With COVID-19 sending markets around the world into a state of flux, investors are looking for alternatives to enter. One of the top-performing assets is fine wine, which offers stability and decent year-on-year returns.
The top end of the fine wine market is self-contained and, to a large extent, divorced from financial markets, because it shadows the movement of wealth around the globe rather than being permanently attached to a single economy. This unique characteristic means it is less susceptible to the fluctuations witnessed in conventional markets and, more importantly, provides flexibility, as its appeal is less open to fashionable interpretation than other luxury collectables.
World Finance spoke about upcoming developments in the fine wine market with Andrea Elia, Managing Director of the Swiss fine wine company UKV International, which buys, sells and trades some of the most sought-after wines on the planet.
Why do you think the fine wine market attracts such a high level of interest?
Collecting fine wine to trade in the future is not a new concept. It has, however, become one of the most popular soft commodity markets, enjoying a perpetual increase of investment over the last 25 to 30 years, because it enjoys an extremely stable environment, flexibility and favourable tax treatment from regulators.
Historically, the fine wine market has outperformed many other investments and is considered a safe haven for funds
The wine market originated when aristocrats and gentry would buy more than they intended to drink, before selling some to subsidise their own consumption. Fine wine was also frequently used as an alternative currency and was exchanged for other goods, used to pay debts or offered as security against financial borrowings. Today, it is used more as a safe place to park money in the medium term, realising a decent return on the capital element.
Why does fine wine have such international appeal, particularly among canny investors and the wealthy?
After the 2008 financial crisis, people looked for areas to safeguard funds that were not directly linked to the financial markets and therefore were free of the exposure that traditional investors are often forced to endure. Investors were drawn to assets that would be less volatile and more sustainable over time.
The tangible aspect of a fine wine may be another reason why investors like this market; it is comparable to property without the maintenance or dependence on trends. Few tangible assets can be easily traded internationally, and even fewer are not reliant on a single economy.
In 2008, fine wine showed a brief dip in values before bouncing back to record highs. How does the market remain stable in turbulent financial periods?
I believe the wine sector remained resilient in 2008 because, while some financial markets were in meltdown, others, like the Far East, were bullish. In this way, fine wine is quite mercenary and unique as it follows the money, moving to active markets to maintain a strong presence.
Historically, the market has outperformed many other investments and is considered a safe haven for funds. In the first quarter of this year, the COVID-19 crisis sent stock markets into free fall. While the S&P Global Luxury Index fell 23 percent, the Liv-ex Fine Wine 1000 slipped just four percent and had begun its recovery by May (see Fig 1).
How does the market remain strong as political landscapes and financial horizons change?
The market maintains a strong position within the performance rankings because it is always attracting new money. While luxury goods and markets are often led by fashion, fine wine seems to have a much broader appeal. In many countries, it signifies success, not unlike an impressive property or exotic supercar that can be displayed as a status symbol in social or business circles. By broadcasting success in this way, fine wine is given an extra dimension as an investment.
The simplicity of the market also adds appeal. Driven by the simple laws of supply and demand, trading fine wine makes economic sense to investors – even those with no experience of this asset.
What drives demand in the market?
The market has attracted investment from wealthy individuals, which has increased demand on an already limited supply chain. To appreciate this, one needs to realise some of the leading Châteaux in Bordeaux and Burgundy produce less than 2,000 cases per year. This demand grows exponentially as the market attracts new areas of wealth, but with production remaining static, it is easy to see how demand outstrips supply of the most sought-after wines.
Wine is regarded as an armchair investment that requires no maintenance and has minimal costs except storage and insurance to safeguard the asset. It is important the wine is held in a secure facility with automated atmospheric conditions suited to the long-term storage of wine to ensure its condition is maintained.
Unlike many luxury consumables, there is a definitive stock at the end of each harvest year, because you cannot produce more than the capacity of the vineyard. Therefore, you cannot increase production to meet demand. Additionally, not every harvest produces the same quality of grape. Extreme weather will create a lower yield, forcing Châteaux to be more critical with their grape selection for top labels. In some instances, this reduces production to as little as a third, which naturally affects the values of the new vintage and subsequent vintages.
The fine wine market maintains a strong position within the performance rankings because it is always attracting new money
Do you have any advice for someone who wants to get involved in fine wine?
Our clients are from many walks of life, but the one thing they have in common is that they prefer to have funds outside the more volatile mainstream markets. They know this is not an in-out, buy-sell marketplace, which means they don’t have to monitor market performance on a regular basis. Most clients appreciate wine as a medium-term investment and know that if they get between seven and 14 percent growth per annum in a tax-efficient environment and the wine is held for eight to 10 years, they will have a valuable fine wine collection.
Anyone wanting to get involved in the fine wine market should understand this and look elsewhere if they are pursuing massive overnight profits or quick returns. This market remains stable because it is about a steady, incremental growth over months and years. My advice to anyone looking to enter the marketplace would be to see it as an asset they can add to frequently. They should lay a solid foundation and then build on it.
How could an individual engage with the market before committing financially?
UKV International holds luncheons and social events, to which we invite both prospective and long-standing clients so they can network, gain first-hand examples of how the market works and hear feedback about the service we provide.
This allows would-be clients to get an idea of the marketplace, enjoy the social aspect of our services and set their expectations in terms of time frames, returns and exit strategies. Many different people from a variety of geographical areas and social backgrounds attend these events, showing that the market is not the preserve of a particular demographic.
Our clients have many reasons for entering the fine wine market. Many of them are successful entrepreneurs who simply want funds outside the mainstream markets; they are company owners and directors who have utilised all of their personal tax allowances and traditional tax wrappers and want an additional tax-efficient vehicle. Additionally, many of our clients are looking to bolster their pension or retirement plans.
Levels of entry differ and can be flexible depending on the client’s circumstances and objectives. Most clients enter the market with between $24,000 and $61,000 to create a foundation to build upon. Some start with as little as $12,000 and add regularly to build a solid portfolio over 12 to 18 months.
Those who are looking for income from their investment usually transfer more volatile or underperforming funds, and so their entry levels are much higher. In these cases, entry levels are between $600,000 and $1.2m, but it largely depends on the individual, the purpose of holding wine and what they are looking to get out of the market. Whatever they are looking for, the message in the bottle is: fine wine is not just for drinking.
