Fine wine investment: Dancing to a different algorithm

We would like to thank everyone who responded so positively to last week’s article which highlighted what the algorithm brings to the party. All such new enquiries are most welcome. We had queries asking which regions the algorithm most favoured, which vintages, and more specifically how best to use it to assemble a portfolio.

One of the interesting features it is drawing our attention to at present is the value available in the 2014 vintage, as we discussed this at some length back in November. Any diversified portfolio should have a good weighting in this undervalued vintage. But as we are always at pains to stress, the fine wine market can accommodate varying levels of risk.

Risk in fine wine investment can be controlled in various ways, and one of the ways to ramp it up is to polarise your holdings. As we often say, for £100,000 you can either have 25 wines from many different regions across a wide range of vintages, or you can have six bottles of 2008 Domaine de la Romanée-Conti

In recent months we have had investors focusing on specific opportunities, like 2008s from Pomerol, for example, or the 2014s referred to earlier. This is a decent approach because you get the specific theme you are looking to take advantage of, but you are also diversifying through holding a variety of producers. High conviction investment with mitigated risk, if you like.

So one of the queries arising from last week’s note asked which was the top scoring algorithmic wine in every region, and a good question it is. Another asked for a small portfolio consisting only of wines whose algorithmic score is a distinct outlier. In certain sectors, like the first growths, several wines vie for the top spot and their scores are quite close. In others, like the Super Seconds, Montrose 2012 at £655 is absolutely off the charts cheaper in relative terms than anything else. Let’s cover both questions in this week’s note.

As we say, among the first growths you can throw a handkerchief over the scores of three Moutons (2009, 2012, and 2014), and two Haut-Brions (2006 and 2014). Under these circumstances we can come back to this sector once we see the vintage profile thrown up by sectors with more definitive ‘winners’. As for the Super Seconds, Montrose 2012 picks itself. Looking into the second wines, we find Carruades 2009 edging out Carruades 2010, but both are way ahead of the next contender. Again our final pick can rest on what we discover elsewhere.

Over on the Right Bank, in St Emilion we find Cheval Blanc and Pavie occupying the podium, with both producers’ 2014s vying with the Cheval Blanc 2012 and the Pavie 2008. In Pomerol there is no argument as to either producer, or vintage: l’Eglise Clinet 2011 wins by a distance.

To digress momentarily, we have pointed out in past notes that l’Eglise Clinet as a stable seems to be undervalued, indeed various vintages from there occupy 9 out of the top 10 spots. We have examined this situation from many angles and so far cannot account for the market downer on this chateau, and when a seeming impasse like this runs and runs from an investment perspective you have to ask yourself some pretty blunt questions.

Let’s assume if we may that there is nothing wrong with the analysis and that the market just doesn’t much rate l’Eglise Clinet, at what point do we cut and run? The answer lies really in the investment horizon. If you have a shorter term in mind, forget it, and invest elsewhere; but if you can afford to wait because, say, you have a diversified portfolio other parts of which are hopefully taking up the slack, you might hold on and look out for something which is going to change the dynamic.

In the case of the 2011 clearly the extreme relative cheapness is not yet enough, so what, if anything, might help? Robert Parker clearly adores it (“another brilliant wine from proprietor Denis Durantou”), scoring it at 95 points, but that is hardly news. Succour may arrive in the form of the 2015. Jane Anson has scored it 100 and others like James Suckling are in the 98-99 point range, so that may help awaken the market to other vintage bargains, but it is noticeable that there is usually a large disparity between on-vintage and off-vintage prices for L’Eglise Clinet. It may be a long wait before what we might see as “fair value” is realised!

Moving elsewhere, from the DRC group the Richebourg 2009 has it over La Tâche 2009 and 2010, while in Champagne Dom Pérignon 2004 takes the laurel from Cristal and Taittinger of the same vintage. In Italy it is Sassicaia 2014 and in Napa, Dominus 2009, both comfortable winners.

Taking all of this into account therefore, we think the final portfolio under this strategy might look like this:

Haut Brion 2006, Montrose 2012, Carruades de Lafite 2010, Pavie 2008, L’Eglise Clinet 2011, DRC Richebourg 2009, Dom Pérignon 2004, Sassicaia 2014 and Dominus 2009.

Narrowing it down to the clear outliers: Montrose 2012, Carruades 2010, L’Eglise Clinet 2011, Sassicaia 2014 and Dominus 2009.

As you can see, even with a very focused strategy it is still possible to spread risk as to both region and vintage, another example of the endless flexibility of this excellent investment space.

Do keep the questions coming!

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.