Fine wine investment: Closing the gap

There have been three Liv-ex posts in recent days, the combination of which makes for interesting debate. This is the way of much Liv-ex analysis: it points out the facts arising from the data it collects, and leaves you to draw your own conclusions. This can be quite frustrating but the platform makes no claim to be an adviser, and hopefully for a lot of fine wine investors this is where Amphora comes in.

The posts drew attention to three seemingly discrete features: last week the Bordeaux market share plummeted to an unusually low level; the ratio of second label to first growth prices has narrowed significantly; and lastly, Burgundy’s relentless price rises.

It is quite easy to link the first and the third because in effect the one has caused the other. In a generally thin market such as can persist over the summer, it doesn’t take a great deal of activity in the relatively very high price of Burgundy wines to affect the overall picture to a seemingly disproportionate degree.

That said it is worth noting that every other sector’s market share for the week was above its June level, but obviously you have to be very careful about extrapolating from a very short time frame.

The middle point, however, deserves more careful study, because this movement in ratio between ‘first’ and ‘second’ prices has been going on for some time, suggestive of a focus away from the Liv-ex 50 wines exacerbating the decline in overall Bordeaux market share.

It is proposed that the reason for this is that consumers are happy to buy the label, the association, if you like, with a top château, as their guiding principle, rather than anything so discriminating as taste and quality, and this is perfectly plausible. If this were not the case there would be no market for copies of luxury brand items, a trade which we all know is as vibrant as ever.

Yet there comes a point where the price of your fake Louis Vuitton bag becomes so close to the price of the real thing that the market for the copy disappears. This would only change in the bizarre circumstance that the fake brand should start to achieve brand recognition of its own, which is not quite as impossible as it sounds – we have all heard stories of places where the best copies are to be found, which is merely an extension of the outcome.

At present no-one is anywhere near suggesting that any second label is even approaching the quality of its first growth equivalent vintage, but as Liv-ex points out, Mouton Rothschild in general is “only” two times the price of its Petit sister over the last 10 physical vintages while the 2013 vintage is only 1.6 times. Is this all as it should be?

In mainstream investments it is usually unwise to question the market because it always knows more than you do. This is increasingly so in the modern era because global communication is instant. In all markets, mainstream or not, it is unwise to forecast ‘the turn’, because that is tantamount to seeing into the future.

At Amphora we believe that there is evidence aplenty that the fine wine market is not as efficient as the mainstream and as a result we believe that we can find mispricing of wines, which we aim to take advantage of. What we do not believe is that we can forecast changes in sentiment or reversals in trends.

What this means in respect of the second labels is this. Is it absurd that Petit Mouton 2013 is priced so close to Mouton Rothschild 2013? Well on the face of it, yes it is, but the second label sector as a whole has some very idiosyncratic characteristics. Prices don’t currently seem to follow the normal ‘rules’.

The 2013 vintage was not one of the finest, in fact across all Bordeaux it is difficult to find another with such universally poor scoring. In Pauillac the vintage score is a paltry 81!

Three years earlier we had the blockbusting 2010 in which vintage The Wine Advocate scored Pauillac 98. That year Petit Mouton scored a highly creditable 93, an excellent score for a second wine and along with the 2015 as high a score as any other this century.

The 2013 individual wine score was 89 which in the annals of second labels was not at all bad, but given the wine and vintage score differentials you might expect a big price difference.

There is certainly a big difference at the Mouton Rothschild end: 36%. For the Petit Mouton? 6.7%! Indeed this is the thing about second labels: vintage score and individual wine quality have a much more muted effect on pricing that any other sector in the fine wine market, so as an investment adviser how do we recommend playing it?

The difficulty about playing a trend is establishing its validity in the first place. In investment terms the best trends are conclusive and long-term, the move towards mobile telephones, for example, or the rise of text messaging. If you invest in something more like a fad or the latest craze you run the risk of it turning sour on you.

This is the issue we at Amphora have with the second label ‘price narrowing’. Logically it has a terminus ad quem: they can’t become more expensive than the grands vins. In addition we find the underlying premise a bit flimsy: how much longer will consumers or investors pay a premium for an 89 point Petit Mouton 2013 over a 99-point 2010 Montrose?

In a mere 30 months the price of Petit Mouton 2013 has risen 300%!

In conclusion, there may be a game to play on this front but to our mind it is not the best game in town. There are much better bargains around following coherent relative value principles. The best Second Wine bargains remain Carruades 2009 and 2010 along with Forts de Latour 2010.

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.