Country, Napa Valley

Is Wine A Good Investment?

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It was September 2000—an average fall day in Chicago. A friend of mine was finishing up his workday, trying to leave a few minutes early to catch a wine auction downtown with his colleagues. He wasn’t planning on purchasing anything, but after a few complimentary tastings he started getting loose with his wallet. There were numerous bids and counterbids (and additional tastings), and when all was said and done he ended the day with a handful of First Growth, Left Bank Bordeaux wines. For those unaware, the Bordeaux region in France is divided by the Gironde Estuary, a body of water fed by the Garonne and Dordogne rivers. Each side encompasses multiple appellations and sub-regions, but the primary grape used in the Left Bank is Cabernet Sauvignon, while Merlot is more common on the Right.

Even if you don’t follow the world of wine, chances are you’ve heard of some Left Bank producers. The region houses famous Chateaus like Latour and Margaux—two wines my friend happened to procure at this auction. All in, he paid a total of $1,560 for 7 bottles. A couple of years went by and he eventually moved out west to San Francisco, which is where I met him. But it wasn’t until late 2010 I became aware of these prized jewels in his possession. I pleaded and begged for him to open one, but my cries went unheard. By this time, the bottles had appreciated so much in value he was left with one choice: he had to sell. Selfishly I disagreed, but it was hard to argue with his decision.

Over the last decade, the price for French Bordeaux has reached astronomical levels. Much of this is due to rising wealth in China, where fine wine has become a sort of status symbol. In fact, the Chinese were buying so much Bordeaux they surpassed the US in 2009 as the largest non-European export market, according to the Wall Street Journal. The results were clear. My friend put his 7 bottles up at auction, and a few days later had over $8,000 in his pocket. That’s an annualized return of 16.9% over his holding period—not bad! The S&P 500, by comparison, was up only 12.9% over that same period. Total. On an annualized basis that’s only 1.1% per year.

Of course, much of this difference can be explained by mere timing. The S&P 500 was sitting close to an all-time high in September of 2000, and shortly thereafter plummeted as the Technology bubble burst. But even if you measured from the market bottom in 2002, these wines would have outperformed the S&P over the last 10+ years.

So Why Isn’t Everyone Investing In Wine?

Investing In Wine Table

For one, returns like these are more the exception than the rule. Elroy Dimson, Peter Rousseau and Christophe Spaenjers published a recent study called The Price of Wine. In it, they estimated the long-term (1900 to 2012) annualized rate of return on wine was 4.1%, net of inflation, storage and insurance costs. Clearly that’s a bit lower than the growth my friend experienced. And over that same period equities have offered superior returns.

The study was also based on five of the most famous and highly sought after Bordeaux wines: Haut-Brion, Lafite-Rothschild, Latour, Margaux, and Mouton-Rothschild. Had the study focused on more “average” producers, or producers from other regions in the world, the long-term returns would be even lower. French Bordeaux (and Burgundies for that matter) command some of the highest premiums in the wine world. This means that 4.1% likely represents the upper bound of historical returns.

But perhaps most important is the fact that wine is a physical asset. Unlike stocks, bonds and other liquid investments, most purchasers of wine take physical delivery of the bottles. And once you take possession, the wine needs to be properly stored in a temperature controlled environment. This means you need a cellar or storage device, or at least a third party location that rents storage space. And of course, you would want insurance against damage or theft. The monetary cost of these factors was included the study’s 4.1% long-term return, but transaction costs were not. There are a number of online trading platforms and auctions, but fees still range from 10% to 30% of the selling price. This is a significant drag on performance.

There are also non-monetary factors to consider, like time and effort. Buying and selling wine means you have to get to and from locations that sell, pack and ship wine. This is a much bigger hassle than sitting at your home computer and entering an order to buy 10 shares of Google. Like other investments, you also need to do your research. Not all vintages and producers are created the same, so they will not appreciate at the same rate. Some will even decline. A couple of recent vintages serve as prime examples. Characterized by almost perfect weather, 2009 was considered one of the best years on record for French Bordeaux. As such, it commanded some of the highest prices ever in the futures market. A 2009 Lafite Rothschild, for instance, was selling for over $1,900 a bottle at certain retailers in 2010. However, according to Bloomberg, prices have already pulled back by more than 50% as demand from China waned over the last few years.

