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Moving Away from Wine Funds
By Jeannie Cho Lee MW on 30 Nov 2012 in WineBack to overview
Investing in wine appears like a glamorous option – great lifestyle, a fascinating product, and interesting people, both on the production as well as the consumer side. Not surprisingly, many investment banks such as Deutsche Bank and others, have offered wine investment funds over the past five years. With stock markets on a roller coaster ride in Europe, United States and more recently even in growth-mode countries in Asia, wine seems like a good alternative investment. If you speak to anyone from a major wine fund, such as The Vintage Wine Fund in the UK or Bordeaux Wine Bank in Singapore, they will often talk about how returns on fine wine beats the performance of the Hang Seng, Dow Jones, FTSE 100 and other traditional investment options.
In Hong Kong, the frenzy of wine auctions over the past four years has increased awareness among wine lovers about the most collectible wines. When I travel overseas, I often hear wine professionals and enthusiasts bemoaning the increase in fine wine prices as a result of strong demand in Asia, especially from China. Worldwide auctions of fine and rare wine in 2011 was a record high – $478 million, an increase of 17% from 2010. Again, it is Hong Kong auctions leading the way with collectors in Europe and the United States choosing to sell their wines in Hong Kong since prices realized in Asia are higher on average than auctions in New York or London.
With astronomical Bordeaux prices, 2011 witnessed many collectors switching to Burgundy. Over the course of 2011, it was rare Burgundies that was in huge demand. The highest priced auction lot of the year, sold for US$813,333, was the 55-bottle lot of DRC Romanée-Conti containing nearly every vintage of Romanée-Conti from 1952 to 2007. In 2011, there were three key wine auction houses dominating the market – Acker Merrall & Condit, the clear leader with US$110 million in worldwide sales, followed by Sotheby’s and Christie’s with US$85 million each. Other wine auction houses such as Zachy’s, Hart Davis Hart and Bonhams were a fraction of the top three.
Given the vibrant auction market and encouraging figures, wine funds in Asia proliferated over the past several years, including China’s very own Dinghong wine investment fund launched in 2011. According to Ms. Ling Zhijun (凌志君), founder of Dinghong, the initial investment requires 1 million Yuan, which is tied up for at least five years. Only after five years, the investors can take stock of their wines or sell back the wine. There are no details about how the wines would be evaluated since market price differs by country and by region. Also, what about logistics and handling costs of bringing the wines to China? Who will handle those tricky details? If the investor wants to sell will Dinghong have a guaranteed buy-back policy and will those wines be sold in the open market or just to trade? And what about timing of fine wine sales – if at the end of the five-year period, the world is in recession, how will the wines be evaluated and who will evaluate?
While fine wine investment funds are new to Asia, it is more established in London. Many wine funds are based in London, including The Vintage Wine Fund launched in 2002, The Wine Investment Fund established in 2003 and the Fine Wine Investment Fund. Normally funds charge around 2 percent of assets under management, plus 20 percent of the profits. Much of a wine fund’s performance depends on market prices and there is no acknowledged common market price evaluation of wine except for the information available on Live-Ex. While Live-Ex prices are one barometer, there are thousands of companies that lie outside of their analysis and coverage. There are no easy answers to questions such as: What are the best channels to obtain the highest prices when you want to sell? How can you be sure that the fund is accurately evaluating the wines? In wine purchasing, how is provenance assured? When is the best timing to sell fine wine?
The Wine Investment Fund based in the UK writes this proviso on their website: “The Fund is an ‘unregulated collective investment scheme’ as defined in s235 FSMA and has not been approved by the FSA or any other regulatory authority.” Their message is very clear: “Buyer beware!” Despite these warnings, many people have chosen to invest in wine funds, looking mostly at the graphs and performance of fine wine, based on price evaluations of highly erratic and sometimes unreliable tools that can be called into question.
Timing is crucial for fine wine transactions since it closely mirrors the stock market and can be just as volatile. Just look at the plunging prices of Chateau Lafite Rothschild over the past 24 months. If you got the timing right, you could have purchased the 1990 Lafite for below US$500 per bottle. From mid 2009 onwards, it was impossible to find it below this price and within months, the prices went above US$1,000 per bottle. It stayed above this price until early 2011 when prices started to descend very quickly, with prices reaching US$600 to US$700 per bottle and even faling below US$500. Lafite 1982’s story is even more dramatic: At its height in price, the wine sold for US$132,584 for a case of 12-bottles in October 2010; by end of 2011, the price fell to US$41,140 a case at Acker’s Hong Kong auction. Investing in a wine fund means knowing when to divest and sell your stock of wine. Like the stock market however, it is hard to predict the best timing.
The latest trading prices of fine wines, including those available at Live-ex, shows that prices are down by around 15 to 30 percent. As with the financial markets, there are always cycles, so we are clearly in a downturn. With unsettled economic and political situations around the world, it is unlikely that prices will rebound anytime soon. For the wine market, this is a healthy correction of prices since so many wine prices were becoming absurdly high. Burgundy has bucked the trend and prices continue to climb but this region has always been too small and volumes too low to meet the demand of its devotees around the world.
I discourage investing in wine generally, but if you decide to take the leap of faith, then please do your research. There have been numerous wine scams of dealers selling wines that do not exist, widespread existence of fake wines or swindling money in wine futures. In April this year, BBC Money Box program reported that as much as US$160 million may have been lost by investors over the past four years following the collapse of several phony wine investment firms. For wine lovers, now is the time to buy, especially Bordeaux, given their more reasonable pricing, not for investing, but rather for drinking.
Much has been written in the wine press recently about wine investment scams - some informative pieces include Financial Time's article about Noble Crus and Robert Joseph's blog where he questions wine as investments.