FINE WINE INVESTMENT

FINE WINE INVESTMENT

The market and recent performance

 Although investing in fine wine as a viable asset class seems a relatively new phenomenon, savvy collectors and fine wine enthusiasts have been doing so for many years. By buying more wine than they intended to drink, the future sale of their excess cases – once matured – would fund new purchases. Our aim is to help make the Fine Wine Investment Market accessible to everyday investors, who may not have the knowledge, understanding or time to do it themselves.

 Over the last 25 years, there is no doubt that fine wine has been a sound investment, with prices for some of the top investment-grade wines rising consistently at 10-20%+ per annum. Of course, there have been quieter periods, outbalanced by periods of sharp growth, but overall, the market has proved to be low risk, with little volatility. Traditionally, the US and European have been the largest buyers of Bordeaux Grand Cru classés, but in more recent times, the Asian market has taken a very keen interest in the market. As a result, investing in fine wine gives UK investors the opportunity to tap into the world’s biggest growth economy – China. With Chinese buyers showing insatiable demand for the top wines, and with only a finite supply, the demand: supply imbalance that this market relies upon has been exacerbated and this is reflected in the Liv-ex Claret Chip Index’s 42% and 47% increases in 2009 and 2010 respectively. Fine wine is the only asset class that operates on a perfectly inverse supply curve, that is that whilst supply can only diminish for any given vintage after production, demand is only set to increase, as the consumption market demand for Bordeaux wines will only reach its peak once the wines are into their drinking window (typically 5-50+ years from production for Grand Cru classé wines). It is this unique market mechanism that creates the consistent growth curve for fine wine values and the reason why wine has little correlation to other asset classes in terms of volatility.

 For those who are tired of low interest rates, inconsistent stock market performance and the recent hike in Capital Gains Tax to 28% - fine wine investment offers a simple solution. Wine is a tangible asset, a highly desirable luxury product that we aspire to have and when this asset becomes more rare and expensive, its desirability increases, thus it is a Veblen good. However, it is unique amongst other investable Veblen assets, such as gold, as it has proven to be recession proof and is free from Capital Gains Tax*.

Why does fine wine go up in value?

 Fine wine matures once bottled and improves with age. A limited amount is produced every year (up to 20,000 due to French law) so when bottles are bought, the supply of the wine becomes rarer and therefore the price increases. While supply disappears, demand for mature wines can make early purchases an especially good investment. Demand and interest in fine wine investment is growing around the world and supply of the top wines cannot be increased. Fine wine investment is considered one of the best tangible assets.

Do I need to know a lot about fine wine?

 You do not need to have much knowledge in the subject, as an fine wine investment service we will take you from beginning to end as comfortably as possible! We strongly recommend seeking advice when investing in wine as not all well-known wines are suitable for investment and so it is possible for potential investors to put funds into the wrong type of wines. Cult Wines deals only with the top 50 investment wines and has advice from financial experts and a ‘Master of Wine’ of which there are only hundreds of in the world.

What are the advantages of wine over other investments?

 Finite Product: You are investing in a tangible, improving asset that has a limited production but a huge global demand base. The supply of this already limited asset then declines over the years as the wines are consumed.

 Tangible Asset: Shares that fall in value are good for nothing save for selling at a loss. Wines that do not perform financially as well as expected can be enjoyed.

 Tax: Your fine wine investment is exempt from duty and VAT and, in theory; profits are exempt from Capital Gains Tax. Please note that we advise you to consult a financial institution or an IFA for clarification.

 Performance: Wine has performed very favorably amongst the strongest investments over the past few years. Even in times of macro-economic downturn, wine tends to remain more robust than many other investments.

What are the risks?

 Fine wine investments - It is an investment market like any other, so be aware that prices can go down as well as up.

 Unregulated Market - Only buy from established merchants and ensure you get the expertise needed.

 Investment Term - Short term gains have been possible over the past two years though your investment should be viewed as a mid to long-term one. At least five years should be considered the norm, eight to ten years being better.

 Wine Types - Only specific wines will tend to accrue value, and these wines tend to be expensive. Make sure that you are buying the right wines at the correct prices.

What sort of wines should I invest in?

 Always speak to an advisor, as they can give you information as to which wines are performing best on the market at that particular time. As a rule of thumb, only ever invest in the top wines of Bordeaux and allow advice from your broker for diversifation once you have a solid foundation. You can then look at other areas for specialist fine wine investments. Whilst other parts of the world make good wines, the global secondary market has a smaller demand for these, so it is best to keep your portfolio made up of Bordeaux.

