FRANCE FINE WINE: Vin that pays

The fine wine industry is booming, with Bordeaux top growths hitting record highs. Are professional investors distorting the market unfairly? Or is it simply a case of supply and demand?

 Hugo Rose MW asks who stands to gain from the trade

Wine investment is big business today. The UK is the focus of professional investment activity, with individual funds of up to E110 million (£66m) in play in a global fine wine market with an estimated annual turnover of £1-2 billion. Outside of these funds are merchants, companies, individuals and, some assert, even producers, who are engaging in degrees of speculative activity. But is wine investment a good thing for a sector currently experiencing rapid price escalation?

The fine wine market appears to be riding a global wave. Since the 2005 en primeurs, Bordeaux top growths have established new price benchmarks and around the world auction prices are hitting record highs. In London the authoritative Liv-ex 100 index of the UK’s most traded wines surged 40% between January and June (see pages 120-121). Traders accept that the presence of more wealthy buyers, in more parts of the world, has changed the landscape for good. Not only is wine touted as an alternative investment for individuals, but the market is attracting the eyes of City professionals. But alongside this excitement there is a concern from consumer champions that the market is being distorted by investment activity, to the detriment of the person who ultimately opens the bottle.

Market forces
Professional investors assert that their presence works to fund the long-term storage of fine wine prior to consumption. If they did not participate, they argue, the job would simply fall to others. And if they make profits from selling later at prevailing market prices, who has suffered? This perspective is based on a belief that the price of mature wine is determined ultimately by pure market forces: supply and demand. James Miles, managing director of Liv-ex, claims that, historically, investment has always been a part of the mix, through the long-term positions taken by merchants in Bordeaux and elsewhere. The opening up of en primeur to the “retail” market since the 1970s has encouraged private buyers to shoulder more of the burden, and more recently pure-play wine funds. As Miles explains: “If there was no expectation of appreciation, they wouldn’t have done it.”

Sceptics see a risk of distortion from the presence of outside investors, those with no direct interest in consumption. The buying power of this new money forces prices up beyond the reach of traditional buyers, levering them out of the market much as, it is said, the growth of buy-to-let has displaced first-time buyers. There is a concern that such speculative activity is leading to a “trophy wine” culture, where the best bottles are encased in collections never to be drunk, and with prices remaining beyond the reach of mere mortals.

Jancis Robinson MW resents “the fact that a substantial proportion of the liquids I find most delicious in the world are being moved into the luxury goods category so that many of us who grew up buying and loving these wines can no longer justify purchasing them. They are sold swathed in the chimera of prestige rather than on their intrinsic qualities”.

Speculative surges

Anthony Rose, wine ist for The Independent, is concerned over the spectrum of wines targeted by investors. “Funds are coming into the market, pushing up a narrow range of wines. As a result, those wines become objects to be traded, rather than wines to be drunk.” Though he regards the prices achieved by Bordeaux 2005 as “to a certain extent justified”, he draws a direct link to what he sees as “overpricing” of the 2006s. “Prices are possibly unsustainable, and too expensive from a drinking point of view.”

There is anecdotal evidence of such a feedback loop, where the pressure from investors drives the market, turning some wines into commodities. But it is hard to disentangle this from the impact of, say, high Parker points or plain market sentiment, and some would argue simply that a new channel of demand is being created, nothing more. And few professional funds claim specifically to target en primeur owing to the volatility of the market. The inference is that it is the private buyer here who is fuelling speculative surges in very young wines.

This is certainly the view from one of the largest players, Cayman-based Vintage Wine Fund. MD Andrew Davison does not believe that individual investors, funds or otherwise, have the power to move prices. He sees the recent surge as nothing more than a reawakening of demand for wine as a luxury good. “We are selling wine to people who have little sensitivity to prices,” he says. “It’s a long-term trend, a realignment. Fine wine is now a leisure pursuit for the very wealthy, alongside yachts and horses.”

Where does Davison see the market going? “It’s pure feel, but I believe we are only a quarter of the way through. The best wines are shockingly undervalued. Lafite, in any vintage, should be more like £1,000 a bottle, rather than the current price. Some vintages sell for less than a couple of parking tickets.”

