Fine wine:
The great diversifier?

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Investing in fine wine is more popular and accessible than ever, and could be an invaluable way to diversify your portfolio explains Tristan Fletcher.

The entrenched low-yield environment and risk concerns are making investors turn to alternative asset classes for higher returns and, crucially, greater diversification from traditional investments. Over the past decade, we’ve witnessed an explosion in interest in fine wine from drinkers and collectors, but amid heightened appetite for alternatives generally, fine wine seems to be really catching investors’ imaginations now. There has been a huge increase in demand caused by the growing number of affluent individuals in traditional markets such as Europe and the US, but also from emerging markets in the Far East and India. Allied to finite supply, this increases prices.

Yet while much has been written about the diversification benefits and low volatility of wine investments, there has been precious little on how to sensibly go about constructing a portfolio in this asset class.

The case for wine investment

  • Past performance: Over the past decade fine wine has proved a solid investment, with compound annual growth rates in the region of 10-15%.
  • Tangible asset: Similar to gold, silver and art, wine is a physical asset that is immune to inflation (governments cannot print more wine!) and thus is a useful asset for protection against this in a portfolio.
  • Scarcity: Less than 1% of all wine produced worldwide is considered “investment-grade” and there is finite production each year. As a fine wine matures and starts to be consumed then the supply dwindles even further. With the demand remaining strong, this creates an inverse supply curve leading to price increases.
  • Rarity: Some investment-grade wines are produced in miniscule quantities which are bought by investors and collectors on release. These wines are oversubscribed on release and the high demand allied to the tiny quantities available creates a secondary market and subsequent price increases.
  • Tax-efficiency: Wine is classed as a wasting asset or “chattel” by HM Revenue and Customs and, as such, gains made on wine sales are generally free of Capital Gains Tax.
  • Finance future enjoyment: Investing in fine wine can be used as means of financing future drinking. For example, you buy three cases of a young wine which you hold for ten years; then, if your investment has performed well you may be able to sell two cases and the profit may cover or exceed the original cost of the remaining one case so you have a free case of wine and maybe some surplus profit to enjoy.

Buyer beware…

  • Investment grade wines can, of course, fall in value as well as increase.
  • Wine brokers and merchants are currently unregulated.
  • While short-term gains can sometimes be achieved, wine should be viewed as a mid to long-term investment.
  • Exit costs can be high depending on the fees charged by brokers for selling your wine.
  • Investment-grade wines should be stored “under bond” in an HMRC-approved storage facility and this typically costs £10 to £12 per case per annum. Most brokers will be happy to arrange the storage for you.
  • Provenance (or the traceability and condition) of wine is important to its value. Reputable brokers will do their best to ensure a high standard of provenance, but there can be less security on peer-to-peer exchanges

How to invest in wine

Wine funds

Wine funds are typically unregulated collective investment schemes. There are several available, but probably the best-known one is The Wine Investment Fund. This launched in early 2004 and has turned an investment of £10,000 into £23,300 over a decade, which equates to annualised returns of 8.9%. However, returns from wine funds are subject to Capital Gains Tax and, in the unlikely scenario of your investment tanking, you will be left with a piece of paper instead of the rather nice case of wine you would have had had if you invested directly.

Direct from brokers

The most popular way to invest in wine is to buy directly from traditional wine merchants or from wine brokers. When investing directly into wine the merchant/broker will advise on wines suitable for investment or in some circumstances can purchase wines on your behalf on a discretionary basis. There are no management or performance charges, although annual storage charges will apply. Any gains are not normally subject to CGT.

Peer-to-Peer Exchanges

Peer-to-peer wine exchanges such as Cavex and BBX are another route to investing in wine and have become increasingly popular over the last five years. Here, you are buying from private sellers and typically no advice will be available. Buyers’ commissions are between 3.5-10%, depending on the exchange, and there will be annual storage charges, but no management charges or performance fees.

Remember to Diversify Within Wine

Although wines are often viewed as being diversifying to a portfolio of traditional investments, the fact that a fine wine collection is a portfolio in its own right is often overlooked by direct investors. Whether buying as a drinker or an investor, keeping one eye on the level of diversification within a portfolio of wine could prove highly beneficial.

About the Author:

Tristan Fletcher is a director of Invin.io, a new website that aims to give investors the tools to construct, keep track of and manage a cellar of wines as an efficiently diversified portfolio. Tristan straddles a career between academia as a researcher in computer science and the financial services industry, where he has worked in senior positions as an algorithmic trader and portfolio manager for some major investment banks and hedge funds.

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