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Value of wine investment questioned
A recent report published by the International Monetary Fund (IMF) suggests that fine wines do not offer much more diversification for an investor than oil.
The IMF noted, however, that there were some strong correlations between emerging markets – such as China – and established ones, with demand for a commodity having a subsequent effect on pricing.
Investment in fine wine has increased significantly in recent years, due in part to the belief that it diversifies the risk of holding traditional commodities, such as oil.
However, the report has prompted many critics to question fine wine’s value as a portfolio diversification tool.
In their research paper, “A Barrel of Oil or a Bottle of Wine: How Do Global Growth Dynamics Affect Commodity Prices?”, IMF economists Serhan Cevik and Tahsin Saadi Sedik concluded: “Our results suggest that although fine wine can be considered as an investable asset, its behaviour is not significantly different than other commodities and therefore may fail to enhance portfolio diversification.”
The report investigated the influence of advanced and emerging market economies on commodity prices by analysing the two different commodities – fine wine and oil – and assessing the impact of global supply and demand.
While investigating the broader commodities market, the economists discovered that the behaviour of oil and fine wine prices “has shown remarkable similarity”.
Specialist fund managers, Wine Asset Managers, disagreed with the findings, saying: “We believe they have found nothing more than a coincidence and that the fundamentals driving oil and wine prices are not closely linked at all.
"Wine investment has its own set of unique fundamentals and we believe it really does offer efficient diversification.”
Laura Pullman, 20.01.2011
I would just like to make a few comments and observations with regards to this subject.
Perhaps this is a little on the analytical and, admittedly, longish side. However, given the considerable interest in this area of late, both among the fine wine trade and investors, with few as yet serious attempts to ground it in academic analysis, it is important both to question fine wine as an investment and to be clear on how we interpret the results.
The coincidence, or not, of these statistics has been discussed variously, here and in the latest Liv-ex monthly bulletin (January 2011). Nonetheless, the findings in this paper do indeed demonstrate, empirically, that there is a ‘robust and statistically significant’ correlation between the behaviour of crude oil and fine wine prices over the sample period (1998-2010). The consequent conclusion being that these figures are not coincidental, but are in fact highly correlated (an enormous 90% between during the, very specific, time-frame of January 2009-June 2010, this latter point is commented on favourably in the aforementioned Liv-ex report).
The findings show that price formation in both commodities has moved beyond supply-side economics, ‘a recent phenomenon’ and is being demand-led as incomes rise in newly emergent economies (with clear implications for price regression should these economies falter). This is a simple observation, albeit hard won, and in this context is to do with price formation, and not directly to do with whether or not fine wine is a credible investment alternative.
In that part of the paper where fine wine is addressed explicitly as a potential investment asset, a direct comparison is made between fine wine and ‘other commodities’, and not specifically between fine wine and oil, an asset known for its particularly high volatility.
The authors’ focus when questioning the suitability of fine wine in modern portfolio theory, that is, as a diversifier, is as compared to other commodities, including oil. In a diversified portfolio, however, a typical spread would include stocks and bonds and not a substantial holding in commodities. When considering fine wine, it would be added to such a traditional portfolio and the value of that is not being questioned at all.
The potential of fine wine as a diversifier has been highlighted the seminal work ‘Wine Investment for Portfolio Diversification’ (M. Kumar, 2006), a thorough study of the subject and an academic grounding in the commodity’s historically low correlation to real economic cycles and its decoupled position towards financial markets.
The paper does appear to show that wine has entered a new phase and now moves like other commodities (the Economist online Jan 14th 2011), and would therefore be subject to the same macroeconomic shocks. It further, notes, however, that the question of including fine wine in asset allocation is a particularly interesting one. In the final analysis, wine is not derivatised and needs little active management, it may now move with oil and other commodities, but it would have to have less volatility. Indeed, one of the most notable findings, perhaps, is by how much the respective commodity prices came off in the sudden turbulence of 2008; oil by 70% as compared to fine wine by 42%.
In our view all the recent data does suggest that fine wine is a worthy diversifier because it’s not positively correlated with stocks and bonds and it’s less volatile than oil.
James Swann, working at Ditton Wine Traders.
[url]www.dittonwinetraders.co.uk[/url]