Spotting anomalies and differentials

One of the key elements of any investment service ought to be the highlighting of pricing anomalies, and Amphora Portfolio Management’s wine investment clients know how much time we spend scouring the market for such opportunities. You can think until you are blue in the face about why anomalies exist. It’s important to analyse each and every one, because there is usually a good reason for a price differential, but you have to distinguish between a price differential and an anomaly.

With an anomaly the price of two elements ought to be the same, or similar, but isn’t. In a highly researched market place there are fewer anomalies than in an inefficient one, obviously, and the reason the anomaly exists is often down to simple market inefficiency. Our advice would be to make the most of those you find in the fine wine market while you can.

Earlier in the summer we pointed out that Latour 2009 was incorrectly priced against Latour 2010, and sure enough the 2009 has outperformed over the last few months. There is still a deal to be done there, by the way, but today we are back to an old hobby horse, Ausone.

One of the key components of the Amphora algorithm concerns the original production level. Unfortunately once a wine has come to market it is impossible to know how much remains in existence over time, yet availability and scarcity are a crucial part of the underlying investment dynamic.

As a fine wine ages in the bottle it improves in terms of complexity and appeal, and simultaneously supply to the market diminishes, as it is drunk. Reducing supply and increasing desirability = rising prices, in any market. Eventually, of course, market pricing starts to resemble the fine art or antique market. Imagine being the owner of the last case of Lafite 1949 in existence. You can almost set your own price.

Anyway, one of the reasons wines like Le Pin in Bordeaux and DRC in Burgundy are off the scale in terms of pricing is that so little is produced in the first place. Some 400/500 cases per vintage, as against 10,000 and more cases of the First Growths. We have analysed production quantities in considerable detail and in all sectors they are an important determinant of pricing.

Back to Ausone. On 22 June Ausone 2010 traded at £8,400. As of last night’s close it is just shy of £13,000, a price appreciation of well over 50%, and over the period since the referendum it is the best performing Ausone. At the other end of the scale, the worst performing Ausone is the 2009. On 22^nd June it cost £9,000, and, despite a euphoric performance in the Bordeaux end of the fine wine market, it can currently be bought for £8,800. Here is the chart:

Robert Parker waxes lyrical about both, scoring them equally at 98+. At en primeur tasting (April 2010) he accorded the 2009 a range of 95-97+, then firmed up to 98+ in February 2012. By contrast you could say the 2010 dropped a notch from a range of 98-100 to 98+. In 2009 Ausone produced less than 1200 cases, in 2010 marginally more at 1500.

On the face of it, therefore, the 2009 is a huge buy.

But we also know that investors don’t really ‘get’ Ausone, (or haven’t over the last few years), so are there any other pricing oddities? Remember that we can’t still maintain that the whole château is out of favour when several have done extremely well of late, but it is interesting also to note how the market treats the millennium vintage, and the 100 pointers, from 2003 and 2005.

2003 is up 6.5% since the referendum, and the 2005 is unchanged. By contrast the 2000 is up 46%. Let’s look over the longer term:

The one thing which should not surprise us when we are dealing in wines of limited production is volatility, because there is often insufficient throughput to create price stability. The recent decline in the 2005 is likely a case in point, and equally likely a buying opportunity should anyone care to take it.

When we run all the wines through the algorithm, we are not surprised to find that, in relative value terms as expressed through the algorithm, 2010 is off the scale expensive, followed by the 2000. Not only that, but the 2009 is no great bargain either, notwithstanding its cheapness against the 2010.

The conclusion we draw is that there is indeed an anomaly here, but it is that the 2010 is unjustifiably expensive, rather than that the 2009 is extraordinarily cheap, so investors should not rush out and buy the 2009 on the strength of the discount.

Ausone is comfortably the most expensive St Emilion partly due to heritage, and partly to scarcity. Liv-ex posted a blog yesterday (14 November) focusing on a couple of others, highlighting the outperformance of Angelus against Pavie. They are right to do so. Since the referendum there are only two Pavie vintages in the top 15 price performers against 13 from Angelus.

We have looked at these two producers before, and our conclusion has always been that Pavie has created the higher scoring wines over the last 15 years or so, and therefore the better opportunities likely exist there. We have noticed over time that Angelus tends to be the more expensive, like for like, and in Amphora’s view this is explained in no small part by the production levels.

On average, Pavie produces around 8,000 cases per vintage, whilst Angelus produces just under 7,000. It is always difficult to be precise about why a market might seem to value one producer’s wines more highly than another, which is why we have gone to the trouble of creating the algorithm. If we put all of the last 15 vintages of both Pavie and Angelus through the algorithm, we find there to be almost without exception better value in Pavie than in Angelus. Amphora therefore favours the view that the next few months will see the recent outperformance of Angelus over Pavie unwound somewhat, and would therefore overweight the latter in a balanced portfolio, against the former.

Best buy: Pavie 2008 if you can get it for under £2,000.

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 Amphora Portfolio Management