Fine wine investment: fundamental narratives

At Amphora Portfolio Management we spend a lot of time reading what other commentators write by way of fine wine investment advice. A lot of articles tend to leave the reader hanging. Conclusions such as: “has the easy money been made?”; “can the market maintain its direction?”; and “can the market press on, or are the Dollar and Euro cellars now full?” populate most market updates. For those who think there is no such thing as a bad decision this isn’t particularly helpful.

From a market commentary perspective we think this is rather unsettling. These articles are read both by those who know a lot about the market, and can make their own mind up, and the less initiated who need a bit of guidance. If you give someone who needs a bit of guidance an endless series of questions he or she will end up doing nothing. The market is being made more complicated, when it needs to be simplified.

Currently, for example, the key question seems to revolve around not just the market having done so well, (so can the momentum be sustained?), and the currency effect, which has undeniably helped the rally. Fascinating though this may be, we at Amphora think it is the wrong tack for fine wine investors.

Fine wine investment is a medium to long term game. It should not be treated as a quick in-and-out gamble. There are several reasons for this but the most significant is the cost of doing business. It is a physical asset, for one thing, which needs to be inspected and stored correctly. Additionally, and crucially, it isn’t always possible to match willing buyer and willing seller.

In other mainstream markets this isn’t an issue, because there tends to be enough liquidity to reduce dealing spreads to a minimum. If there is less liquidity, then spreads widen, and we have seen this graphically illustrated in recent months in the fine wine market. For the years of the consolidation phase (2012 to 2015), spreads were very wide, because quite simply the next buyer had to be induced to buy with the offer of a very cheap price. This is no more than human nature. If you don’t have to buy you somewhat call the tune. This year spreads as evidenced on Liv-ex have narrowed dramatically.

Why, therefore, not just ‘play the market’ at times of greater liquidity and narrower spreads? No reason at all, other than the opportunity cost of being out of the market and the difficulty of maintaining the knowledge required during quieter times to let you know when it is appropriate to participate.

Nor is this the way to play the investment game for most non-professionals. Read the financial press and 99% of advisors tell investors to ‘play the long game’. What this means is figure out what percentage of your investment portfolio you wish to allocate to fine wine, and stay in the market riding out short term vicissitudes.

Recent mainstream market performance illustrates the wisdom of this approach. Hands up all those people who thought the Brexit vote would be great for UK stocks. Hands up all those who thought the Trump incumbency would be great for US stocks.

There is a great aphorism in the stock markets which fine wine investors would be advised to take to heart: ‘narratives change, fundamentals abide’. The fundamentals for the fine wine market revolve around the ancient cast-iron law of supply and demand. Fine wine is made in tiny quantities and diminishes in supply to the market as it is consumed. Meanwhile it is improving over time as it ages in the bottle. In any market place for any good this means only one thing: upward pressure on underlying prices.

Liv-ex is right, of course, to point out potential pitfalls which may impact over the shorter term. Even then there will be plenty of out-performers, so the idea of heading for the hills at what appears to be a sign of possible short term trouble doesn’t really make much sense. Let’s just remind ourselves of what happened to the broader market when the Bordeaux sector corrected and consolidated:

Over five years Bordeaux corrected and has now regained its ground, while other sectors have powered ahead.

That doesn’t quite capture the full correction. The next chart does though. To our way of thinking if you remove the exogenous shock of the China factor, the light blue Bordeaux line would look much like the others. It is amazing how people remember the bad times and conveniently forget the good. Either way, this is a fascinating investment world that repays careful study.

The next few weeks may well be challenging in broad index terms, but there will be out-performers even in Bordeaux, as well as the other sectors. Investors should continue to believe in the medium and long term merits of the market, and look out for relative value at all times as they pursue their fine wine investment strategy.

May we wish all readers of the drinks business a very Merry Christmas and a Happy (and prosperous) New Year.

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 with Amphora.