Fine wine investment: minimising risk

As regular readers will know we at Amphora Portfolio Management have been banging the fine wine investment drum for some time in India, and it is with interest this week therefore that we see the wisdom of this highlighted in the Indian Economic Times.

The journal’s Alternative Investments Monitor looks at diamonds, precious metals, fine wine and coins, and the performances over a year read, respectively, down 4%, down 2%, up 20%, and down 10%.

This is interesting for (at least) two reasons: firstly, fine wine would not have been worth a mention in an Indian economic journal of, say, three years ago because such an investment would have been anathema to that readership; secondly, many more Indians have, almost automatically, over the years invested in both gold and diamonds. They will hopefully be shocked that what they have been salting their money away into could have perhaps been better spent had they diversified into fine wine.

We also had our inaugural visit to Dubai recently. It may come as a surprise that in a Muslim country we can find interest in investing in alcohol, but remember that fully 80% of the population of Dubai is expatriate, and while many of these are in the wrong socio-economic bracket, there are plenty of others who are very interested in what we do.

A typical question when we enter a new environment revolves around risk, so perhaps it is worth dwelling on this topic for a moment. It is vital that whoever you use as an adviser or intermediary in your venture into fine wine investment, they are able to convince you that the ONLY risk you are exposed to is market risk. Let me state categorically here that there should be NO OTHER risk involved with your investment experience.

To clarify, there should be no risk of non-delivery of your wine, no risk of incorrect delivery against your invoice, no risk of your not enjoying absolute ownership, no risk of imperfect storage compromising sales proceeds, no risk of loss from uninsured bottles, and so on. You should also be minimising the risk of buying the wrong wines at the wrong price, by ensuring that you are dealing with someone whose interests are aligned with your own.

While the market carries its own risks, fine wine investment carries some very interesting guarantees, which set it apart from other investment media. Not only is supply limited, but supply to the market place diminishes over time. By definition, since wine is made to be drunk, and as it is produced in finite quantities, every time a cork is popped that’s one less bottle to go around.

Again, by definition, the distinguishing feature of “fine wine” as opposed to other wine is that it improves over time as it ages in the bottle. It does. Fact. Otherwise it wouldn’t be classed a ‘fine wine’. So it doesn’t take a genius to work out that diminishing supply in the face of increasing desirability tends to result in upward pressure on the price of the underlying asset.

This is why people invest in fine wine. The dynamic is almost unique, and over time it is quite hard to go wrong. Hence the risk of making an investment should be reduced provided you remove non-market risk.

Last week we highlighted wines which have been thrown into relief by the en primeur campaign, and there are more along similar lines. One of the recent releases thrown up by our proprietary algorithm is La Mission Haut Brion 2014. ‘Mission’ typically produces high 90s-scoring wines in on-vintage years, and mid 90s in off. In Pessac Leognan in 2014 the vintage score is 93, superior to any other off-vintage in living memory bar 1998 (94 pts). Yet the 95-point 2014 languishes alongside inferior wines at around the £1,600-£1,700 mark. This wine has just gone physical having suffered alongside other 2014s through an indifferent En Primeur campaign, and is now one to watch.

You might be interested to see what a basic algorithmic page comparison looks like. Here is l’Evangile:

What this tells us is that the 2008 is worth looking at. Actually we know it is, because while most of the anomalously-priced Pomerols from 2008 that we have highlighted in the past have come into line, L’Evangile is still lagging.

The above chart is a pictorial expression of the amalgam of inputs that represents the algorithm. In simple terms, it is quite hard to find a L’Evangile below £1,000. The 2012, the 2008 and the 1998 all score 94-points individually, but the vintage score in Pomerol is superior in 2008 at 96-points. There is a single 2012 in the market at £995 after which the prices are over £1,100. The 1998 trades around the £2,000 mark (why? you tell me! If only we could short it…) Meanwhile you can (and should) buy the 2008 around £950, and that is why the blue line above is the highest.

I mentioned the dreaded word “guarantee” earlier. Just to be clear: those guarantees refer specifically to definitions within the fine wine space. You should run a mile if anyone offers you guarantees in terms of investment performance. Like any other market place, the fine wine market is subject to animal spirits, and whilst at Amphora we believe that risk should be embraced, it should also always be acknowledged.

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.