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wine
This page offers a perspective on art investment funds by
considering investment in wine.
It covers -
introduction
In
the UK, Australia, US and elsewhere wine investment funds
aim to buy and hold premium wines for three to seven years,
with investors being rewarded through sale of the holdings
at the end of that time.
They have been claimed to offer -
- growth
of around 12% to 15% pa (some enthusiasts claim average
growth of around 30% pa over a ten year period)
-
tax advantages (because wine as a 'wasting asset' is free
of UK capital gains tax, although wine investment funds
where treated as a financial vehicle are typically subject
to the same tax treatment as other financial funds)
- the
consolation of being able to drink the asset if prices fall
- an
indication of the individual investor's sophistication.
A
spokesman for UK-based Arch Fine Wine Fund stated in 2008
that
We
feel the dynamics of the wine market are about as recession-proof
as anything. It would take a cataclysm to stop the world's
wealthiest from drinking Pétrus. The downside is
very well protected.
Critics
however note that such 'liquid investment' often has high
costs and affected by intangibles such as the vagaries of
pronouncements by influential critics such as Robert Parker.
One fund for example features initial fees of 5%, a 1.25%
annual charge and 20% of the overall gain in excess of 50%
growth.
Critics have also noted concerns
regarding the authenticity of some 'historic' wines, with
works such as in The Billionaire's Vinegar: The Mystery
of the World's Most Expensive Bottle of Wine (New York:
Crown 2008) by Benjamin Wallace highlighting egregious scams.
That is unsurprising when -
- many
bottles, crates or cellars are sold without provenance
- dealers,
including leading auction houses, have been alleged to have
turned a blind eye to abuses
- perpetrators
of frauds have been alleged to use genuine but empty bottles,
add genuine labels to inauthentic bottles with inauthentic
wine, or simply forge labels to decorate indifferent plonk.
operation
Specialist wine investment funds began appearing after the
late 1990s, influenced by discussion in specialist and popular
literature at that time of opportunities for portfolio diversification
and superior returns through investment in 'alternative asset
classes' such as the art, coins, cars, virtuoso instruments
and other items highlighted in the preceding pages of this
note.
The funds typically pool money from a handful of institutions
or wealthy individuals - those with sufficient capital and
an acceptance of risk - to buy premium wine for disposal at
a profit through sale to individual consumers, retailers and
restaurants or other investors.
The wine may be 'old stock', ie cellars, crates or even individual
bottles of vintages created many years before acquisition
by the fund. It may instead be wine that as yet has not been
retailed, either because it is still in the barrel (notably
Bordeaux that as yet has not been bottled) or is still in
bottles at a major winery prior to dispersion through a global
distribution chain.
Wine Asset Managers, running a UK-based fund and an offshore
fund, thus indicates that
We
are predominantly interested in the red wines of Bordeaux,
focusing on prestigious chateaux in investment grade vintages,
as these wines comprise the great majority of the fund.
...
We usually deal in standard cases (12 x 75cl bottles), but
we are interested in offers in all size formats.
There are some basic criteria that we have guaranteed our
members that need to be satisfied before we consider an
offer. Wines must be in original wooden cases (OWC) and
these cases need to be in good condition. The bottles must
have wine at least into the base of the neck, must not have
torn or marked labels, nor export strips. The wines must
be in bond having been stored either at the chateau or in
a professional bonded warehouse. We are not interested in
wines that have had duty paid
The expectation is that the market value of the fund's assets
will increase at a rate equal to or better than share/bond
market indices, whether because supplies of vintages are rapidly
diminishing or because 'new' wine gains critical approbation
- the same mechanism as a contemporary artist attracting the
endorsement of leading critics and curatorial institutions
and thereby seeing a major increase in the values placed on
past, current and future work.
Will Beck of the Fine Wine Fund indicated in 2008 that
We
see ever-increasing liquidity and we see wine becoming more
and more of an independent asset class. That's apart from
the supply-side economics of wine: that it is finite in
every vintage and decreases over time, giving rise to scarcity
value.
The
Financial Times similarly reported financial adviser
Markas Gilmartin as claiming that
wine
is a precious commodity, it has been performing brilliantly
and it ticks a lot of boxes for an ideal risk-return profile.
Reality
is, alas, perhaps less than ideal.
As of mid-2008 some sources suggested that globally there
were around 20 specialist funds, including Arch Fine Wine
Fund (est 2008), Vintage Wine Fund (est 2002), VINOvation
(est 2003), Wine Investment Fund (est 2003), Fine Wine Fund
(est 2006) under the auspices of Wine Asset Managers, Curzon
Fine Wine Geared Growth Fund (est 2008) and Vinum Fine Wine
Fund (est 2007).
In addition a large number of retailers, including dealers
in Australia, appear to have promoted schemes in which they
would buy and hold stocks of wine on behalf of people, selling
that wine on behalf of the owners (at auction or through their
own retail arm) or buying it back from the owner.
A handful of funds, notably Germany's ValVeri VINOvation fund,
have sought to profit from investment in production, rather
than merely trading stock or futures. VINOvation for example
has invested in "land that is below market value"
(and which "becomes exclusively branded, which adds value
to the investment"), production facilities, retailing
and wine brand development.
Information about participation in wine investment funds and
looser wine investment schemes is uncertain, posing difficulties
for potential investors seeking to benchmark performance or
simply to determine whether claims in promotional literature
are credible. There are suggestions that most funds have under
100 investors, typically wealthy individuals rather than superannuation
or insurance companies.
