Fine wine investment: taking the lead in Napa

Back in December last year Amphora Portfolio Management recommended that wine investors pick up Dominus 2009, and over the period it has risen a tidy 20%, a healthy return in most people’s language. Of late the focus has necessarily been on Bordeaux, what with the en primeur campaign and so on. Time now perhaps to remind ourselves that there are fertile avenues of fine wine investment elsewhere in the firmament.

In the same December note we touched on a couple of the intricacies of Napa, and it seems appropriate at this point to elaborate, in case the focus of the market more comprehensively revolves away from Bordeaux.

As a house we re-weighted portfolios during the Left Bank consolidation phase (roughly mid 2012- end 2015) into Napa and Tuscany in particular, with particular good fortune in respect of Opus One 2010, which has rewarded investors with a fabulous return. By the end of the consolidation Opus ’10 had risen around 20% to £2,300, before fully participating in the subsequent rally up to a high of £3,000. It has paused for breath and currently trades around £2,800.

For those who don’t know, Opus One and Dominus, the main Napa producers from an investment perspective, first hit the road back at the end of the 1970s, and so are total parvenus by comparison with Bordeaux. They both, however, have quite substantial aces up their sleeves.

Opus One was established by Robert Mondavi and Philippe de Rothschild, and their first vintage was produced in 1979. It takes a while to get into your stride, obviously, and for the first 20 years the scores were decent without being particularly noteworthy, high 80s to low 90s mostly.

Opus first cracked a 96 in 2004, and it would be nice to report that this was the springboard to even greater things, but unfortunately despite vintages like 2007 being really propitious in Napa, (overall vintage score of 96), Opus has struggled.

“Struggled” is a relative term, of course, but we are talking about an elevated space at the top of the fine wine pyramid here. Opus failed to improve on 96 until 2013, when it scored 97+, admittedly in an amazing vintage. That year the vintage score was 98. It is incredibly hard to find a higher vintage score than that (Pessac Léognan in 2010 is the only 99 that springs to mind), and you would expect the better producers to take full advantage.

Finally, Opus One produces some 25,000 cases per year. This is not the stuff of scarcity. Not many Super Seconds produce as much as that, with many of the top names considerably less. So as the picture evolves we see a winery with impeccable credentials performing slightly below par, if that is not being hyper-critical.

Happily, we have a point of reasonable comparison, in Dominus. Dominus was established in the early 1980s by Christian Moueix of Petrus fame. First proffered in 1983 it scored a 90 off the bat, and only took until 1987 to feature a 96, rising to 98 in 1991 and 99 points in 1994. This represents a pretty fantastic first decade of output.

It took until 2001 to register another 98 but followed it up with a second 99 in 2002, and performed perfectly creditably over the next few years before hitting the jackpot in 2010 with its first maximum. Not content with that it scored another in 2013 and has an in-barrel score of 99-100 for 2015.

It is hard to argue that Dominus is underperforming, and when you see that between the grand vin and the second wine (Napanook) they produce between 7,000 and 12,000 bottles per year, you also have the potential for early scarcity. Earlier than Opus One anyway.

So, we have producers with comparable credentials, the lower production wine (Dominus) significantly outperforming in terms of Parker score. This would suggest that Dominus ought to maintain higher price points, these material variables considered, but such is not the case. Far from it.

One of the features of the Amphora proprietary algorithm is that it allows comparisons not simply between different vintages of the same producer, but across the market as a whole. When we pit Dominus against Opus One, much of whose variable data is the same, we find the top 14 places populated by Dominus vintages, the bottom 13 by Opus One. By every measure Opus is considerably more expensive than Dominus, despite having much higher production levels and achieving considerably lower scores.

Sometimes a market will take what appears to be a fixed view which is at variance with the evidence, and maybe this is what we see here. It is possible that there is a coherent explanation for this. Maybe the market is uncertain about something, perhaps the ongoing secondary market. There are plenty of fine wines, particularly in Australia, which cannot be included in an investment portfolio because there is too fickle (or non-existent in many cases), a secondary market.

If we examine secondary market activity between Opus One and Dominus, it is true that there is more activity in the former. Perhaps that is to be expected given the higher production level. But perhaps you could also argue that the market is unconvinced about Dominus, from a marketability perspective, and is marking it down accordingly.

The Amphora conclusion as a result of this secondary market question mark is that it would be too high risk to overload a portfolio with Dominus at this point. That said there is much to be excited about, and in our experience you have a far better vantage point checking out such nascent excitement from the perspective of ownership than from a position on the sidelines.

We would therefore be a buyer of Dominus, with the 2009 still featuring well in algorithmic terms.

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