What is En Primeur?

 Commonly referred to as ‘wine futures’, en primeur essentially refers to the process of buying wine whilst still in barrel, with bottling and physical delivery 2-3 years after the vintage release. Wines can be purchased in different size formats, but Cult Wines only supply en primeur in 75cl bottles (either 3s, 6s or 12s) in original wood casing.

 Prices for en primeur are quoted ex-cellars (LCB, Tilbury), with any delivery and handling charges included.

Key Benefits of En Primeur

Lowest price – EP typically offers the chance for collectors to get involved at the lowest market offer price.

Youngest age – At EP release, the wines are at their youngest age, with the maximum period for maturity and potential growth in value.

Security of provenance – when purchasing wines EP, collectors have the added benefit of having wines delivered via the most direct route from the Château, ensuring absolute provenance.

Secondary market buying trend – Traditionally, the secondary market buying trend is for physical stock. This allows collectors to take advantage of EP gains, with stocks that are easily liquidated after physical delivery.

Why invest in En Primeur?

 In recent years En Primeur is increasingly being bought for investment purposes. In general, one can secure better prices for En Primeur wines as they are virtually always cheaper than the price of the wine when it is bottled. With the clamour for good vintages, prices of En Primeur wines can increase rapidly, sometimes even double within a matter of weeks. It is a way to secure wines that are difficult to obtain and highly sought after once physical.

 Buying En Primeur does not necessarily mean that prices will increase but if you get involved with the right wines it offers great value and should be considered as part of a diverse wine portfolio.

 The profit margins can be high therefore when purchasing En Primeur there will be several opportunties even before the wine is bottled to take adavantages of price increases and take profit.

How Does It Work?

Process starts with the En Primeur tastings at the start of Spring quite sometime before wines are ready to drink.
 
These barrel tastings are assessed and rated by the wine trade and experts.
 
One can purchase En Primeur selections before they are bottled and released to the market while they are still in Bordeaux. All wines are purchased “In Bond” which means the purchase prices are exclusive of Duty and VAT
 
The Chateaux offer some of their production at a lower price than the final bottled product. This wine is released in a series of tranches, typically at higher prices in line with market demand.
 
Delivery of these wines in the UK is typically expected around 24 months after release.
 
The wine will arrive in our UK bonded warehouse where it will be stored under bond and on the clients behalf.
 All En Primeur purchases are Ex-Vat and Ex-Duty. If you choose to have the wines delivered (anywhere in the EU) these taxes become payable.
 
Cult Wines are responsible for insuring En Primeur purchased through Cult Wines at the original invoice value until delivery of stock has been completed.

PORTFOLIO COSTS

 There are a few different ways you can invest.

 1) You can invest a lump sum into a portfolio and watch it grow, adding additional amounts as time goes on.

 2) You can join a fund or club and invest small amounts. This is a newer idea that generates much smaller profits but requires a much lower base amount.

 3) You can invest in an investment fund, run by a financial company that requires a minimum of £100,000 and generates medium yield profits. This option invariably means you will also pay tax (SEE TAX FREE INVESTMENT). If you are a private investor, I would suggest staying away from this option.

 Remember, this is a market for people who understand patience, and value strong sensible growth.

 Don’t expect the market to make you a millionaire overnight, and don’t believe anyone who tells you that your money will have multiplied in a year. This market just like everything else has no guarantees.

Your 2 main costs for wine investment will always be TIME & MONEY. This is a market with a minimum time of 18 months and the costs are at least £2000 per go. You want to put as much as possible into your fund, but this means what you can afford.

 Don’t put all you eggs in one basket!

If you put 3k in every two months which is 18k a year, that would be a very strong, healthy amount. Obviously this is for people with high net worth status.

If you put 3k in every sixth months which is 6k a year, that would be a low- average amount, but you should look to build more.

A middle ground is always good, and you can invest whenever you like, so make sure you listen to advice just like any other market.

A good Bordeaux case (12 bottles) is going to cost £3-5k on average for a back vintage and should cost less for a futures option. Storage should be included in the price.

A good new world case (12 bottles) should be £300-400 per case and storage should be included. Most collections cost between £2-5k. Once again it is worthwhile remembering that this is not an area for beginners and it’s advisable to stick with Bordeaux.

