I would be lying if I said past wine investors have not seen a boom in sales especially the Bordeaux wine products. To prove me wrong further is evidence by the fact that, a 1982 Lafite-Rothschild bottle was sold at 490USD at auction. The same bottle was sold at a whopping price of 2, 586 USD in 1988. Using simple mathematics brings a 70% annual return yield to the investors who took part in keeping the bottle for six years. You may now be thinking that the wine must have been sold at that price because it is a Bordeaux product. Other wine product also had lucrative impact. An example is the Barbaresco Riserva Santo Strefano which saw a raise in price from 135 USD in 2002 to 613 USD in the year 2009
Such an investment have been attitude changing arena for many investor who now considers wine to be not only a pure consumer good but also an opportunity to diversify on their capital; they consider it pure gold without floss. This idea has brought into realm a number of markets in form of auction houses in the broad Europe, USA and also Asia. The growing popularity of the market has increased worldwide with a resulting turnover from 90 million USD in 2003 to 276 million USD in 2008.
The rise in wine interest by many investors has ignited academics to start studies to explain why this is so. We will take a glimpse at a number of these studies from different scholars who did them during hard economic downturn- this way, the risks, return, and diversification benefits of fine wine’s true colours was brought into realm.
In 1979, Krasker did a study and concluded that actually wine brought returns but there were no proofs that it outdid riskless assets. This initiated Jaegar to carry out more research in 1981 who propelled his argument by carrying a thorough study from the 1960 through 1970 where the globe was faced with an oil crisis. His conclusion is that wine has a higher volatility compared to any other collectible like jewellery and paintings. Later in the years (2001) Burton and Jacobsen advised Investors that the heterogeneity of the wine market is an aspect to be considered when having a repeated sale regression. For instance, in the Bordeaux region the quality of vintage influence wine investment returns – meaning more expensive wine generate larger returns, but on the other hand they have a lower volatilit.
Overall, the studies above were carried down and the conclusion was that wine was a prolific investment worth trying. This is especially for those people with the passion of it. A recent premium Australian wine study by Fogartry in 2006 showed that yet indeed wine brought in sparkling returns but still remained to be less volatile as compared to other equities. According to a 2007 repor the value of fine wine demand is greater than the supply. “The beginning of the year 2006 shows that the Liv-ex 100 index (of wine investments) rose +43.2% to November, this performance was way above other asset classes like copper and gold, oil, the FTSE and Dow Jones,” in regards to this investors are also warned on dwindling profit margins following that purchase of wine have become so competitive; they will be forced to buy the wines at great initial prices. The challenge associated with wine cellaring, importation and also the desire to drink, is sorted out by the spiralling wine investment funds that are common in Europe, the UK and many other parts of the globe.
According to the Fine Wine Reports “the Fine Wine Fund posted a 45% increase since it first commencement early in 2006, and a 35% increase this year.” On the other hand, the Vintage Wine Fund reported a whopping 23.97% returns for the year 2006, and 24.94% in September 2007. If wine aficionados will consider wine as an asset, then the studies above will tell you of the deep rooted returns in the future. This brings us to the issue of portfolio diversification of wine to other alternative investment.
Wine as a diversification of a portfolio
As supported by the studies above, wine as any other collectibles provides its benefits in portfolio diversification. Since wine has low to less correlation with financial assets, it’s addition to an investor portfolio consisting of bonds or stocks means moving to the next bar as the efficient frontier is moved to the left that enhances a better risk-return trade-off.
A number of past studies are in favour of wine as a diversification of a portfolio. A report in 2008 showed evidence that wine brought excess returns which state that this exotic investment had a low correlation with financial equities. This they brought into the fore front when they applied the Capital Asset Pricing Model and the Fama-French three factor models Further studies by Masset and Henderson in 2009 which included the use of skewness and kurtosis in the portfolio confirmed that actually wine investment had high returns and low variance. They also agreed that wine had a low correlation with other assets. Investing in some world renowned wine offers the one of a kind portfolio return, skewness, kurtosis, and volatility in the long-term.
