Don’t count out Bordeaux

One of the interesting aspects of the fine wine market over the course of the last few years is the seemingly obvious change of leadership, from Bordeaux to both Burgundy, and the ‘Rest of the World’, writes Philip Staveley.

From a position of trading domination back in 2011, has Bordeaux simply become “another player in the market” in more recent times?

As with much in the world of statistics, a lot depends on your time frame. As the below chart illustrates, a fine wine investor would have been very wise, and possibly blessed with genius, had he or she switched out of the first growths back in mid-2011 into Burgundy, the Rest of the World, Italy, and even the much overlooked Champagne sector, (mind you, that does seem to offer quite a lot of options).

The headlines have resounded in recent years with tales of woe from the fine wine investment fraternity: “Liv-ex 100 down AGAIN”; “Liv-ex 100 down for the third year running”; and so on. As an adviser to this august body we at Amphora Portfolio Management have our fair share of disgruntled clients, principally people who were attracted by the stratospheric rally in that same Liv-ex 100 and who unfortunately bought within 12 months or so of the peak.

One of the questions any investor has to ask is how long is the term of the investment, and anyone looking to make a fast buck out of fine wine ought perhaps to look elsewhere. The very investment thesis, predicated as it is on diminishing supply (over time), and appreciating quality (over time), offers a pretty big clue.

So how, over time, have the recently under-performing sectors in Bordeaux managed to repay the patient and faithful? And what should we take as a benchmark?

If you were to ask any investors in this space, right now, what they wish they’d been exposed to on a longer term view, you can virtually guarantee that they would plump for Burgundy and the Rest of the World. And why not? These are the outperforming sectors of recent memory. From no investor in these sectors has there been a wailing and gnashing of teeth over the last four years.

But what of the longer term?

Here is the 12 year view of Burgundy, rebased to 100:

Let’s now add the Rest of the World:

So although the five year view favours ROW, over 12 years it is up 122% against the 200% performance of Burgundy.

And what of the much-vaunted Super Tuscans?

It will come as a surprise to many that on a five year view both Burgundy and ROW greatly outperform the Super Tuscans, but over the longer term there is nothing to choose between Italy and ROW.

When we add Bordeaux to the mix, the result is quite revealing:

The orange line is the ‘Bordeaux Legend’ sector, which essentially comprises iconic vintages from producers on both left and right bank, whilst the Liv-ex 50 represents the last ten physical vintages from the five First Growths. Both of these indices have had a tough five years, but if you were early enough to the party you are likely still making a decent return. Not only that, but over the longer term view the under-performance against the market-leading Burgundy sector is relatively small, whilst against Italy and ROW you are still outperforming.

We had the pleasure of reviewing a portfolio recently which broke most investment rules, but which the owner was perfectly happy with. It was worth about £40,000, comprised only six cases, five of which were Mouton or Lafite. It was exclusively Bordeaux, and obviously almost exclusively left bank. However it had two vital ingredients which had bailed it out: one was investment term (the Lafite 2000 was up over 270% and the Mouton 2003 was up over 130%); the other was Mouton 2000.

For a variety of weird and wonderful reasons, Mouton 2000 has ignored the mayhem going on all around it. It isn’t even a 100 pointer (RP 96). Remember that Burgundy chart? Mouton 2000 leaves even Burgundy trailing in its wake.

So not only was this portfolio totally polarized, but fully 33% was a single wine, and that a first growth. The risk was off the scale, yet the owner had more than doubled his money. And the miracle here is not so much the constituent parts of the portfolio, but the term of the investment.

Performance alone would suggest that Bordeaux remains a very important sector within the fine wine market place, but even more importantly so do volumes in the market. Given that an investment is only an investment so long as you can sell it, liquidity is a crucial ingredient, and this is where Bordeaux scores over all its rivals, particularly Burgundy.

Burgundy thrives on quality and tiny production levels, leading to almost immediate scarcity. That’s great during the ride, but if an investor is severely penalized on exit by either no liquidity or a massive spread it becomes very frustrating. That is why many believe Burgundy to be a collectors’ market, rather than an investor haven. That said, an investor who has time on his/her side can afford to accept a miserly bid if the performance over time more than offsets the damage.

Last week Bordeaux represented 84% of total trade on the Liv-ex exchange. Although this is higher than last year’s average, the levels for the other key sectors for 2015 were Champagne (6.5%), Burgundy (5.9%) and ROW (4.4%). The simple fact is that you can’t play this market in any meaningful way without accommodating Bordeaux in your portfolio, and that if you play it as you should, over the longer term, then shorter term woes are given their proper perspective.

Philip Staveley is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition at APM. www.apmwineinvestment.co.uk