How to value fine wine

Firstly we hope this note finds all readers in fine and safe fettle notwithstanding the trials and tribulations caused by the pandemic. Secondly, a note of thanks to Liv-ex which has clearly not had to furlough its staff and who has kept up a healthy flow of information over the period of the lockdown.

Last week the platform issued a report entitled “How to Value Fine Wine”, which got us terribly excited for a moment or two, until we found we have slightly different interpretations of the word “value”. It rather put us in mind of the old adage about the stockbroker who knows the cost of everything but the value of nothing.

In investment terms there is a world of difference between cost and value. Knowing how much things cost is crucial, obviously, and Liv-ex is quite right to highlight how much technological advancement has enabled everyone to discover more easily how much their portfolios are worth. This poses the interesting question: who wants to know how much their portfolio is worth?

We have long argued that there are three major (buying) participants in the fine wine market place, over and above the merchants who hold stock and lubricate activity: the consumer; the collector; and the investor. Although achieving the best possible buy price is most important to the investor, both the collector and the consumer are also likely to want to know that they are not being ripped off. To that extent transparency is great, and enables everyone to know that they are paying a fair price.

The question is, do the consumer and the collector really want to know how much their portfolios are worth? At Amphora we conducted a study some years ago to ascertain the answer to that simple question, and the result was emphatic: “we are not really THAT bothered”. It surprised us as well. If you own a few works of art, or a classic car or two, it is far more likely you will know the exact “value” of these, than of your altogether more amorphous Fine Wine portfolio.

Logic might also suggest indifference to portfolio value on the part of the consumer, who is simply drinking it, and the collector, whose motives are ulterior to making money, although the latter may well realise some profit from time to time, and in so far as he/she does then there is an overlap with the investor. And whilst as the Liv-ex report points out, there are occasional legal reasons for needing a portfolio valuation, these are relatively uncommon.

If then it is the investor who needs most visibility of the value of a portfolio, you have to look more closely at the definition of “value”. There is more to this, as it happens, than using the Liv-ex tool to “value lists of wines which (a buyer) then can use for locating buying opportunities”, because there is a huge difference between picking things up at the best price in the market and engineering optimal investment returns.

Buying at the lowest price possible is important, clearly, but you also have to know what you are looking for. This is where for an investor the definition of “cost” diverges from that of “value”. When we at Amphora talk about “value”, we are capturing the sense of “relative value”, whereby two or more things which are ostensibly the same don’t always have the same price. This is more difficult to ascertain in a reasonably complex market like Fine Wine than simply by comparing prices.

In “How to Value Fine Wine” we are reminded that there are several key elements which influence the price of wines. As an investment advisory firm we believe it is important to put that information to good use. Simply being aware that a First Growth should cost more than a Second, or that a wine with great critical acclaim should cost more than something slightly less exalted, is insufficient. What is important, is the small matter of degree.

Clients of Amphora know well that we have created a proprietary algorithm which analyses all the variables, and assess them on a weighted basis across around 5,000 wines in the Fine Wine market place, to throw up a clear picture of where the relative value in the market actually is. Knowing what is cheap or expensive, on a relative basis, helps inform the investment decision. This is the very cornerstone of our proposition. If you don’t know what you are looking for you are unlikely to find it.

Meanwhile the indices seem to have bottomed, at last, and are trending up. We have received a few questions about Fine Wine’s underperformance against Gold. Uncertain times historically have been good news for physical asset prices, and sure enough Gold has been “on a tear”. Why not Fine Wine? To our way of thinking there are (at least) two reasons.

Firstly, the scale of the current problem is such that an economic Armageddon scenario has been mooted. The sheer amount of money looking to escape risk assets has been such that it could only be accommodated by the size of the Gold market. Secondly, we have long argued that although Fine Wine is indeed a physical asset, it is also a luxury good. Demand for luxury goods tapers off at times of economic crisis.

That Fine Wine should have underperformed Gold of late is not that surprising, nor that it should have outperformed Equities. For your interest here is a chart of the relative performance over 5 years:

As an investment Fine Wine clearly holds its own against mainstream markets. Just as you wouldn’t expect your pension fund manager to operate blind, so it pays to give yourself the best chance of success. At Amphora we believe the algorithm helps give us one eye, as it were, in what might otherwise be the land of the blind.

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.