Are you an investor sitting on the fence in the dilemma of whether to take a step investing in wine? You need to make a choice immediately. Economic calamities may turn your current investments off, but with wine on the side a smile will always overshadow the frowning wrinkles. The interesting risk-return profile and low correlation of exotic investment with other assets are turning out to be the only choice that investor need to stay on board every time. Though correlations between wine and other assets tend to rise during severe economic crisis, the margin is unnoticeable and still supports wine to be the best diversifier of an investor portfolio. The diagram below proves this argument as analysed in the period from 1996 to 2008.
Figure 1.0: The Russel 3000, the General Wine Index (GWI) and first growth in top vintage.
Source: 2010, Russell 3000 vs. Wine, Reuters, accessed 17 July 2011
According to the above pictorial graph, between 1996 and 1998 the wine index and Russel 3000 both spiralled up. In between 2001 and 2003, the Russel 3000 declined heavily while the wine index continued to increase steadily up to 2005, after which it saw sky rocketing increase (golden age period) up to the year 2008. However in the mid- 2008 during economic crises the wine index decreased by 17% compared to that of the Russell 3000 which was greater by 47%. It is evident that during the period neither the New York terrorist attacks nor the boycott of French goods after the Iraq military investment or the burst of the internet bubble affected the wine prices. Moreover, the very same trend of wine index is observed on the first growth wines of top vintage, this time though the magnitude is a bit bigger.
Wine is also considered a cyclical investment due to the fact that its produce, especially the prestigious ones, will depend on fluctuating markets and the producers. Pricesof wine tend to indicate the quality within itself so an economic variable like scarcity can drive up prices. This explains why wine elevates in value as it ages.This is so because as wine ages through the years it increases in quality and in scarcity.
The quality of wine can also vary with other factors that are way apart from economic variables. Wine performance on the market vary dwelling to the fact that quality of the vintage is attributed to the aging of the vine, different genetics and so also the craftsmanship of the winemaker who come and go as they retire from the industry. In brief, it is possible to invest in wine in a given period and realize sky rocketing sales, whereas in other times it may be the complete opposite. For instance, if you have a vintage in the cellar that is known to be produced by a world renowned wine maker you are bound to succeed unlike if you had non-fine ones with no history attachment.
Did you lose money during the recent Financial Crisis? You’re not alone. Did you know that wine investment could have cushioned the fall? The Live-ex fine wine 100 outperformed most traditional asset classes including equities, bonds and commodities through the financial crisis and the current European and US debt crunch. Liv-ex Fine Wine 100 Index is the industry’s leading benchmark. The value of the index as of the end of July 2011 was 359.01, down 1.56% on the previous month. The index has increased by 19.30% year on year (Source: www.liv-ex.com
Today, investors have found out the magical impact of wine investments in enhancing the portfolio. The new demand from investors has brought all round clock development in this new spiralling up economic sector. It is as a result of this that the liquidity and transparency in this market has changed the hearts of many. This if further showed by the wine producing countries in Europe that are on the breach to availing quality standards that will enable recognition of regions that give out quality brands and reward them for the good work. This way, investors are given an easy time recognizing quality by the very first glance they pay to a wine label. This classification system is yet to be impacted to the rest of the world, but meanwhile it’s up to the wise and passionate consumers and investors to decide which world producers give quality wines in accordance to their vineyard history and skills inputted.
Source: Thomson Reuters Datastream - Wine investment against equities, bonds and commodities.
Masset, P and Weisskopf, J 2010, ‘Raise your glass: Wine investment and the financial crisis’, Economics, Issue 57, March 2010, accessed 17 July 2011, Masset and Weisskopf 2010, Ibid.
Zimmerman, C 2007, Want real liquid assets? Try investing in fine wine, NuWire Investor,accessed 18 July 2011, Masset and Weisskopf 2010.
2010, Russell 3000 vs. Wine, Reuters, accessed 17 July 2011