Investing in fine wine

Amanda Skinner - Mon 30 Oct, 2006

...In recent years, more and more people have adopted wine as part of their investment portfolio...It does seem that wines from the top vintages since 1982 outran the FTSE 100 Index and gold over the 20 years to 2003...In 2005, this interest in wine investment reached fever pitch when the Treasury announced plans to allow wine to be used as part of a self-invested pension plan, or SIPP...

 
 
For decades, shrewd people in the know have been buying more fine wine than they ever intended to consume. They have known that by selling some of their excess stock later, they may effectively be able to finance the proportion of the wine that they drink. And, if things go according to plan, they can even make some extra profit. I know one man who bought large quantities of the Bordeaux First Growths (Châteaux Margaux, Haut Brion, Mouton Rothschild, Lafite, Latour and Cheval Blanc) in the 1970 vintage. He had them bottled in large sizes (jeroboams – the equivalent of six regular 75cl bottles and imperials – the equivalent of eight bottles). Then, from the early 1980s, he sold a quantity of them on an annual basis to fund his three sons’ school fees at Eton.

In recent years, more and more people have adopted wine as part of their investment portfolio. Data is not available in the same way as for other investments, such as shares and building society accounts. However, it does seem that wines from the top vintages since 1982 outran the FTSE 100 Index and gold over the 20 years to 2003. In 2005, this interest in wine investment reached fever pitch when the Treasury announced plans to allow wine to be used as part of a self-invested pension plan, or SIPP. However, this legislation was never to see the light of day, with a U-turn on the policy announced in the following December budget statement.

The 1982 vintage, offered onto the market when still in barrel in spring 1983, could be viewed as a defining vintage for wine investment. It coincided with the arrival of former lawyer Robert Parker Jnr. onto the wine scene with his wine newsletter, The Wine Advocate. Parker decided to start rating wine, applying a quality point system from 50-100 and the first vintage that he tipped for greatness was 1982. Over the intervening years Parker has become an increasingly powerful player in the world of fine wine and his scores can make or break a wine’s performance. Whether you agree with his assessments or not (and there are constant and hot international debates about each and every one of his pronouncements), if you are looking to make profits out of wine, you cannot ignore him – his scores impact on the market.

Investing in fine wine: The best time to buy

Usually the best returns are achieved if you buy the wine before it is bottled, or "En Primeur". In the case of Bordeaux this is at the earliest opportunity, six months following the harvest. Bordeaux should form the bedrock of an investment portfolio since the wines have an international following and a proven track record. Furthermore, the top Bordeaux wines are produced in sufficient volume to create a market, even if not enough to satisfy worldwide demand.

Wine should be viewed as a long-term investment – the best returns are achieved between seven to 10 years after their En Primeur release.

Wine should be stored "In Bond", that is in a warehouse regulated by HM Customs and Excise. If you take delivery of the wine you have to pay Duty and VAT which you cannot reclaim when you come to sell. A wine In Bond can be sold internationally and it provides a seal of quality for the purchaser who knows that the storage conditions will have been perfect during the wine’s life.

You should also make sure that your advisor has the network in place to sell your wine for the best price, when the time is right. You need to be sure that they have the ability and contacts to trade your wine for you. Their network should be international and include other wine merchants, hotels and restaurants, clubs and institutions and private wine collectors and drinkers.

Investing in fine wine: Why this "wasting" asset is good news for profits

Bordeaux has a maritime climate and quality varies from year to year. September rain and cool temperatures have been responsible for the ruin of many a fine vintage and so it is very important that you get good advice on your investment purchases. There are probably in the region of just 20 Châteaux which I would rate as "performers". Again, therefore, you need a wine merchant who knows how to tell the winners from the losers and who has strong relationships with the Bordeaux traders and can access the "blue chip" wines.

Wine can also be purchased once it has been bottled and shipped to the UK. A good advisor will be in touch with market prices and snap up undervalued parcels of top wine. They will also regularly taste and re-evaluate wines – buying underrated wines and then watching their reputation and value grow. A recent example of this is the 2004 vintage. At its release, in spring 2005, there was not a huge global demand and the wines tasted awkward. A year later, they had developed well, filled out and were looking very attractive, yet their price had not moved. We bought as much as we could of the top wines and the prices are now starting to move upward.

Wine is classed as a "wasting" asset and as such does not attract Capital Gains Tax on profits made from its sale. There is not enough blue chip wine made to satisfy a growing international market, and demand outstrips supply. When the wines start to mature they are consumed, which brings further potential rewards as the wines become more scarce. New markets such as Russia, China and India are developing a taste for fine wine and there is no shortage of money to pay for the top names.

Investing in fine wine: Watch out for the conmen

As with every money-making venture you can think of, wine investment attracts fraudulent operators. If you buy wine En Primeur, you are paying for it when it is still in barrels at the Château. It will not be bottled and shipped for another two years after you have handed over your hard-earned cash and you need to be sure that the merchant will, and can, honour the contract.  You also need to make sure that your ownership is physically recorded on your cases of wine – in the 1990s several wine companies collapsed and their customers’ wines had not been separated from the company’s stock nor labelled with their owners’ details. Beware also of traders offering seemingly competitive prices, but who create cases of the same wine with 12 bottles from varying sources. Cases must be packed at the Château, and provenance is critical when you are buying for investment.

Investing in fine wine: How to start a wine portfolio

What follows is a rundown of the service we offer and its costs to investors, it is not an overview of the market. Other wine merchants will no doubt differ to varying degrees in the parameters of the service they provide and the costs attaching.

The minimum initial investment is £10,000, but I would recommend an investment of £25,000 to establish a balanced portfolio of different wines. Our practice, is to propose a portfolio, confirmed in writing. Wines are bought In Bond at list price, which – because of the transparency of the fine wine market – will, in effect, be the market price.

Portfolio service clients have online access to their account, quarterly valuations and vintage reports, and access to fine wine and investment experts for a £35 annual charge. Annually updated stock certificates itemising original cost, current value, customer rotation numbers and drinking date information are also provided.

In addition, a client account is set up at Vinotheque (an HM Customs & Excise regulated warehouse, providing ideal and secure conditions for wine storage – www.vinotheque.co.uk), where the bottled wines are stored. Rent and insurance against fire, theft, flood and accidental damage are charged on a quarterly basis, currently in the region of £9 to £11 per case, on a sliding scale favouring larger collections of cases.  Although it is impossible to provide the same degree of segregation for En Primeur wines, still in cask overseas, we insure all such purchases against possible default in the supply chain.

Though no commission is charged on purchase, when it is time to sell commission is charged currently at 12% plus VAT if cash is being withdrawn A reduced rate of 10% plus VAT is charged if the proceeds are to be reinvested in wine. Clients can of course withdraw wines for drinking at any time, although Duty and VAT become payable.


Regards,

Amanda Skinner
for The Daily Reckoning