Fine wine investment: Playing the Burgundy game

It is tempting when you see the headlines to think that investing in Burgundy is a pretty easy way to make a few bob, but it rather reminds us of the old adage: “them that has, gets”.

Undeniably the best way to have made a fortune over the years has been to be a long-standing customer of a merchant with great connections in Burgundy. Then you would have been able to merrily absorb your allocations over the years, but you would only get into such an exalted position buy buying heavily in the first place.

This presupposes that you would actually have been able to sell them. Producers like Domaine de la Romanée-Conti number their bottles, and woe betide a beneficiary of the cellar door price trying anything as philistine as to make a profit by selling in the open market. The bottle would be traced back and future allocations would cease. This compounds the Burgundy conundrum, of course. It is released in tiny quantities and owners daren’t sell, so its jolly hard to lay your hands on any in a secondary market sense.

If the likes of DRC and Armand Rousseau are complex from a liquidity perspective, how on earth to play the Burgundy game? As we pointed out last week, there is liquidity in the market and whilst you may have to avoid the biggest names we are still talking Grand Crus and index constituents here. Comte Vogüé, Ponsot and Lambrays offer a decent starting point.

Volumes for these three are still very small by Bordeaux standards, so going back too far is not really an option. The Liv-ex Burgundy sub-index captures the 10 most recent physical vintages, so we at Amphora believe that is an appropriate perspective to take.

What is interesting in each case is the range of performance over all recent time frames. Sadly, or perhaps encouragingly, it has been possible to invest in Burgundy over the last five years and make hardly any money at all, against an index rise of 65%. As an investor you want wines to have underperformed and outperformed, because these very facts in turn help inform acquisition and disposal strategy. You want diversity of quality, and certainly diversity of price.

In the case of Comte de Vogüé Musigny Vieilles Vignes, absolutely nothing has outperformed the index rise of 52% over two years. The best performer is the 2010 with a hike of 51%, while the 2014 actually declined by 5%. Over one year the index went up 21% while the 2010 rose 48% (yes, the majority of its last two year performance was in the recent 12 months). The following barely moved: 2008, 2011, 2013, and 2014; the 2015 declined by 15%.

The most expensive Comte Vogüé is currently the 2010 which is just shy of £8,900, while the cheapest is the 2011 at £4,200. The 2010 is a very good year, 2011 an indifferent year. The Burghound wine scores are 97 and 94 respectively. So far, so good.

2012 and 2013 are much closer in terms of overall vintage quality. Robert Parker scores them 93 and 92 respectively, so not amazing but both perfectly respectable. Allen Meadows at Burghound scores the individual wines 97 and 96, so you might expect there to be some difference in price but perhaps recognisable. In fact the prices are well over £7,000 for the 2012 and around £5,000 for the 2013.

It is worth pointing out for The Wine Advocate aficionados that Parker’s individual wine scores are a wider 98 and 95 and we need to acknowledge the possibility that while in elite wine circles Meadows might be the more highly-considered Burgundy critic, in the broader market place Parker may have many more adherents.

Ponsot Clos Roche Vielles Vignes tells a similar story in terms of dispersal of results. Over two years the 2006 has risen a hearty 115%, while the 2013 has languished and is currently down 9%. The 2007 and the 2011 are up 105% and unchanged, respectively. The propinquity of this combination of results is interesting, because the current prices, in chronological order, are £3,300, £3,500, £4,200 and £3,900. The earlier pair, despite their extravagant outperformance, are still cheaper. This would appear to be justified by Parker’s vintage scores, and by Meadows’s individual wines scores, but the message is clear: even if the prices are “just about right” in relative terms at present, there was very recently the opportunity to make a lot of money in the back vintages, for those looking at the market clearly enough.

What is interesting about Lambrays is that while the best performer over five years, two years, one year and six months is the 2006, it is the most expensive Clos de Lambrays bar only the 2010. Why might this be? It wasn’t a great vintage and Allen Meadows only gave the wine 92 (RP 91), and when there are better wines from better vintages like the 2014 which only costs £1,500 the best advice would be to sell the 2006 if you own it and avoid it if you don’t.

Finally, there is a feature of production and pricing in Burgundy which seems to play into an investor’s hands. While release prices for producers like DRC have been influenced over recent years by skyrocketing secondary market prices, most domaines pay more attention to the quality of the harvest than the secondary market for their wines.

As we say, production is already small, and can be further compromised by climatic conditions. Hail arriving at the wrong time can reduce yields dramatically, for example. Smaller producers have bills to pay, and for them it is of primary importance to cover the forthcoming year’s costs, as a result you can get vintages where prices are high despite inferior quality wines simply because production was lower than usual. Buyers will pay these higher upfront prices in order to stay on the list for better years, and thus the cycle perpetuates.

Amphora believes that there is ample evidence to suggest that prices for Burgundy follow the broad patterns we experience elsewhere in the fine wine market. There are anomalies, of course, and these need analysing just like any other to see if there is an opportunity, and if so we would look to take advantage. We have used the above wines in this instance because as index consitituents their price movements affect the index of which they are part, and we have used that sub-index performance to illustrate the arguments. This is no reason only to invest in index constituents, however, so our future recommendations my well come from without.

As a final point, let us again be clear on this: there is plenty of evidence of the above three wines being available to buy. There is much less evidence of anyone being able to offload them for cash at anything other than a penalising spread. Much the best disposal strategy would be to offer to the market at prevailing prices and expect the sale to take a little while. You might view this delay as the tax you pay for enjoying such elevated returns.

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.