GROWTH PERIOD

A wine from the old world (Bordeaux, Burgundy, Italy) can last for 70+ years and they are usually ready to drink around 7 years after being made.

A wine from the new world (Australian) will last for 20 years and can be drunk after year 1. The Australian market is smaller in choice is considered to be gaining a response in the markets, but this will still require many more years before it will become less speculative. The low life expectancy and short maturity means that the market works very differently and doesn’t contain the ‘waiting factor’ you see with the Old World.

 French Bordeaux is usually best to buy once an initial grading has been given. If you are new to this, buying futures can be speculative and risky, even if the wine is from a well known name. As French wine is re-graded many times, it will have many spikes in price. Buying as a future is not the usually the safest way to proceed. If the wine is graded poorly, you are going to get minimal growth, so wait till the wine is at least 2 years old.

Back vintages are wines that are already in bottle with a track history. Less risk and rarer to find, these are ideal for first time investors and if you buy shortly before full maturity you can often see great value added. This would be something like  Lafite Rothschild 1998, or Cheval Blanc 2003.

When wine is ready to drink the stock will drop off fairly rapidly. This is often where you can see a spike in price. Don’t be fooled into thinking that you need to buy young wines, as often the best wines take up to 15 years to mature. This market ultimately requires patience and those that know this will benefit the most. It is important not to buy too late or when the wine has a short life expectancy as this can mean very small profit or none at all. See our wine price system to examine your choices or see examples.

The supply and demand of this market means the Bordeaux area has and always will remain a strong financial investment. With time to come, new fine wine areas will also grow.

MARKET HISTORY

Wine investment is older than the stock market and has outperformed most other market during the last 25 years. The Bordeaux market has proven to be stable and low risk when experts have compared it to modern investments.

Out of the massive 4000 choices of stock in the Bordeaux market, you will find that only 50 are what you could call ‘investment wines’. Going back over 200 years you can find records proving consistency and favouritism in the market. Throughout this time, the wine market has proven to be one of the most stable, unaffected by any forms or problems in society.

A little correlation from a vastly affected economy still has not stopped the powerful investment area of wine.

The French Bordeaux accounts for 93% of everything in the Fine Wine Index – a wine version of the FTSE!

The portions of trading in the investment market (Fine Wine Index) are on average:

90%    French Bordeaux

1.5%   French Burgundy

5%      French Champagne

1%      Rhone

1%      Italian

1.5%  Australian

The current Fine Wine Index was started in 1982, and can be traded on Bloomberg systems, by banks and is commonly used for hedge funds and private investment data and trading. Cult Wines Ltd, of Richmond, uses the Fine Wine Index to pick out short term strategies on back vintages. Mr Oliver Gearing, Managing Director said “This system allows us to calculate our choices and limit risk mathematically and this is becoming a more common event in the market”

 Australian and American (new world) is a new market which has been around for 100 years or so in terms of product. The investment track record is young (12 years give or take) but has been quite impressive on a small number of wines. This is a difficult market for beginners to pick out and the proof of a track history is very small so we would advise sticking to the Bordeaux market.

STORAGE IN BOND

ALL WINE INVESTORS SHOULD USE A STORAGE FACILITY

 A storage facility like London City Bond or Octavian assures and insures your wine in temperature controlled and light conditions. Wines need to grow and develop, and you will need perfect conditions to guarantee the re-sale of your wine.

 These cost between £10-25 a year per case, but a broker company should pay for this within the 10-15% profit they make on sale.

 These companies are 3rd party and some have existed for over 200 years.

 Your wine will be ‘IN BOND’ this means it is in ‘TRANSIT’ - not liable for VAT. Wines stay like this between year 1 and year 50 sometimes and change hands up to 10 times without ever actually moving.

 When someone eventually drinks the wine, they will pay the VAT, not you!

 By investing in wines you actually own the stock and this means that you won a physical tangible asset that always retains a worth. Unlike the banks and shares which boil down to a piece of paper, you own something that carries infinitive historical worth.

 It’s important for the company to offer you an account with your own rotation number so that you can verify that you own the stock.

 When the wine is stored under your name is can only be released or sold when you sign and authorise the trade.

