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The Unquenchable Thirst for Wine… As an Investment

Wine is no longer just an object of enjoyment – it is now a serious investment commodity. Credit Suisse Research Analyst, Dan Scott, provides tips for seeking out the best wine investments.

Cushla Sherlock: Whereas previously people would buy wine, store it
in their own cellars, watch the value increase and then drink a few
cases and sell a few cases, it’s now becoming a true investment
market. What’s driving that change?

Dan Scott: Yes – or they would drink it all themselves. I think a lot of the people who collect wines probably still do so in order to enjoy it themselves. But in addition, people have started to appreciate that wine can also play a role in the context of an investment portfolio. We have run a correlation between wine and wealth creation and found that currently a quarter of high net wealth individuals own wine collections. So, there is a market for fine, investable wines and trends in the fine wine market are highlighted by the benchmark index, the Liv-ex 100 (which tracks the performance of the 100 most sought after wines). In general, wine provides an opportunity to invest and also to generate some returns, either by collecting the wines themselves or through some sort of financial market application.

Wine is a so-called “passion investment”. Is it really stable?
Wine, like art, is a passion investment. Broadly, passion investments can be seen as real assets, like equities, for example. The attraction to these is that they provide protection to inflation – in times of high inflation, passion investments will do well. Historical analysis also shows that wine has been a good investment. If you had been invested in the Liv-ex as part of your portfolio over the past 50 years you would have done very well. In an efficient frontier analysis, even, you can see that passion investments might have been a better way to position your portfolio than with some other alternatives. Overall, yes, we do see wine as a serious investment. If done properly it can be beneficial to your portfolio.
Are there certain risks, though?
Yes. There are many risks associated with investing in wine – just as there are risks with investing in all other asset classes. One risk involves gaining expertise: who will you rely on to tell you which vintages are the right investments? Storage is another concern. Furthermore, liquidity for wine as a tradable asset is very low. There are a range of additional implications that make wine investing more difficult than investing in traditional asset classes.
Consumption of wine has gradually trended higher over the
past ten years. Which countries are responsible for that?

On the one hand, overall consumption has trended higher. It took a bit of a hit after the financial crisis, but total hectoliter consumption keeps increasing. The US is still the biggest wine market. In terms of fine wines and investable wines, we are now seeing a trend for Asia – in particular China – to impact prices for fine wines. The Chinese have a real liking for Lafite. As a result, Lafite prices have seen volatility depending on buying patterns in China. Because we expect global wealth to continue to increase, we believe that the price support will be there in longer term.
What’s your advice for would-be wine investors? How do they
get started? Do they have to enjoy drinking wine to invest in it?

Yes. All passion investments need to be driven by personal passion. That’s why they are called passion investments and not real assets. We believe people should only be invested if they really do have a passion for the product and the dividend of enjoying ownership of the asset class is something that they appreciate. Otherwise, for collectors that do not have a strong knowledge of wine, there are various other financial market opportunities to gain exposure. A number of funds are available, which are run by expert sommelier fund managers who have been following the wine market for a long time. That provides a way to gain exposure to the asset class.
How much do you need to invest to make money?
Can investors at all levels profit?

We certainly do not believe wine should be a major part of any portfolio. But as a portion of the alternatives within a global portfolio, we believe that it can play a role. Depending on how you want to invest in wines, starting from very small denominations is a possibility.
Source – «Credit Suisse»

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