Fine wine investment: Tale as old as time

This is the time of year when market watchers shake their heads in disbelief at some of the en primeur prices released during the campaign just-finished, and people question afresh things like the validity of La Place and the viability of the négoçiants, but to us at Amphora this is becoming rather a tired old tale.

The argument runs like this: the producers need the négoçiants to bring their wares to market, and it therefore behoves them to keep prices sensible to allow everyone to have a slice of a functional, lubricated market place. If the négoçiants aren’t able to shift the stock and can’t finance the resulting holding period they would go bust, which helps no-one.

So, why does it keep happening, and what are the consequences? Moreover, is the system now anachronistic?

To take the last point first, any system which has been in place for 400 years is going to be hard to shift, even if it has evolved since the days when négoçiants used to do the bottling and labelling as well as the marketing and selling. Believe it or not, although château-bottling began around 100 years ago it was only in the 1970s that it became mandatory.

Most châteaux rightly believe that their priority is the production of as fine a wine as they can manage, and few currently appear keen to swallow the task of distributing it globally as well. Smaller production wines can sell directly to the market, as can mass-produced wines whose focus is distribution rather than high quality, but for the moment it seems that anyone trying to make over 5,000 cases of fine wine per annum sits in a part of the market for whom the négoçiant is indispensable.

With respect to the second question, it does appear slightly odd that in campaigns like 2017 the producer and négoçiants are hardly in harmony. A lot of wine has failed to find a buyer, so whose problem is it?

The immediacy of information which transformed the stock exchanges of the world back in the late 1980s and early 1990s has taken somewhat longer to be visited upon the fine wine market, for the simple reason that it comes at a cost, and the market concerned has to be big enough to justify that cost. Until now there is little evidence of many intermediaries making sufficient money out of the fine wine market place for them to want to make this capital outlay.

This is now changing, and although Amphora has been singing this tune for some years, it is interesting to see so much current focus on the following ostensibly obvious point: pricing should follow existing prices for available physical stock, rather than some bogus comparison with the previous year’s offering.

We believe the reason for this tardy acknowledgement is that it was too easy to dismiss the en primeur campaigns of 2011, 2012 and 2013 as both reactive to the mispricings of 2009 and 2010, and reflective of poor vintages, relative to those two prior years. Market observers though they need look no further for explanation, and were comforted by the improvement from 2014, 2015 and 2016, where greater quality was available at more realistic prices.

Are we now back to square 1? What is clear is that over the last few years the négoçiants world has not stood still in the face of these financial pressures. Some have merged, and others have been bought by larger entities as far afield as the US and China, all with pockets sufficiently deep to weather a storm. They saw what happened to smaller houses unable to meet their liabilities and have chosen not to become another former participant in the market. Rumours of the demise of the négoçiant system are, we believe, premature.

Point ! though begs a different question. What on earth are chateaux thinking with some of their hallucinatory pricing? Might they be trying to emphasise the value in their own back vintages by offering at such premia?

Ironically what has been happening amongst the négoçiants is insulating many of them from economic reality. Their logic, possibly, is this: just as clients of Corney & Barrow (sole importer of DRC into the UK) have to take their full allocation in order to get their bottle or two of the Romanée-Conti Grand Cru itself, so if the négoçiants want an allocation in good or great years, they have to accept the funding cost for those vintages which are harder to shift. And if those négoçiants are owned by people with deeper pockets as advised above, they are in a better position to comply.

We believe this will become an unviable strategy over time, as the négoçiants become part of larger enterprises less reliant of their relationships with the chateaux, and therefore able to say “non”. For the moment though there are clearly consequences in the broader market of all of this supply which fails to find an immediate home, because it will drip into the market over time preventing some prices from moving ahead. The broader indices, therefore, may face headwinds for a period of time until the stock is absorbed.

Fortunately we are not suggesting anyone invests in the broader indices, indeed at this point it is impossible to do so. What we advocate is buying only wines that represent great relative value, which tend to outperform over time, as the excessive undervaluations unwind. This all happens irrespective of what is happening at headline index level, which obviously captures out and underperformers alike.

We readily accept, however, that while what happens at index level is less relevant, it is certainly not irrelevant. Index performances inform banner headlines, which in turn influence behaviour. When people see indices rise they are attracted to the honeypot, and new money drives prices higher. Absent the headlines, the new money is slower to arrive.

In summary, we would all prefer en primeur campaigns to be a success, but a failed campaign need not spread alarm throughout the market, just disappointment at the paucity of bargains and at the reluctance of the producers to acknowledge economic reality. The market is not yet efficient, but as ever we aim to take advantage of these inefficiencies where possible.

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.