Asset picks: Wine

There are many different types of alternative assets out there, from watches and jewelry to cars and artwork, but probably none as exciting and as experiential as wine. Wine has a character and it changes with time. It’s origins traced from all around the globe define it’s value while time makes it appreciate culminating in a possible investment or a gratifying tasting of its characteristics. Each wine has character that can be uncovered through tasting and felt with all your senses. Yes, vintage cars can be driven and watches worn, but there is something else to wine that could touch our feelings and those that it is shared with. Fine Wine investment is one of the longest standing alternative asset classes, showing a clear history of very attractive returns, a hedge against inflation and low correlation with other markets. It is an asset that improves with time and its consumption creates a supply and demand that is constantly changing with each generation. It has a finite supply that is controlled by producers which allows for strong price performance. The chart below plots the appreciation of wine as an asset class since 1988 against other popular investment options like gold and major indexes. A track record of bringing double digit returns year on year with lower volatility and susceptibility to large draw-downs alongside other markets. Moreover, high liquidity and flexibility makes it a perfect asset to enjoy and preserve your wealth.

The journey from grape to wine is one of patience and complexity. Enjoyed by many and appreciated as a commodity and luxury for some, wine has been a central part of daily life since Roman times. The quality of wine starts with its roots. The soil predetermines the minerals that are going to be absorbed that’s why the region of its origination plays such an important part. Additionally, each region has it’s own weather patterns, humidity and the most important sun exposure that determines the character of the wine. When to pick the wine according to the weather and growth stage is one of the key areas to the production of a great wine season. Wine is experiential as it touches on all the Five senses:

  • taste – sweet/dry, acidic, sour, bitter among others outlining its character.
  • smell – smell of a wine – “nose” or “bouquet” – fruit, flowers, earth, leather, wood, chocolate.
  • sight – color & clarity and its appearance as observed when fresh out of the bottle.
  • touch – “mouthful” – full vs light bodied, defined by different thickness and consistency.
  • sound – clinking of glasses. There is a whole industry around creating different shapes and sizes of glasses for particular types of wine and of course the specific cling to them.

The way that wine is consumed plays a role in defining some of its value while the quality is defined by its origination. There is a clear separation of the provenance of wine determining it’s quality, reputation and characteristics. “New World” vs “Old World” is the clash du jour as the two main categories of wine provenance. New World typically lists the variety of the grape on each bottle from North America – California, Washington, Oregon, Canada and Mexico to South America – Chile, Argentina & Peru versus Australia, New Zealand & South Africa. Old World names the wines after the particular region where it was made France, Italy, Spain, Portugal, Germany, Greece, Bulgaria. Some of the most collectible and highly sought after wines come from France in Bordeux and Burgundy as well as Italy Tuscany, Piedmont and Puglia. In Bordeux, red wine is represented by blend of cabernet sauvignon, merlot, cabernet franc, petit verdot, and malbec. Burgundy is famous for it’s Pinot Noir. The wine making tradition in this French region goes back to the Romans while it’s modern standing has been achieved through the Christian monks from the Middle ages who developed the region and tradition of wine making separating single varieties and helping the wine develop its characteristics. Pinot Noir was the variety of grape that greatly benefited from the soil type and weather in this region. Burgundy is relatively small region in France, though what it lacks in size compensates with it’s complexity. Further to the East in Italy, Tuscany’s Sangiovese grapes red wine is favoured as one of the best. Chianti & Brunello di Montalcino and Vino Nobile di Montipulciano are all regions within Tuscany making wine with those grapes with truly outstanding quality and worldwide reputation. Final mention of great quality that is highly collectible is red Piedmont from Nebbiolo grape – Barolo & Barbaresco. This sample of wines is serving only as an example and is no extensive and picked at random to get an idea of regions, varieties and characters that could potentially represent an investment. Moreover, the characteristics of Investment Grade Wine include it’s pedigree or the place it was produced and the reputation it carries, longevity – matured for at least 10 years and the awards that it has won. The reputation of winery is an important aspect that define the price appreciation of the wine as well as how liquid it is in terms of availability of bottles on the market.

The global wine market is projected to grow with a CAGR of 5.8% in the following 5 years. In consideration of the current market conditions, expected economic turmoil and inflation increase in different countries wine is positioning itself for out-performance against other asset classes. The wine market is driven by increasing demand for wine, due to its health benefits and premiumization of wine products, coupled with innovation in flavor and more advanced distribution networks, globally. Changing taste and new preferences among consumers, along with increasing demand for new and exotic flavors, such as Riesling wine and other tropical fruit wine are expected to fuel the growth in the market. Asia-Pacific is expected to witness rapid growth, during the forecast years. This is due to an increase in the number of companies that produce wine in China, India, and Japan. An increase in demand for premium wines and growing westernization also act as factors that drive the growth of the wine market in this region.

There are certain risks and threads to the whole industry. Firstly, global warming is one of the biggest threads to winegrowers as temperature increase and drought hits the soil. Secondly, large discrepancies in prices between the higher end luxury wines and the lower to mid tier grows widder as the growers struggle to managed their margins. As with any other investment there are risk involved. There has been a steady market movement towards alternative asset classes over recent years. Wine is one of the most accessible and liquid of such alternative assets, with trading spreads now approaching those of traditional financial market-traded assets. Wine made from the same grape can vary drastically in quality and flavor. This depends on a lot of different factors such as geology, geography and climate. The type of soil mix paired with the weather and sun that the grapes take in defines the quality of the wine created from them. Finally, wine is tax efficient investment as the classification of fine wine by H.M. Revenue & Customs as either a ‘wasting asset’ or ‘chattel’ generally means that Capital Gains Tax does not apply. Whether you wish to diversify your portfolio, reap attractive returns or simply enjoy consume it and collecting it, Wine is truly an exciting asset class.

References:

Disclaimer: Opinions are my own and not the views of my employer. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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