Fine wine investment: Contrary bubbles

It is quite a challenge at times like this when the Champagne sector outperforms, because the dynamics which apply elsewhere in the fine wine investment world do not tend to apply to Champagne.

As most people now know we at Amphora Portfolio Management have a proprietary algorithm which assesses a series of variables all of which are to a varying degree crucial determinants of pricing.

Although it is best to take all of them into account, you can do rough calculations by focussing on cru classé status, vintage quality, and critics scores, because the outcomes from those variables are more or less binary. A first growth will cost more than a Super Second; an ‘on-vintage’ will cost more than an ‘off-vintage’; and a wine scoring 100 points will score more than if it had scored 98 (or indeed anything other than 100).

We can endlessly debate the relative impact of all these variables, and in-house we often do, because we are aware that the algorithm is destined always to be a work-in-progress, but we can park that particular discussion for another time. The question for now is, in light of the above, how do we treat Champagne?

Firstly, we are only talking vintage Champagne here, and that in itself is a curiosity. Non-vintage Champagne also improves over time as it ages in the bottle, but it is hugely mass-produced and more significantly, until recently, not dated.

Furthermore, a house like Krug doesn’t even believe that its best offering is vintage Champagne, and always vigorously markets the benefits of its Grand Cuvée. Remi Krug, chairman of the company, has always said that the first decision revolves around the Grand Cuvée ahead of the particular vintage Champagne.

Then there is the Robert Parker effect. Parker isn’t universally considered the most influential critic of Champagne, partly because he handed over the responsibility to other Wine Advocate tasters so long ago. That accolade is often reserved for Richard Juhlin, a Swedish journalist who at a blind tasting back in 2003 correctly identified 43 out of 50 different Champagnes. The Juhlin scores aren’t published widely though, unlike those of the Wine Advocate, so the influence of his opinions specifically on pricing is harder to ascertain.

So, why bother? See chart below.

As we are all aware the fine wine indices have had a very decent 12 months, with the Liv-ex 1000 up from 273 to 317, or a shade over 16%. Most of the constituent sectors within that index have done pretty well too, but the outperformer is Champagne.

We last wrote in any detail about Champagne just over a year ago suggesting that there ought to be an allocation to Champagne in a diversified portfolio, but any prescience we might wallow in from that suggestion has to be tempered by the fact that at the same time we advised that the issue price of Krug 2002 looked pretty toppy and it has rewarded that forecast by rising 13% over the last year. Still, it has underperformed, please note!

Looking for investment opportunities we see that the aforementioned Juhlin thought very highly of the Krug 2002, awarding it 97 points. It transpires that the best Champagne your correspondent has ever tasted, Krug 1998, also merits 97 points. Same price then, presumably?

Hardly. Here is the chart:

The 1998 has done well on a two year view, clearly, but something has to break here. Either the 2002 comes off somewhat, or the 1998 is a bargain. Interestingly Parker scores the 2000 alongside the 1998 at 95 points, but in a Decanter tasting Juhlin scored it 94, so that may explain the c.6% discount against the 1998 offered by the 2000.

It’s not like all the 2002s are particularly expensive either. Juhlin’s scores for Taittinger’s Comtes de Champagne are identical at 95 points for the 1998 and the 2002, yet a few months ago the 1998 awoke with quite a start:

It is hard to identify any particular explanation for this but we did mention in the note last year that it was particularly cheap.

Regrettably we forced too few investors’ hands into picking some up, so it is worth stating loud and clear that this makes the 2002 look pretty attractive at around the £1,800 mark. We should mention that Wine Advocate scores are a mere 94 for the 1998 and a spanking 98 for the 2002 so if it has any credibility in the Champagne market this offers further support for the recommendation to buy the 2002.

There are some weird and wonderful aspects of pricing in the Champagne sector, it has to be said, but it is worth participating in for such times as now when the sector has the wind in its sails.

We would recommend buying Krug 1998 and Taittinger 2002.

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.