Much investment scheme marketing by dealers, as distinct from
specialist funds, appears to have been aimed at the 'mum &
dad' market, reflecting the naivety of those investors and
the lack of attention by some regulators (an inattention,
as noted below, that has seen disappearance of some assets).
As with art investment funds, wine investment fund managers
expect to profit irrespective of whether the assets for which
they are responsible outperform other indices. The funds typically
have subscription fees of two to five percent, often on minimum
individual investments of between US$10,000 and €250,000.
Management fees (which may or may not include charges for
specialist storage, insurance and even verification of authenticity)
are often around 20%.
As with art funds, the viability of wine funds has been questioned.
Jason Butler of Bloomsbury Financial Planning for example
was reported by the Financial Times in May 2008 as
saying
Put
it this way, I'd rather stick needles in my eye than recommend
one of these wine funds to my clients. Investing should
be like watching paint dry - it may be boring, but
clients should stick with the tried and true asset classes.
problems
The volatility of participation in funds is unclear. Several
are domiciled in low regulation tax friendly jurisdictions
such as St Kitts & Nevis, Guernsey and Cayman Islands;
some are listed on the Channel Islands Stock Exchange. Most
funds are quite small, with ValVeri reporting €15m prior
to fundraising outside Germany in early 2008. Magnum Fine
Wines Plc is reported to have 1,000 clients and stock of 15,000
cases in bond as of early 2008.
Many managers and investors are reported to rely on data provided
by Liv-ex, an electronic trading platform for the wine industry,
an extension of traditional sales records and price listings
from specialist wine brokers and negociants.
Critics have often complained that much pricing data is problematical,
with significant variations in quoted prices from particular
brokers or retailers, questions about whether supplies are
available and debate about the authenticity of stock. Elsewhere
this site, in discussing wine fraud, notes the industry quip
that more Chateau Petrus is sold in Las Vegas and Manhattan
each year than has been produced by that vineyard over the
past decade.
In 2001 the UK Department of Trade & Industry shuttered
London businesses Goldman Williams and City Vintners, established
in the late 1990s amid excitement about wine as "the
new derivative" and promising investors that they could
expect a double figure annual return over a five to ten year
period.
It is reported that the two investment services pulled in
around £19 million, with the value of the stock being
less than £8 million and over £2.2 million simply
disappearing offshore.
2006 saw expiry of the Caymans-based AWM Fine Wine Fund (est
2000), operated by the Geneva-based Ascot Wine Management
SA. The fund included a tiny quantity of superlative wine
but most of its holdings were of less than stellar quality,
accordingly failing to show significant appreciation and unloaded
through ordinary retail distribution (rather than acquisition
by a competing fund) when AWM was wound up.
2007 saw the demise of Bordeaux Advisory, which had reportedly
made a killing through over-charging and wild claims. Some
investors apparently paid more than £800 a case for
wine that retailed at less than £100 per case. One investor
was told that his investment had increased by 16.4%, thereupon
handing over a further £10,000 for wine at 10 times
the market price. A representative of the UK Serious Fraud
Office commented sensibly
The question people need to ask themselves is, why are they
being asked for money? If these companies can really make
200 per cent returns in a year, why aren't they simply going
to the banks and borrowing the money to buy the wine themselves?
studies
Works by proponents of investment in wine include Wine
Investment for Portfolio Diversification: How Collecting Fine
Wines Can Yield Greater Returns Than Stocks and Bonds
(London: Wine Appreciation Guild 2005) by Mahesh Kumar.
The tradition of misbehaviour in making and dealing in wine
is highlighted in Christopher Fielden's "Is this
the Wine You Ordered, Sir?": The Dark Side of the Wine
Trade (London: Christopher Helm 1990), Fritz Hallgarten's
Wine Scandal (New York: Time Warner 1988).
Studies on pricing and appreciation include 'Wine market prices
and investment under uncertainty: an econometric model for
Bordeaux Crus Classés' by Gregory Jones & Karl-Heinz
Storchmann in 26(2) Agricultural Economics (2001),
115-133; 'Rethinking Wine Investment in the UK and Australia'
(PDF)
by James Fogarty and his 'The return to Australian fine wine'
in 33(4) European Review of Agricultural Economics
(2006) 542-561; 'Predicting the Quality and Prices of Bordeaux
Wine' by Orley Ashenfelter in 118(529) The Economic Journal
(2008) F174-F184; 'The Rate of Return on Investment in Wine'
by Benjamin Burton & Joyce Jacobsen in 39(3) Economic
Inquiry (2001) 337-350 and 'To Save or Savor: the Rate
of Return to Storing Wine - Comments' by Elizabeth Jaeger
in 89(3) Journal of Political Economy (1981) 584-592;
'The Impact of Gurus: Parker Grades and En Primeur Wine Prices'
by Héla Ali, Sébastien Lecocq & Michael
Visser in 118(528) The Economic Journal (2008) F158-173;
'The Rate of Return to Storing Wines' by William Krasker in
87(6) Journal of Political Economy (1979) 1363-1367;
'Wine as a medium term investment vehicle' by Walter Labys
& Bruce Cohen in 5(1) European Review of Agricultural
Economics (1978) 35-49; and 'Alternative Investments:
The Case of Wine' (PDF)
by Lee Sanning, Sherrill Shaffer & Jo Marie Sharratt.
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