Currently, the 2013 Bordeaux vintage is for sale. But this was a much more challenging year plagued by poor weather conditions—some even calling it a disaster. So while there may be pockets of quality, as a whole it will be very difficult for producers to command the same premiums as before. Lafite Rothschild already reduced prices by 14%.

How Would Wine Fit In Your Portfolio?

Wine is a physical asset and collectible, and is not considered one of the major liquid asset classes of investing. Nevertheless, it should be evaluated in the same context. Said another way, will investing in wine help diversify your portfolio, enhance returns, or both? The study referenced earlier points out that wine prices have a substantial positive correlation to equity prices. In other words, prices tend to move in the same direction as stocks. Conceptually this makes sense. Wine sales are predominately driven by rising wealth, and wealth increases as the stock market rises. So when it comes to diversification, wine is probably not the best counterweight to a portfolio of stocks. For a more in-depth (albeit technical) discussion of this topic, see our previous post How Diversification Helps You Save Money.

There is, however, some potential return enhancement. While the inflation-adjusted historical return on wine is lower than equities, it is still higher than bonds. So trading a small amount of bonds for wine could make sense, as long as it didn’t substantially increase volatility (i.e. risk). But again, other monetary and non-monetary factors need to be considered, like transaction costs, and the time and effort of dealing with a perishable physical asset.

So Is Wine A Good Investment?

In reality, investing in wine is impractical for most. There are simply too many hurdles to buying, storing and selling that it’s not worth the time. Moreover, fees at most online trading platforms and auctions are much too high. I, for one, am a consumer of wine, not an investor. Every bottle in my possession will eventually end up in the same place: my stomach. But if for some reason a bottle in my collection appreciates +500%, I might consider letting it go. The proceeds, of course, would be used to acquire more wine for consumption.

Related: Giving Up A Six Figure Job For A Wine Passion

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Brendan Erne, CFA
Brendan Erne serves as the Portfolio Management Team Leader with Personal Capital Advisors. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

One Response

  1. Tom Gearing

    Whilst I would agree with the general sentiment and points made in this article, I feel the author has somewhat over-exaggerated the negative carry associated with investing in wine – namely the transactional, storage and insurance costs.

    To store and insure a case of fine wine in a professional wine storage facility – where it is held exempt of duties and taxes – costs a very small amount relative to the value of the wine. For example a £2,000 (12 bottle case) would cost £8-£12 per annum depending on which facility you use (0.5% p/a). In terms of tracking prices for fine wine and valuing your investment in real-time, it has never been easier and more transparent. A free membership to Liv-ex, wine-searcher or a free account with http://www.wineinvestment.com will provide collectors with live accurate daily updated prices of their wine portfolios at zero cost.

    When it comes to exiting the market and liquidating your holdings, it has never been more competitive to sell your wine. there are a number of established wine platforms which can charge sellers as little as 3.5-5% for sales. whereas most reputable wine merchants, brokers and investment firms will charge 10% to sell. But this is a number which if shopping around, could easily be pushed down to 7-8%.

    So realistically over a typical investment term of 10 years for optimum returns from a fine wine portfolio. The investor who incur (0.5% x 10) 5% fees for storage and insurance. And worst case scenario 10% for selling. This accumulates to a total outlay of 15% over 10 years. 1.5% per annum.

    As long-term historical performance of fine wine shows (www.liv-ex.com) the average returns over a 10 year period since 1989 have been 12.9%. Therefore the adjusted returns over and above all costs works out at 11.4%.

    over a 5 year period the 15% total costs annualize to 3% p/a which reduce the overall investment return to just under 10%.

    For those that are time sensitive and are put off by the scale of knowledge required to analyse and select wines to buy, there a specialist wine investment companies that will do this for you and provide a full top-to-tail service so you don’t have to worry about any of these hurdles or spend your time doing them.

    Reply

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