ILLUSTRATION: COURTESY OF CULT WINES
Buying top-quality wine that you’re willing not to drink is a novel way for wealthy investors to insulate their investment portfolio from market volatility.
That’s because wine, like other tangible assets, including art or real estate, has a low correlation with global stocks, meaning prices of each tend not to move in tandem. Allocating a small portion of a diversified investment portfolio to wine, or other tangible assets can potentially make for a more stable portfolio overall.
To prove the point, Cult Wines, a more than 10-year-old London-based firm, stacked up the price performance of fine wine as measured by the Liv-ex Fine Wine 1000, an index representing secondary market prices of 1,000 global wines, against gold and global stocks.
Their research found that the correlation between wine prices and stocks is predictably low when the economy is humming. In more troubled times, however, the correlation is higher. But Cult Wines found that even so, fine wine still provides a defensive buffer and it even does a slightly better job than gold—the quintessential flight-to-safety investment.
In 2008, in the midst of the financial crisis, the Liv-ex Fine Wine 1000 dipped just below a 0% annual return, while global gold futures slid to return about a negative 3%. Both these results were far better than stocks, as the MSCI World Stock Index plummeted to a negative 38% return and the FTSE All Shares index, a capitalization-weighted index of about 600 companies traded on the London stock exchange, fell to a negative 25% return.
“A lot of people say what happens if the global markets crash? The benefit is, it did drop in price, but nowhere near as bad as the other markets,” says Tom Gearing, managing director of Cult Wines.
Gearing co-founded the company in 2007 with his father, Philip, a former investment banker. The elder Gearing had first introduced his son to the best Burgundy on annual visits to top vineyards when the younger Gearing was a child.
How to Invest
There are several ways wealthy individuals can invest in fine wine, from owning a vineyard directly, to building a collection of the finest wines purchased at auction or directly from producers. There are also various wine funding vehicles that operate similarly to private equity funds, where investors pool their money into a single fund for the purposes of buying investment grade wine. These funds typically have terms of, for example, five years, and charge a management fee of about 1.5%, and a performance fee of 20%.
Cult Wines, which has about US$100 million in assets under management today, operates funds that are more like a separately managed accounts—individualized, actively managed portfolios of fine wines based on risk each client is prepared to assume and on how long they want to be in the fund.
Except for futures (which aren’t bottled yet), all the wine is bought wholesale from producers in original wooden cases and is stored, tax free, in bonded facilities in the U.K.; the wine is then traded to take advantage of market opportunities and inefficiencies identified by the portfolio managers, just like a stock fund manager would do. Cult Wines has eight portfolio managers in London and another five in its Hong Kong and Shanghai offices, with plans to open later this year in Singapore to serve clients in Southeast Asia.
A moderate-risk investor would likely have a portfolio 60% invested in well-established blue-chip equivalent names, like First Growth Bordeaux. Most of these will be bottled vintages, not futures, where the price performance is less certain, says Tom Gearing. The remaining 40% of non-Bordeaux wines will be invested in the “strongest wine brands/producers in Burgundy, Italy (Barolo and Tuscany), U.S. (Napa) and Champagne,” he says.
A high-risk investor seeking returns above 10% will own more Bordeaux futures—where returns range from below 0% to triple digits—as well as smaller boutique properties in Bordeaux, upcoming producers in Burgundy, and more “new world” producers, like Almavia in Chile, he says.
The minimum investment is about US$10,000, but US$50,000 allows for a more diversified portfolio, leaving an investor less vulnerable to the price performance of only a few wines. For the one-year period through the first quarter, the Cult Wines Index is up 8.52% versus a 2.1% gain for the Liv-ex Fine Wine 100, an index of secondary market prices for the top 100 wines. For the five years through Dec. 31, 2017, the index was up 7.21% on annualized basis, the firm says.
Those returns don’t net out fees, however, which vary depending on the type of account an investor has. For an “all-inclusive” portfolio, investors will pay a 15% up-front management fee, but no annual fee and no charge to liquidate the fund. At the six-year point, these investors are charged £15 (US$20) per case per annum for storage.
For ongoing portfolio management investors are charged a 5% initial set-up fee and then an annual management of 2% a year, which covers storage and insurance, and there’s a 2% fee to liquidate the portfolio. Investors own the underlying wine in both cases.
“There’s no hiding from the higher transactional ‘up-front’ costs” of investing in fine wine versus stocks, Gearing says, but he argues, “if you were to match up our model against that of a traditional wine merchant, then we provide a much more transparent and cost efficient way of investing in wine.”[“Source-barrons”]