The claim of distortion, either from the creation of “unreal” demand, or from a focus on a narrow range, can be supported only if it can be shown to override the forces of supply and demand. Evidence would come in the form of a cornered market, or a speculative bubble and subsequent price collapse. Some commentators allude to the low prices of mature wines relative to the prices of the youngest vintages as being evidence of just such distortion. Merchants such as Farr Vintners, for example, will compare, often unfavourably, the value of the new vintage to that provided by a year of similar style of 10 or more years old (2006 Suduiraut, for example, was compared to its 1990 vintage). But what such a comparison is telling us is unclear. An en primeur wine is not a direct substitute for a mature wine, nor vice-versa. And those mature wines have themselves frequently appreciated substantially in value over the years, with no sign of a pricked bubble.

Lack of transparency

Bordeaux has experienced just such a collapse, however: in the early 1970s when initially-overpriced first growths were dumped on the market for a fraction of their cost. The victim wines included the dire 1972s and 1973s, but the acknowledged great 1970s were caught in the crossfire and could be picked up subsequently for a song. The debacle did serious damage to the fine wine market at the time, though whether this was caused by investment mania or more simply commercial blindness is a matter for debate. The protagonists were the merchants themselves, however, not financial speculators. And the better vintages climbed back up in value when market conditions recovered.

The view from Bordeaux today is that despite the current level of demand – and of prices – there is no evidence yet of a similar bubble. “Fundamentals are driving the market,” according to Bill Blatch of négociants Vintex. “It’s a bit of everything: new, expanding markets; more millionaires; and decreasing production [through tighter selection] of the most in-demand wines.”

Nevertheless, there is a lingering concern that the en primeur market is open to abuse owing to a lack of transparency. “Chateaux manipulate all the time,” claims Rose, through the opaque tranche system, a view supported by Maxime Hamma of négociants Bordeaux Magnum, who successfully sued Château Latour for withholding its annual allocation. “They are keeping back wine to push up the price… This [speculation] is the phylloxera of the 21st century.”

Liv-ex’s James Miles is more sanguine, seeing the greater professionalism of investors as having a benign influence in just this area. “As funds become more powerful, they will demand higher standards, both in the provision of data for production and selection and in terms of sample integrity. Bordeaux is being left behind, and needs a step-change in transparency and in its internal market.”

It is difficult to avoid a discussion of the impact of critics’ scores, and of one critic’s in particular. Is Parker himself inadvertently sponsoring a speculative market, with fast money chasing the wines accorded his highest scores? “One should not understate his importance,” says Miles, particularly with regard to the spiralling prices of the narrow circle of top wines. A 98-100 score results immediately in a 100% rise in price, a winner-takes-all atmosphere in which consumers bid up to “drink the best”. But even here Miles sees a market benefit. “Parker scores are helpful, they put wines into perspective. And their following is perhaps greatest within the trade.” Yet he predicts that the bull market, speculative or otherwise, will not wither away when Parker finally puts down his pen. “Most of the time the market consensus happens to agree with Parker,” though not in every case. “Brands are becoming increasingly important, outweighing even Parker’s influence.”

Investors to the rescue
Plainly the market is not in total thrall to Parker: Miles cites the case of Château Pavie, where prices for recent vintages have not matched their scores, ditto a number of “garage” wines. And the consensus, and with it prices, appear to become increasingly independent of Parker scores when people begin to drink the wines.

The narrow spectrum of attention on an elite group of fancied wines has worried observers for a number of years with its implication of a two-tier market, the lucky few trophy wines sought out by the less-knowledgeable newly wealthy and the majority of nearly-as-good wines stranded in a price quagmire. “The activity is centred around the level of the first growths and perhaps a few super-seconds,” explains Vintage Wine Fund’s Davison. “Very wealthy buyers want the best of the best: they are not really interested in the likes of Gruaud-Larose or Léoville-Barton.”

But even here, Miles optimistically sees investors as riding to the rescue. What we have seen, he suggests, are “unsustainable differentials”, and already second and third tier wines are going up in price as investors flush them out.

Undoubtedly, concern over the role of investment in the market will be around as long as investors apply financial criteria to wine in a bottle. But for centuries, investment, whether internal or external, has been a factor in the industry owing to the need to finance maturing stocks, a need that is not going away. And those who complain about the impact of the professional investor should perhaps consider whether a less efficient market for wine, with its market fog and hype, is preferable.

© db September 2007