Fine wine investment: Looking for opportunities

Further to last week’s note which focused on wines whose prices have come under what seems to be undue pressure during the recent index downturn, we now extend the study to underperformers year-to-date.

We would stress of course that any date you place on a performance table is totally arbitrary; there is actually no more logic to judging from 1 January 2018 than any other point in time, except that it is human nature to think around fixed time frames. The natural starting point is the date of investment but obviously these differ investor to investor.

There is no need to alter the process we adopted last week: wines which are down in price AND show up well on the algorithm. We are attracted to wines the market has it in for, but only if the selling throws up clear mis-pricing. Masseto 2002 may be down 10% this year but it is still poor relative value at £5,000. By contrast the 2010 is excellent value at £5,840, but to appreciate why you have to understand the key determinants against which fine wines are priced, and that is where the algorithm comes in.

You could actually create a well-diversified portfolio based on the criteria currently in review. First growth exposure would be Lafite 2009 at the ‘on vintage’ end, and Haut-Brion 2012 at the ‘off’. The Liv-ex 1000 is up 8.4% year to date, while Lafite 2009 is down 3.4% and Haut-Brion 2012 down 1.5%.

On the Right Bank the best options are Angelus 2009 (down 5% ytd) and Ausone 2012 as mentioned last week (also down 5%), but you could also select Cheval Blanc 2014 as your ‘off vintage’ wine as it is down 4%. In Pomerol L’Evangile 2008 is down 16% statistically, but that masks a spike in the price at the end of last year against which it seems very cheap. It is the top algorithmic scorer nonetheless, but if you prefer to remain faithful to the process you might prefer Lafleur 2011 which is genuinely down 3.2%.

There are quite a few bargains around in the 2014 vintage so that is where we would go for a ‘Super Second’. La Mission Haut-Brion is down most at -3.5%, while Palmer 2009 (down 2%) would be the on vintage choice in that sector. On the Italian front we recommend Masseto 2008 (down 3.3%), in Napa it would be Opus One 2012 (down 3.5%), and paradoxically we would turn to the New World for the oldest wine in this portfolio by buying Penfolds Grange 1998, down a juicy 11%.

Just to linger over the Grange 1998 for a moment, in his tasting notes Robert Parker called it, “a wine that flirts with perfection, and should rival the 1986 as one of the legendary Granges produced”, giving it a score of 98+. Grange is a tricky investment because it trades relatively seldom; when it does it can generate a very tidy profit, but only if you buy at the right price. This wine trades at under £4,000 per case, and we believe it worth the risk.

Moving on to the wider sphere, it is clear that equity markets are in a state of flux at present. This makes it fashionable for commentators to remind everyone that physical assets tend to do well at times of investment crisis, and as always it is possible to make your arguments match your desired conclusion.

It would be very easy for us to bang the fine wine investment drum at times like this. Here is the year-to-date chart performance of the Liv-ex 1000 against the FTSE and the S&P:

The argument would be: “rest easy, invest in fine wine.”

This is nonsense, of course. An investment in fine wine is never going to be an alternative to anything mainstream. An investment in fine wine, should you choose to make it, should be seen as an adjunct to a diversified investment portfolio which would certainly incorporate stocks and bonds, and which might include gold.

We actually believe it is quite irresponsible to charge about saying things like: global stockmarkets are in turmoil, so you should invest in wine. The reason you should invest in wine is absolutely nothing to do with what is happening elsewhere.

Just to be clear: most people find it easier to leave the greater part of their investment portfolio to professionals. They are called pension fund managers. Beyond that, meaningful amounts are managed by other equally experienced practitioners. Fine wine investment is the purlieu of individuals who have caught on to the unique investment dynamic and are either trying to make sense of a passion or interest, or who recognise the opportunity to fund their drinking habit inexpensively.

The best thing to happen to the fine wine market at present is not so much global turmoil which for all anyone knows could be over in three months, but the currency. At these levels sterling has had a lot thrown at it over the last few months and is indeed close to 10-year lows against the US$ and the Euro. Again, if many people were to be believed, this should have resulted in the fine wine market being much stronger than it is. That it is not is just another example of market misbehaviour, but market misbehaviour creates opportunity.

You should be investing in fine wine now because it is still improving over time as it ages in the glass, decreasing in availability as it does so. And because it is cheap in Sterling terms. Global market instability, believe it or not, is a sideshow.

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.