Fine wine investment: is EP a ‘mug’s game’?

One of the great principles for investment of any kind, and fine wine investment is no exception, is to constantly question what you think you know. Many investors get blinded by beliefs which are actually erroneous.

How people come by their views varies enormously, obviously, but time moves on and as it does so, circumstances change. It pays to constantly update your convictions, or else you risk having the market-place leave you behind.

One of the widely held tenets in the world of fine wine investment concerns en primeur activity, and as it was voiced in response to our article last week we thought we should try and meet it head-on: “Great wine as an investment changed dramatically when futures for first growths went from US$330 case (1982) to a $1,000 to several thousands a case now. Other growths had similar cost increases. The higher initial investments per case has not allowed any room for appreciation, for the consumer or retailer.”

What is certainly true is that by comparison with the present day, historic en primeur prices, or ‘futures’, as per the quote above, represented an absolute bargain. The producers quite reasonably acknowledged that the buyers at this juncture were in effect funding the château for a couple of years, and since it was de rigeur, (rather than as a result of some philanthropic disposition), it discounted its offerings accordingly.

This was great for those in the know, who had lines in to the merchants, either as retailers or private clients. They would load up the truck safe in the knowledge that inflation and availability to the wider market would result in higher price points when the wines became physical, and they would then sell and pocket the profit immediately, or await further price appreciation which would result in their being able to fund their own consumption effectively for nothing.

As we all know, this cosy arrangement collapsed around the time of the 2009 and 2010 vintages, by which time it had become apparent to the producers that the upsurge in interest particularly from Asia meant that they could charge ‘top dollar’ at en primeur, thereby removing the opportunity of easy money for the investors, and my goodness how they howled.

For the next few years, such was the clumsy pricing strategy pursued by the châteaux even in off-vintage years, that en primeur activity ground to a standstill, and it is still not clear who carried the financial can for this. We know that quite a few négociants went bust, but the financial implication for the châteaux themselves is much harder to gauge. We know that a few have changed hands, but not so many of the top names whose resilience to this shock would have been greater.

As a house Amphora dealt in hardly any en primeur from the 2009 to the 2014 vintages, when we identified the occasional bargain, slightly more so in the 2015, before fully participating again this year with the 2016 vintage. What is not in dispute is the impact on the broader market of all this which as we now know did not start to recover until the summer of 2015.

But is it fair to say that there is no longer room for price appreciation?

We have analysed the first growths, a good few Super Seconds, and the right bank grand cru classé ‘A’ wines to see how en primeur buyers are currently faring. We make the assumption that a putative investor has invested the same amount each year since the 2007 vintage, and up to press has held on, as some might believe, for grim death.

The first growths all follow the same pattern: fabulous returns for the 2007 and 2008 vintages as you might expect, as they were prior to the ramp, declines for 2009, 2010, and 2011, although frankly not as extreme as you might think, followed by excellent returns for 2012, 2013, and 2014, (2015 not yet being physical).

If you think that in a world of zero interest rates returns of around 50% in two years is derisory when the FTSE, the S&P500 and gold are up 12%, 17% and 16% respectively, then we would like you to share with us the identity of your financial adviser.

As you can see from the table below, Super Seconds don’t fare quite so well but are still highly respectable, while the St Emilion wines are very revealing for a different reason.

The numbers are the % move since release, with the red numbers representing declines.

The worst Super Second performer is La Mission Haut-Brion, which is a château we believe offers quite a few bargains, and logically the underperformance is reflective of the bargains. More interesting perhaps is the profile of performances of Pontet-Canet and Montrose, and how that profile differs from the other Super Seconds. They both benefitted from the ‘shock’ of earning 100 point scores in 2009 and 2010 [from Robert Parker] but they both used their new found status to increase subsequent prices disproportionately to others in the sector, hence the underperformance of the 2011, 2012 and 2013 vintages.

Turning to St Emilion we see the huge outperformance of Angelus and Pavie as a result of their elevation to grand cru classé ‘A’ status, and the massive underperformance of Cheval Blanc and Ausone. The former point is entirely understandable. As to the latter, such underperformance might have been more easily explained had Ausone and Cheval Blanc become darlings of the Asian investor, because then their declines would have been from inflated levels. Their levels were hardly inflated though, so something else is at work which may mean they are in bargain territory, and we shall be investigating further in coming weeks.

The conclusion we draw is that investing at en primeur is not the mug’s game so many people think it has become. Clearly had you timed your incursions to coincide with the top of the market it would have hurt somewhat, but had you done so over a longer period you would have made significant returns.

As always you have to evaluate the prices on offer, and you need the tools to be able to do this satisfactorily. What is in addition very encouraging from the above table is the degree of logic at work behind so many of the prices. This augurs well for future investors, and should give comfort to people already in the market.

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.