Fine wine investment: The lure of the old

The most interesting feature of the fine wine market at present, as we continue our wait for more significant 2017 en primeur releases, is action at the opposite end of the chronological scale. There has been a distinct hoovering up of a series of 1980s first growths and equivalent, and we are trying to find out why. Some wealthy dude having a glitzy party in Hong Kong doesn’t quite cut it.

When you go back in time volumes naturally evaporate, and this reduction in liquidity can have interesting consequences. We have observed in the past how prices/values escalate exponentially when wines become considerably older, largely because their scarcity reinforces the market dynamic. It becomes more of a collector’s market, not unlike the world of art. If you are the only person in the world with a case of Latour 1961 and someone else wants it you can set the price pretty much where you like.

If you go on wine-searcher for Latour 2003 you can pick up as much as you need between £7,100 and £7,250, and even for 1996s the market is awash between £6,100 and £6,200. Drift back to 1982 though and you find only a couple of vendors that actually have a 12-bottle case OWC, each offering ostensibly the same thing (depending on condition), with prices ranging from £23,000 to £30,000.

This is obviously an absurd-looking spread for what purports to be exactly the same thing, but such is the nature of the beast that two cases of the same wine stored in the same place for the same length of time can still evolve slightly differently. In addition, and perhaps more pertinently, vendors are at liberty to post whatever price they like, and if they are in no hurry they may just achieve their aim.

The result of all this is that when there is genuine demand for older wines, prices can seem to move very sharply, as the lower priced stock exits the shelf leaving its more expensive counterpart as ‘the market price’, at a significant premium to what it was before. This is of relatively little consequence for a collector, but can dramatically impact the value of an investment portfolio. Here at Amphora we are not allergic to seeing older vintages in portfolios but they carry the obvious caveat.

A propos of which we had a good response to last week’s 2014 recommendations, and one or two interesting queries: “if it takes longer for younger wines to become scarce, surely this limits the investment return?”

If the fine wine market was efficient, which it is not, that would represent a valid argument. The point is that it takes this market place a while to adjust to all the prevailing factors, and it is this lacuna between release and pricing equilibrium that creates the opportunity.

Furthermore, the game is not all about scarcity, important though that aspect is. A collector is first and foremost interested in scarcity. Making money is not always, indeed not often, the key motive. When making money is the key determinant as it is for the investor, depending on time scale, liquidity is if anything even more important, and unarguably the younger the wines, the greater the liquidity.

To be clear then, if you have £20,000 to spend and you buy a case of Le Pin 2008 or a Latour 1982, you may well make money, indeed you are more than likely to over time, but you have made more of a punt than an investment, and you have very little control over what happens to your money while it is pledged in this way.

Meanwhile the Liv-ex 50 has had a volatile couple of months, by fine wine market standards. The other Liv-ex indices adjust on a monthly basis so although it is very narrow the ‘50’ is the only day-to-day arbiter, and it suffered a sharp-ish decline mid-March to mid-April before recovering equally sharply to mid-May. It has spent about nine months around the 350 mark which is a consolidation consistent with the prior rally of 24% over the last two years.

There has been speculation that currency movements might be behind this move, with sterling strengthening against the US dollar from mid-March to mid-April before weakening since then. Had the equation been as straightforward as all that the Liv-ex 50 would have rallied further, so that is clearly not the only explanation, furthermore the euro rate holds few clues as it has been steady against the pound of late.

It is the way of investors to find cause and effect behind every breath of movement in a market place, and we are as guilty as anyone in this! The most important thing in a market where shorter term returns are more elusive is to keep an eye on the middle distance, and this will cover the forthcoming EP releases.

It has been suggested that we will have to await the conclusion of Vinexpo Hong Kong, which is underway right now, for the next batch. The logic here is that Asia has become a very important market in the wine firmament, and this biennial exhibition might be an opportunity to gauge potential demand. We don’t set too much store by this explanation, but the market in general will likely take some cue from the release prices of the major producers, when they eventually appear. To be quite frank most releases hitherto this campaign have been lacklustre, with cheaper and often better physical availability from back vintages, so nothing to write home about yet. Stay tuned…

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.