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THE BROAD VIEW

Investment in fine wine yielding bigger pay-offs

It is up there with fancy cars and rare coins in what private bank Coutts & Co calls the "passion index"

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The fine wine secondary market hovers around US$5 billion, a fraction of the US$302 billion global wine market.

New York

BUYING rare wines is like investing in a startup: You need 10 years of runway to see significant returns. But unlike a startup, wine is a lot more lucrative these days.

Had you allocated US$100,000 to Cult Wines, a UK-based wine portfolio manager, your money - which is to say your wine - would have returned an average of 13 per cent annually. In 2016, its index performance was actually 26 per cent. The fine wine secondary market hovers around US$5 billion, a fraction of the US$302 billion global wine market. But market researcher Euromonitor projects that while "key luxury players face mounting risks in 2018" the wine and champagne category is set to increase by an estimated 7 per cent.

When it comes to what private bank Coutts & Co calls the "passion index", wine is right up there with fancy cars and rare coins.

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Due to the unique nature of wine, however, investors should hire a manager. Cult Wines, Farr Vintners and Berry Bros & Rudd are a few of a small network that will invest your money depending on your risk level, suggest purchases and track your portfolio.

Tom Gearing, co-founder of Cult Wines, said that his more than 1,700 clients should hold on to their wine for at least three to seven years before trying to sell them. The management fees, 15 per cent of the total investment value, are paid upfront and include storage. Farr Vintners charges 10 per cent commission on purchase of wine and 10 per cent on the sale.

Such managers buy from only trusted sources so that they can confirm its authenticity. Cult Wines does guarantee the wine, should it be opened, but this is less than one per cent of the total value of their annual trades. Most stay corked.

Investment wine even has its very own exchange. The London International Vintners Exchange, which came online in 1999, shed some much-needed light on what had been a very opaque market. It is now the industry standard for tracking prices of luxury wine and includes the Liv-ex Fine Wine 100 Index, which follows the top 100 most sought after wines.

What to buy?

So what to buy? To anyone who knows wine, French is the must-have, and French Bordeaux the absolute must-have. The apex is the premier crus, or first growth wines, a classification system begun in 1855 that created a ranking of importance still in place today. On the list are Haut-Brion, Lafite-Rothschild, Latour, Margaux and MoutonRothschild. Each chateaux can also have secondary labels, which may not be as valuable as the first.

The problem with premier crus is that it is the very top of the market. Unless you get in early, your wine will not see massive increases.

Jamie Ritchie, worldwide head of Sotheby's Wine, reported that a diversification has begun. "Last year, it was Bordeaux and Burgundy at 40 per cent each," he said. In the past, Burgundy was 20 per cent of the total investment wine. "We've seen a huge, growing demand in Burgundy. Great Bordeaux is selling well, but there's actually too much of it."

One other French quirk is the en primeur market, which refers to the opportunity to invest in wines while still in the barrels. It is risky business, though, given that the vintage could end up with poor marks from critics. But when the wine turns out well, there are more profits to be had. For investors who do not mind the risk, there is a chance for a 20-40 per cent increase in value after only one or two years. 

Knowing when to sell is why you trust someone else with your bottles. "There's a huge market for mature wine. From restaurants and drinkers. People want mature wine - they aren't in the market for the wine when it's first released. We buy the wine back from investment customers and sell it to drinking customers," said Stephen Browett, chairman of Farr Vintners, which opened in 1978. With about 14,000 active clients, UK-based Farr manages about US$523 million of wine in bonded storage. "Private people find it to be a fantastically efficient investment," Mr Browett said.

Client portfolios typically hold 65 per cent of their wines from Bordeaux and 15 per cent from Burgundy. Wines from France's Rhone Valley, Italy and even California follow, but bottles from Napa Valley or other locales in the Golden State are a tiny fraction of what is traded. To many investors, California winemaking history is still considered young. Farr prefers California wines with French roots, such as Opus One and Dominus.

"When you're looking at French producers, they're the ones who've been doing it with that kind of intensity for quite some time. It's dependable. That's one of the things you have to have in a collectible product," said Rob McMillan, executive vice-president of Silicon Valley Bank, which invests heavily in wineries on the west coast.

Despite their success on American restaurant menus, only a small subset of California wineries gets investment attention.  Mr Gearing co-founded Cult Wines in 2007, seeing it as a tool for diversification. "It's got a long-term record, it's low volatility, and it's an asset uncorrelated to the financial market," he said. "We didn't want to be a wine broker or merchant or carry inventory. We wanted to be a financial market approach to wine." Today, Cult Wines manages about US$100 million in assets.

To date this year, Sotheby's has sold US$64 million in wine with about 80 per cent going to private collectors who plan on drinking it someday and 20 per cent to investors.

While Cult Wines does buy from auctions, deals are not generally to be had there. Despite this, Sotheby's and Cult Wines are seeing the same shift: an investing boom coming from Asia. In addition to Hong Kong, Cult Wines is opening an office in Singapore this fall.

According to Mr Gearing, 30, Cult Wines has over 800 unique brands under management. The top holdings, Lafite and Pavie, are each 6 per cent of his total, at an average bottle price of US$621 and US$304, respectively. While "the vast majority is traded daily", he said, there are areas of opportunity. "While Bordeaux and Burgundy can demonstrate periods of higher shorter-term growth, the long-term stability of champagne adds important diversification benefits," he said.

Chad Walsh, head sommelier of Michelin-starred restaurant Agern in New York, registers online for auctions where he will bid for both work and personal investment. "It's one thing to chase the blue-chip stuff at a good price," he said. "But the best investments are when you're finding the thing that everyone is buying when they're squeezed out of whatever the blue chip was."

There are still risks

Of course, in the world of collectibles there are risks. Famously, there was the cataclysm that befell WineCare, a storage business in New York City that flooded during Hurricane Sandy in 2012. A US bankruptcy court judge ordered that the owner "liquidate the company."

Bill Carmody, a trial attorney in New York who used WineCare for his small collection, said: "It was a total loss. The bottom line was, there was no insurance." The lesson? Check out the insurance plan before you start investing, not to mention pay attention to where your bottles are kept. 

All of Cult Wines clients' assets are stored in a sophisticated, static, temperature-controlled facility inside a government-bonded warehouse (which keeps the wine exempt from taxes and duties) and includes an insurance policy that covers up to 110 per cent of the market value. Each bottle has a "passport", like a bar code, that is recognised within the fine wine trade and ensures that they have been checked for provenance and condition.  Cult Wines said that it only accepts ex-chateau (wine bought direct from a vineyard) or SIB stock, both in the original wooden casing, which is the most valuable. BLOOMBERG

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