What exactly is there to invest in? Bonds are overpriced; equities are not cheap, while post-crisis regulations are
prodding their biggest investors to sell them. There is a risk of true financial disaster, while the aggressively
easy monetary policy of the Federal Reserve prompts fears of runaway inflation.
Put like this, logic leads inexorably to hard assets – something tangible that will hold its value, and whose supply
cannot be affected by central banks. But truly hard assets, such as oil or copper, are at the mercy of economics. In
a recession, oil will be as useful as ever, but its price will go down because there is less demand for it.
So there is a new notion of “hard” assets about, and even a new acronym. SWAG – short for silver, wine, art and gold –
is the term coined by Joe Roseman, a British former hedge fund manager and investment banker, in his book
Swag: Alternative Investments for the Coming Decade.
What links these four very different assets, Mr Roseman says, is their scarcity. There is only so much gold and silver
in the ground; fine art’s supply is limited by the mortality of great artists, and any vintage of fine wine is finite
and becomes scarcer as people drink it.
The problem with all four is that their value lies in the eye of the beholder (barring industrial uses for silver).
Gold, wine and art are valuable because of people’s taste. None produces an income.
Do all four belong together? Gold and silver can be measured for purity, and they are fungible, buyable by the gramme.
They can be treated as investments.
It is not the same for art, even if the $120m recently paid for Edvard Munch’s The Scream shows there are big profits
to be made in that market. Art is so lacking in fungibility, so expensive to store and so impossible to mark to market,
that it is hard to call it an asset class. Even with several art indices now in existence, an art-backed exchange-traded
fund is not going to happen any time soon.
That leaves wine – a fascinating case. It is fungible, buyable by the bottle, and the wine broking industry ensures that
there is a sensible “market price”, at least for the finest wines, at any one time. During the past 20 years, Mr Roseman
shows, it has had low volatility and a low correlation to stocks. In the past decade, fine wine indices have tripled while
stocks have been flat. So is wine a hard asset that will rise if the financial crisis comes to the worst?
I believe it might, at least at first – but this requires cynicism. Wine satisfies a long list of conditions for investors
searching the world for the next bubble.
First, there is strong new demand for the stuff from China. Any purported play on Chinese growth is a good bet to go up.
Second, it has a benchmark around which to congregate. Robert Parker, the wine critic, has criteria that enable him to
score all Bordeaux wines of each vintage on a scale from 50 to 100. His scores instantly drive buying. Any bubble needs
such an anchor; emerging market stocks only took off once they had an index. Sub-prime credit took off once credit rating
agencies gave them clear numbers.
Third, it has shown a tendency to bubbles. According to Fine+Rare, Lafite Rothschild’s 2008 vintage leapt more than 50
per cent in a few days in September 2010 (thanks in part to new China-friendly labeling). It has since given back those
gains.
Fourth, it has recently shown strong non-correlated returns. When investors spot such an asset, they stampede in. That
is what happened in recent history to emerging market stocks, real estate, industrial commodities, hedge funds and
foreign exchange. The irony is that once money hit such assets in volume, they soon became more correlated.
Finally, it is a play on inequality. Like luxury goods and art, fine wine is driven by the spending habits of a small
super-class. Bordeaux Index even produces charts showing the correlation between wine prices and the number of
billionaires.
All of these are arguments for a cynical bet that wine will form a bubble in the near future. But all investments need
a margin of safety. For wine, I suggest, that safety comes from asking the same question as a connoisseur: “Does this
wine taste good to me?”
If you would actually enjoy drinking it, that is your margin of safety.
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