Here’s a riddle for you. What is sometimes red, sometimes white, sometimes sparkling, sometimes flat, sometimes a year old, sometimes hundreds of years old, but no matter what always great for a celebration. I’m of course talking about wine, an age old beverage that’s as essential to the human story as water. But did you know that it could be great investment too?
Wine investments have been a part of the wealth portfolio for well-heeled individuals and families for centuries. However, as we will soon see, this investment class is rapidly being democratized so that it’s available to the average individual as well. Additionally, with the entire world embroiled in an inflationary tailspin not seen in decades; a wine investment might be the perfect hedge against financial ruin.
Here are some basic facts. Over the past 15 years alone “fine wine” investments (investment quality wines made by quality producers in respectable regions) have produced a 13.6% annualized return when compared to the Dow Jones and S&P 500, respectively 7.8% and 8.58%. [1] Not only that but the secondary wine market has consistently hit new highs year after year for the past five years. The secondary market currently sits at $5 billion dollars.
In truth the complete list of wine investment benefits speak for themselves. Wine investment returns often exceed those of global equities. Wine investments have an excellent track record of inflation resistance. This largely stems from the fact that fine wine tends to be a Veblen good (as the price goes up, the demand goes up in tandem). Additionally, most geopolitical disturbances don’t affect wine prices the way they affect other commodities like oil. In fact, the volatility in wine prices have been surprisingly subdued. An analysis of the Liv-Ex Fine Wine 100, an index that tracks the price movement of the 100 most traded wines in the world, found that returns in the fine wine category were not only stellar but they came with less volatility than gold in most years.
However, this doesn’t mean that wine investments are risk free. Depending on how you invest in this market, you can end up with significant maintenance costs. Even more importantly, this is a very illiquid asset class. Even if you are simply investing wine-based funds or futures, you should expect to have that money tied up for at least three years. This alone presents a dilemma. There is an opportunity cost to having your money held up in a single investment too long. For instance, while the aforementioned Liv-Ex outperformed the S&P 500 in terms of return from an initial outlay of money; researchers found that if you were able to reinvest dividends and returns from the S&P 500, then your returns would exceed the Lix-Ex by 60%. And lastly, like most veblen goods, fine wines are an attractive asset class for scammers and crooks looking to make a quick buck.
Why Now?
While wine investment is enjoying a renaissance in accessibility and transparency, truth-be-told wine prices (like many commodity prices) are near their all time high. So what makes this investment class still attractive? First….climate change. The progressive warming of the entire planet is not only devastating certain vineyards but it is also changing the composition of the wine that those vineyards produce. It is estimated that his alone with reduce the wine production in some of the most reputable wine-producing regions of the world, making pricey wines even pricier at a time when demand is o projected to increase. On the demand side of the wine market, there have been seismic shifts as well. The average
age of fine wine investors has come down to the mid forties (it was in the 60’s). But this means that fine wine is appealing to a larger market in general. Moreover, the wine market is growing tremendously in South America, Asia nd Russia. Now may be just the right time to jump in. Let’s take a look at how we might do that.
What Makes For a Good Wine Investment?
Fine wines differ from mass market wines on a number of parameters. Truly successful fine wine investors understand these nuances in order to get good returns. What are these parameters? Well first, it is best to choose vintages and varietals (wines made from a single grape variety) that are made by reputable producers. For instance, Cabernet Sauvignons from California’s Napa Valley command such high prices because the of the stellar reputations of vineyards like Abreu Vineyards or Schrader Cellars. Furthermore, if you can get your hands on so called “Cult Wines” (wines that have a dedicated following of enthusiasts who are willing to pay large sums of money for them), your almost guaranteed to make bank.
Secondly, while there are many different types of wine red, white, dessert wines, sparkling; keep in mind that red wines traditionally fetch higher prices. Thirdly, as with most investment assets, rarity increases the asset price. For example, in 2012 the vineyard Domaine de la Romanee Conti in Burgundy, France produced fewer than 4,500 bottles. However, the bottles from this year now sell for more than $13,000 per bottle today. [2]
Lastly, as a prudent investor in any asset class you should seek diversification in your investments; wine investing works the same way. Successful wine investors almost never hold wine from a single vineyard, a single geographical region, or even a single type of wine. Instead, they manage an broad range of wine bottles that will hopefully appreciate over time.
Ways To Invest:
Unlike with other investment classes like fine art or real estate, there are very few opportunities for debt investment (investments into loans backed by wine collateral) in fine wine. Therefore, almost all fine wine investments are equity investments (investments that depend on the appreciated value of the wine over time). These investment can be broken down into four categories: Bottle-by-Bottle, Futures, Stocks, Investment Platforms.
Bottle By Bottle:
The most traditional (and labor intensive) way to invest in the fine wine market it to buy individual bottles. Most fine wine is bought and sold on the secondary market and through wine auctions. Popular websites through which to buy fine wines include WineBid, Sotheby’s and Christie’s.
But keep in mind that purchasing wine bottles is only the beginning. You will have to keep those wine bottles in proper storage in order to maintain their value, ideally in a wine cellar or vault. The wines should be kept away from sunlight and must be kept at the right temperature to preserve them. Moreover, owning a wine cellar may necessitate the purchase of additional home insurance for that wine.
Wine Futures:
Wine futures (also called en primeur) are a way to purchase wine before it has even been bottled. The concept is actually quite simple. Before wines are released to market, they are aged in barrels (often for up to three years). During this maturing period, you have the opportunity to buy wine at a lower cost than you typically would on the secondary market or at auction.
Wine Stocks:
If you want really broad exposure to the general wine market without having to pay for storage, maintenance or insurance; wine stock may be the best investment option for you. Some of the most population stocks that are directly tied to wine in particular are:
STZ — Constellation Brands
NAPA — Duckhorn Portfolio
WVVI — Williamette Valley Vineyards
At the time of this article’s publication there are no specific ETFs for the wine industry so you are limited to individual stocks and by extension a handful of wine companies/brands.
Investment Platforms:
Wine investment platforms are the newest kids on the block. Some platforms like Vinovest, Vint LLC and Cult Wine Investments enable you to invest in individual bottles or in a collection of bottles in order for you to see asset appreciation over time without the hassle of storage or insurance fees. (FYI: some of these platforms may require you to be an accredited investor as specified by the SEC rules).
Other platforms like ALTI Wine Exchange and Vindome actually use blockchain technology to actually tokenize wine bottles so that they can be sold on the secondary market (similar to how NFTs are bought and sold). These platforms represent a bold new frontier in the wine investing space, so with that in mind proceed with caution and investigate all investments thoroughly.