Vinotheque

 The massively constructed 19th c. grade II listed building offers the perfect environment for the long term cellarage of fine and maturing wine. In the last two years in excess of £1million has been spent upgrading and enhancing the warehouse to ensure storage conditions and security second to none. After all, our customers have invested a lot in their wine, so we have invested a lot in keeping it in top condition.

 London City Bond’s market leading systems have been extended to enable Vinotheque’s customers to have full visibility of their stock over the Internet at all times, as well as giving the ability to order over the Internet and monitor orders.

 Corsham Cellars, home to many of the world's finest wines, wines that have been entrusted into our care.
 Our cellars are located 100 feet beneath the hills of Wiltshire, encased in solid Bath stone. This gives us a naturally balanced environment ideal for the cellarage of fine wine. Here, perfect temperature is a constant, and humidity is controlled at the optimum level. There is no natural light, vibration is non-existent and fresh air quality is maintained at all times.

 At Corsham Cellars, we understand that only the best is good enough for your wines, so we constantly monitor and control the smallest of detail and have invested heavily in the fabric of the cellars and the technologies we use. Nothing is left to chance.
  
SUPPLY & DEMAND

Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy.  Demand refers to how much (quantity) of a product or service is desired by buyers.

 The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship.  Supply represents how much the market can offer.

 The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

Fine wine investment is an improving asset, because of the combination of a winery producing a limited quantity each vintage and the consumption of it as it ages, thus making it increasingly rare and causing prices to increase with demand.

 "While it is hard to find totally accurate records and therefore data, it is fair to say that the prices for the very best wines have risen by an average 15 per cent a year over the past 25 years," suggests Joss Fowler, a fine wine manager at wine merchants Berry Bros & Rudd. "That includes quiet periods – for example, from 1998 to 2002 – being more than balanced out by the busy ones, like 2005-07."

PROVENANCE

An increasingly critical factor to ensuring the maximum sale value is achieved upon exit, is the provenance of the wine.

 In order to maximise provenance, wine should be stored in bond (IB), in original wooden casing. This ensures that the case is stored in optimum conditions, because bonded warehouses in the UK will offer specialized conditions for fine wine, both in terms of temperature and humidity. Perhaps more importantly though, bonded warehouse are subject to stringent rules regarding the traceability of wine in order to ensure no foul play in relation to wines being removed from bond before tax is paid. What results is an audit trail for any every case stored in bond, following the movements of the wines since delivery to the UK – providing a solid method for tracing provenance.

 Other issues that will affect the market value of a case of wine are:

 Non-OWC

 Wines that remain in their original wooden casing are the most desirable, as they will almost always carry superior condition to a non-OWC case. Non-OWC cases are usually either an original case but with a new lid replacement or a cardboard case.

 Duty paid (DP) cases

 A case of investment-grade wine that has been removed from bond and had the Excise Duty and VAT paid, will almost always command an inferior price to one that is still held under bond. The simple reason for this is that even DP cases have had £1.81 Duty and 20% VAT paid on them, they are less attractive from a buyer’s perspective, as they do not carry the traceable provenance of an IB case.

 US strip label stock

 Any wines imported into the USA require the importing firm to place an importing sticker onto each bottle – known as a strip label. Naturally, wine that is exported to the USA is far less attractive to buyers from other regions of the world, as the wine has already made the journey half way around the world, with little-to-no record of transportation climate or conditions.

 Soiled/damaged stock

 Cases or bottles can often become ‘soiled’ for various reasons. With older wines, label damage can be expected, and funnily enough the staining of labels can often occur naturally as a result of correct humidity/climate for optimal storage. To ensure that a case will carry the maximum premium for exit sale, when initially buying wine, it is important to check all labels and capsules are in perfect condition, wine levels are into the bottle neck (top shoulder is acceptable as a minimum for certain wines) and the case is original wood.

In the last 12-months, provenance has become increasingly paramount, as the major Châteaux have begun to implement Prooftag technology in an effort to combat the rising number of counterfeit wines coming from the Far East. The new technology means that ‘tagged’ bottles can be validated and traced upon request.

WINE CRITICS - THE MARKET INFLUENCE

Fine wine is subject to rigorous and constant review by a number of wine critics, and journalists worldwide. A handful of the world’s best known and most highly acclaimed critics have the power to make or brake a particular wine or vintage – sometimes before it is even released onto the market!

 We have included a brief bio for some of the notable wine critics – in particular, those that typically have the most profound effect on the prices of investment-grade Bordeaux wines.