Unscrew the boxed chablis, top up your 64-oz slushie mug (remember your straw), and grab a seat with oversized cupholders.
You’re about to get drunk on knowledge.
Specifically — how to think about investing in wine.
This is the first of our three-part series on how to think about investing in an asset class where liquidity is more important than even the puns would suggest:
- Today: Fine Wine as an Asset Class
- Next Week: Wine Markets Today + Investing in Burgundy 🇫🇷
- In a Fortnight: Our Favourite Wine Opportunity
Can’t wait two weeks? ​Learn about the opportunity today​.
This guide was written by our mates at ​WineFi​ and edited by Stefan and me.
Ok, let’s go
Table of Contents
Fine Wine – As An Asset Class
For those unfamiliar with the concept, it may be surprising to learn that people have invested in fine wine for hundreds of years.
As early as 1787, American statesman Thomas Jefferson noted in his diary that a premium was being charged for Bordeaux wines from the more mature 1783 vintage versus the more recent 17a86.
The lesson here – that fine wine improves with age and will, therefore, be worth more in the future than it is today – remains the cornerstone of wine investing.
Since Jefferson’s time, investing in wine has become an increasingly mainstream pursuit for investors seeking uncorrelated, attractive risk-adjusted returns.
This trend shows no sign of slowing, with HSBC​ reporting​ in 2023 that 96% of UK wealth managers expect allocations to fine wine to increase.
Liquid Gold
Compared to other collectibles, fine wine has two unique characteristics that make it stand out.
Firstly, unlike other collectibles, an objective, third-party price is readily available through platforms such as​ Liv-ex​.
This ensures investors receive a fair price and allows professional wine investment businesses like​ WineFi​ to conduct extensive quantitative analysis and modeling.
This starkly contrasts with more opaque markets like art, whisky, or classic cars, where investors are – to a greater or lesser extent – at the mercy of their broker’s valuation.
Secondly, wine’s status as a consumable ensures a unique supply-demand dynamic. There are a limited number of “blue chip” producers across a handful of top wine regions.
Each winery can only produce a finite number of bottles yearly, and the quality varies from vintage to vintage.
As the wines improve with age and bottles are consumed or damaged, they become
increasingly scarce. At the same time, as global wealth increases, so too does the demand
for high-end wine.
This combination of ever-increasing scarcity and growing demand helps drive prices higher.
By The Numbers
Looking at the data, the growing enthusiasm among wealth managers for investment-grade wine as part of a broader portfolio is understandable.
Since 2004, the Liv-ex 1000 – the broadest measure of the investment-grade wine market – has returned 300%, delivering equity-like returns with a fraction of the volatility.
Fine wine also compares favorably to more established asset classes on a risk-adjusted returns basis.
This is demonstrated by a higher Sharpe Ratio (shown below), which measures the average return of an asset over the risk-free rate relative to its volatility.
This characteristic stems from fine wine’s favorable supply-demand dynamic and the fact that it is – ironically – an illiquid asset. This means it can take considerably longer to sell down a wine portfolio than an equity portfolio.
Whilst this latter point can be a drawback if investors need to release cash quickly, the asset class’s illiquidity protects investors from panic selling in a broader economic downturn.
This is reflected in fine wine’s volatility profile, even during market turbulence, as in 2023/24.
Uncorrelated Returns
Perhaps most fascinating, fine wine is uncorrelated to the performance of traditional asset classes, making it an attractive diversifier within a wider portfolio.
The correlation matrix below shows that wine has almost no correlation to mainstream equity indices, bonds, commodities, or gold.
Tax Treatment
A final consideration for investors is that, in many circumstances, returns from fine wine are exempt from Capital Gains Tax (CGT) in certain jurisdictions, including the UK. [Ed: this doesn’t include the US as far as we can tell] Investors should be careful to do their own research to understand the tax treatment of fine wine in their locality.
Choosing ‘Investment-Grade’ Wines
Given that wine pays no yield, investing in it means selling it to someone else at a higher price than you paid for it yourself.
While many wines improve with age, only a fraction of wines globally can be considered ‘investment-grade’ – WineFi puts this figure at around 1%. The critical factor that most don’t consider is liquidity – investment-grade vintages must be regularly traded on the secondary market.
If you are brave enough to approach the wine markets yourself, auction data can provide useful insight into the types of regions and producers for which there is secondary market interest.
It is also vital to ensure that the wine is of excellent quality and relatively early in its drinking window—ensuring it has time to mature and appreciate. A quick Google search on the wine name and region will unearth the drinking window, vintage data, and critic scores—a proxy for quality.
Finally, it is critical to ensure that you pay the right price. Websites like​ Wine Searcher​ allow investors to compare prices on a vintage-by-vintage basis to ensure they get a good deal.
A final factor to consider is that each wine region performs slightly differently. This contrasts commodities like oil, for example, and is more akin to a miniature stock price.
Burgundy, Champagne, and Tuscany are high-growth regions that have attracted increasing interest from consumers and investors in the past decade.
As markets begin to level out from a decline following a lockdown-fueled bull run that peaked in October 2022, wine collectors and investors anticipate a return to growth.
If this all sounds too complex, don’t worry. Platforms like WineFi offer access to diversified, professionally curated portfolios at a fraction of the cost of owning individual assets outright.
The Risks
Market Timing
Like any risk asset, fine wine is subject to market cycles, which see prices rise and fall. As a result, wine should be treated as a medium-long-term investment, with a rough time horizon of 5-7 years.
Illiquidity
Whilst wine is less illiquid than other collectibles, selling an extensive wine portfolio can take considerable time. Investors should factor this in when allocating to this asset class.
Asset Selection Risk
The most significant risk facing investors is selecting wines with little or no secondary market. WineFi estimates that only around 1% of wine globally can be classed as ‘investment-grade’, or roughly 350 individual producers.
Unscrupulous wine brokers have been known to stuff portfolios with ’emerging’ wines with no onward demand, leaving investors with assets with no resale value.
Conclusions
Offering uncorrelated, attractive risk-adjusted returns, fine wine can be a valuable – not to mention interesting – addition to an investment portfolio.
Over the next few weeks, we will explore this fascinating asset class and outline how you can get started.
Next Week – Wine Markets Today, Investing in Burgundy
Now go top your slushie cup back up.
Cheers,
Wyatt
Important Disclosure
This issue was not a sponsored post, but if you invest with WineFi in the future, we may get a couple percent of that.
