Upward trends

Well, thank goodness for that. We have at last entered a new tax year, and so until around next January your inbox will be mercifully free of inducements from the likes of Hargreaves Lansdown to take advantage of your ISA allowances. The financial pages will have to find something else to fill their column inches.

ISAs, you see, are incredibly big business, even though the investment returns on the most popular (cash ISAs) are derisory. The reason they are such big business is that they are tax free. There are incredibly few tax breaks around in the investment world, unless you have an account in Panama, and the most obvious, apart from your primary residence which you may prefer to view as a domicile rather than an investment, is an ISA, all returns on which are tax exempt.

Tax free savings opportunities should form a staple part of any coherent investment plan, and at Amphora Portfolio Management this is the way all investors in the fine wine market should view their exposure.

Don’t buy a case because some bloke down the pub tells you the market is going up. Allocate a small proportion of your investment portfolio and take it seriously.

Remember you are not actually buying a case of wine, any more than buying a share in HSBC makes you an owner of that bank. You are merely paying to enjoy the economic benefit over a period of time.

That benefit has to include the option of sale at any point, otherwise it does not constitute an investment. Thus you are, in fact, borrowing a case of wine for an indefinite period (unless you decide to drink it, but of course you can’t drink it because it is part of your investment portfolio, not your drinking cellar).

Investment returns are currently very hard to come by. A year into the pension reform programme which has allowed people to access their funds more easily than ever before, the last 12 months’ “balanced portfolio” returns (equities, bonds and cash) make pretty grim reading. Last weekend’s ‘Money’ supplement in the Sunday Times would want to make you go live in a cave.

We should therefore view the current rally in the fine wine market with excitement and relief. We have talked about this in recent weeks, but the rally continues apace. A healthy, or alarming, depending on your state of mind, correction last Monday in the Liv-ex 50 was more than made up for the following day.

Two things stand out in the current phase. Firstly, the leadership of the market. As we all know, the fine wine market behaves in the same way as the stock market, in that interest rotates from sector to sector.

Nothing in the investment firmament ever goes up or down in a straight line. Over the last five years Bordeaux has had a rough ride, admittedly having earlier gone stratospheric, but during that time wines from Burgundy, Italy and the Rest of the World have picked up the slack.

In the current phase, it is Bordeaux leading the way. In the last month the Super Tuscans and Champagne have been flat, but all other sectors are in positive territory (even the Rhône!), but Bordeaux is leaving them all in its wake. On a month-on-month (MOM) basis the Bordeaux 500 sub-index is up 2.57%, the Bordeaux Legends + 1.8%, Burgundy + 1.5%, Rhone + 1.2%, and ROW + 1%.

Secondly, the breadth of the Bordeaux rally is impressive. The market is not just being supported on a narrow front. The best way to illustrate this is to compare the Liv-ex 50 with its sister index, the Liv-ex 500. The Liv-ex 50 represents the last ten bottled (as opposed to en primeur) vintages of the First Growths, and it is measured on a daily basis. As a result it is the most immediately responsive arbiter of activity in the fine wine market.

The Liv-ex 500, by contrast, constitutes a much wider spectrum, including first growths, second wines, Super Seconds, Sauternes, Left Bank, Right Bank, the works. Movements in this index therefore betoken activity on a much broader front, and as you can imagine, activity on a broader front is healthier than on a narrower one.

As you can see from the above chart, over a full year the performance tallies exactly (+5%), while the journey from A to B was somewhat varied. Lest you believe the performance is somehow bound to tally longer term, please be disabused of that notion by seeing this chart.

What is encouraging for fine wine investors about this chart is that it behaves exactly as it should. In a coherent investment environment the narrower gauge ought always to be more extreme. For those who think investing in fine wine is a dartboard or finger in the air experience, this is (yet another) piece of evidence undermining that myopic view.

Acknowledgement of this also further supports the active management approach, over the passive. Last weekend’s ‘Money’ supplement also carried plenty of comment disparaging passive investment, and tracker funds.

In brief, tracker funds became popular because active managers found it hard to beat the indices. Most fund managers aren’t allowed to take too much risk, as they are measured against benchmarks, or indices. As a result they virtually shadow those indices, and take large fees for doing so. Hence the conclusion: pay a lower fee and buy a tracker.

This is all fine and dandy when things are going well, but the fact is that by definition a tracker is buying the most heavily capitalized, and often most expensive, stocks in the market, which is a disaster when a year ago they might have been oil companies and banks, for example.

This is the reason Neil Woodford has received so much airtime since setting up on his own: he is a stock picker. The indices are irrelevant to him, and to his investors.

The point is, better fund managers take a view. Woodford, Odey (for better or worse), Buffett and their like, are all active players in the market place, and so should a fine wine investor be. By all means cross-check your performance against the indices, but at Amphora we would advocate that you use the intricacies of the market to make sure your investment returns are as good as they could possibly be, rather than just buying your case and sitting in hope.

Time in the market, as opposed to timing the market, is crucial, obviously, but so is using whatever means the market affords to enhance investment performance. That means remaining alert to exactly what is going on, and using asynchronous sectoral movements to your best advantage.

P.S. Obviously I will be getting a case of finest claret from Messers Woodford and Odey for mentioning them in the same sentence as the Sage of Omaha…

Philip Staveley (pictured) 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