Finding space in the trophy cabinet

The launch of the latest vintage of Screaming Eagle has aroused a certain amount of interest.

Clients of Amphora Portfolio Management who bought the 100-point-scoring 2010 have made very good money, and for the last year or so people have followed up with purchases of the 2012 which also scored a maximum 100-points.

An interesting feature of this pair of perfect Cabernet Sauvignons is that the 2012 trades at a 20% discount to its elder sister. That, of course, is a pricing anomaly. Investors should be adding the 2012 if they feel comfortable about the market, or at the very least switching out of the 2010 into the 2012.

The 2013 has earned a creditable 97+ points from Robert Parker. When he first tasted it in October 2014 he raved about it thinking it could match the 2012. His initial rating was 98-100, the spread being consistent with an en primeur tasting.

A year later he firmed up his score to 97+ adding: “This reminds me somewhat of the 2010 Screaming Eagle. Full-bodied, rich, but perfectly balanced, it’s another terrific example of this iconic estate. It should drink well for 30 or more years.”

We might therefore expect a discount to the 2012 to account for the rating differential, but in the early market showing the pricing seems much the same.

Something is therefore out of kilter. Either the 2010 is priced correctly, in which case the cheaper 2013 is probably the right price, making the 2012 look very cheap, or the 2012 is the right price, making both the 2010 and the 2013 look unjustifiably expensive.

If you think the 2013 is priced for a subsequent upgrade to 100, which would be unlikely, it having been tasted as recently as last October, the 2012 is still the banker having already achieved that rating.

These considerations also beg the question: what place ‘trophy wines’ in a diversified portfolio?

A trophy wine is a wine which seems not to observe the pricing rules which apply to the rest of the market, whether this results from tiny production and the resulting immediate scarcity, amazing marketing, or a producer achieving a cult status for whatever reason.

The issues in respect of trophy wines are twofold. Firstly, given their relative scarcity, is there an adequate secondary market to offer sufficient liquidity should an investor want to sell?

Secondly, is the price so high that it compromises the desired balance in a fine wine portfolio, by becoming too dominant a feature? In other words, to what extent is the risk profile affected by the inclusion of a highly-priced and potentially more illiquid component?

The answers partly depend on the scale of the investment, in absolute monetary terms. It is difficult to be definitive in this market place, but if Amphora’s client base is anything to go by, a £100,000 portfolio would be somewhat higher than the average.

Even at that level it is worth acknowledging that you can have a very well balanced portfolio of about 25 different wines from around the world covering a variety of sectors and vintages, which would be considered ideal from as risk-weighted perspective, or you could have a single case of DRC 2001, which would not.

In such a portfolio what exposure to the ‘trophy sector’ would be permissible, or advisable, if you still wanted to retain some control of risk?

The way to think about this still revolves around the investor’s pain tolerance threshold, because if you have 20% exposure overall to a wine which goes down 30%, then clearly you have to make up the 6% performance hit elsewhere. That doesn’t seem too bad, even if undesirable! If, however, you have 50% exposure and it goes down 30% then that “undesirability” in investment terms veers towards the unacceptable.

At Amphora Portfolio Management our advice to clients is never to exceed that 20% figure if you are looking to retain a coherent degree of balance and risk. And this is where you can argue that producers like Screaming Eagle have done their bit. They market their wares in cases of three bottles.

Given the vital importance of provenance and storage to the fine wine investor, it is helpful for a wine to be sold in an ‘Original Wooden Case’ (OWC), and happily in the case of most trophy wines, these come in three packs as well as six and 12. Indeed, top flight Burgundies can arrive in a single bottle OWC. Many DRCs, of course, cost around £10,000 a bottle, so you really need to be investing upwards of £50,000 if you are keen to include one.

When investing there is no real need always to buy full cases. What you want is levels of financial exposure on a diversified basis. One bottle of DRC costing £8,000 is exactly the same in fine wine investment exposure terms as six bottles of Petrus costing £8,000 and 12 bottles of Latour costing £8,000.

The investment decision beyond that is exactly the same as any other: does this bottle/six-pack/full case represent good relative value against the rest of the market? Just be careful not to over-egg the trophy basket, if you are looking to control your risk.

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 at APM. www.apmwineinvestment.co.uk