How The Fine Wine Market Works
How The Fine Wine Market Works
With COVID-19 sending markets around the world into a state of flux, investors are looking for alternatives to enter. One of the top-performing assets is fine wine, which offers stability and steady year-on-year returns.
The top end of the fine wine market is self-contained and to a large extent, divorced from financial markets, because it shadows the movement of wealth around the globe rather than being permanently attached to a single economy. This unique characteristic means it is less susceptible to the fluctuations witnessed in conventional markets and more importantly, provides flexibility, as its appeal is less open to fashionable interpretation than other luxury collectables.
Collecting fine wine to trade in the future is not a new concept. It has, however, become one of the most popular soft commodity markets, enjoying a perpetual increase of investment over the last 25 to 30 years, because it enjoys an extremely stable environment, flexibility and favourable tax treatment from regulators.
After the 2008 financial crisis, people looked for areas to safeguard funds that were not directly linked to the financial markets and therefore were free of the exposure that traditional investors are often forced to endure. Investors were drawn to assets that would be less volatile and more sustainable over time.
The tangible aspect of a fine wine is another reason why investors like this market, it is comparable to property without the maintenance or dependence on trends. Few tangible assets can be easily traded internationally, and even fewer are not reliant on a single economy.
The wine sector remained resilient during our last recession because, while some financial markets were in meltdown, others, like the Far East, were bullish. In this way, fine wine is quite mercenary and unique as it follows the money, moving to active markets to maintain a strong presence.
Historically, the market has outperformed many other investments and is considered a safe haven for funds. In the first quarter of this year, the COVID-19 crisis sent stock markets into free fall. While the S&P Global Luxury Index fell 23 percent, the Liv-ex Fine Wine 1000 slipped just four percent and had begun its recovery by May.
The market maintains a strong position within the performance rankings because it is always attracting new money. While luxury goods and markets are often led by fashion, fine wine seems to have a much broader appeal. In many countries, it signifies success, not unlike an impressive property or exotic supercar that can be displayed as a status symbol in social or business circles. By broadcasting success in this way, fine wine is given an extra dimension as an investment.
The simplicity of the market also adds appeal. Driven by the simple laws of supply and demand, trading fine wine makes economic sense to investors – even those with no experience of this asset.
Supply is limited due to strict production laws, creating steady demand for a class of wine in finite supply. As a wine matures and improves with age, a high number of bottles will be consumed which reduces the supply further. Leading American financial services firm Morgan Stanley once quoted their concern over a world shortage of fine wine, with the demand exceeding supply by 300m cases. The Bordeaux region has seen a reduction of around 12.5% in production, meaning that the best wines in the world are highly restricted and therefore face increasing demand. All these factors add up to the remaining wines being more and more valuable.
The market has attracted investment from wealthy individuals, which has increased demand on an already limited supply chain. To appreciate this, one needs to realise some of the leading Châteaux in Bordeaux and Burgundy produce less than 2,000 cases per year. This demand grows exponentially as the market attracts new areas of wealth, but with production remaining static, it is easy to see how demand outstrips supply of the most sought-after wines.
Unlike many luxury consumables, there is a definitive stock at the end of each harvest year, because you cannot produce more than the capacity of the vineyard. Therefore, you cannot increase production to meet demand. Additionally, not every harvest produces the same quality of grape. Extreme weather will create a lower yield, forcing Châteaux to be more critical with their grape selection for top labels. In some instances, this reduces production to as little as a third, which naturally affects the values of the new vintage and subsequent vintages.
Our clients are from many walks of life, but the one thing they have in common is that they prefer to have funds outside the more volatile mainstream markets. They know this is not an in-out, buy-sell marketplace, which means they don’t have to monitor market performance on a regular basis. We do however provide ongoing management of our investors portfolio with automated valuations on a biannual basis. Our membership with Liv-ex also ensures that all clients have access to the most liquid platform available with the option to sell their wine as and when they see fit.
Most clients appreciate wine as a medium-term investment and know that if they get between 7 and 14 percent growth per annum in a tax-efficient environment and the wine is held for 5 to 10 years, they will have a valuable fine wine collection.
Anyone wanting to get involved in the fine wine market should understand this and look elsewhere if they are pursuing massive overnight profits or quick returns. This market remains stable because it is about a steady, incremental growth over months and years. Our recommendation to anyone looking at entering the marketplace would be to see it as an asset they can add to frequently. They should lay a solid foundation and then build on it.
Wine is regarded as an armchair investment that requires no maintenance and has minimal costs except storage and insurance to safeguard the asset. It is important the wine is held in a secure facility with automated atmospheric conditions suited to the long-term storage of wine to ensure its condition is maintained. Part of our affiliation with Liv-ex enables us to offer our clients a secure storage facility to house their wine, which also comes with a comprehensive insurance policy. Most of our clients wine is stored at one of London’s leading underground bonded warehouses, London City Bond (LCB). All clients have 100% control over their asset so delivery outside of this facility is also something that can be arranged.