Navigating Fine Wine Investment
by Peter Lunzer
Many people consider investing in wine as an asset and develop a taste for investment. I developed mine more than 35 years ago and have since navigated the wine trade and invested over £86m on behalf of a broad range of investors.
The troubling area about collecting wine is that the pitfalls are many and the public tend not to have access to the inside track.
I am often encouraged to share some of the ins and outs and thought a would give you a glimpse of my investment thoughts and strategies.
The premise is simple - wine is created in limited supply and becomes scarcer as people drink it. Wine also can improve with age, so as time passes, the tastier, rarer, and more valuable it becomes. Wine investment can deliver excellent returns and historically there are some great charts demonstrating decidedly weak correlation to other asset classes and at the same time, quite strong correlation to the perceived number of billionaires on the planet!
However, the wine investment industry has tended to attract scams and a raft of unscrupulous business directors - not least I imagine, because it seems like easy money when the headline figures, which are not verified by regulators, simply tell you who the great winners were in the previous year. No-one is guaranteeing the performance in the following year.
The greatest challenge for all investors, regardless of the asset, is the ability to undertake research so that the individual can convince themselves that they are making the right decision... One of the great barriers to even minimal requisite research, is that wine is an unregulated asset class and how do you sift between truth and marketing blurb? Performance claims for fine wine portfolios are extremely hard to verify and in recent times whilst there has been some steady growth the oldest adage still applies... "past performance is not a guarantee of future results"
Navigating wine investing and knowing which fine wines to choose takes research, expertise, and a great deal of luck on timing. To any investor this must all sound quite familiar but even if people are excited about the potential, they should only invest what they can afford to lose* and confidently accept that with wine, there is an option to consume the investment.
*Unlike shares in, for example, a 'Tech start up', carefully chosen wines, bought from verified sources, have never lost all their value, other than when becoming the subject of an insurance claim!
Since first investing back in 2003, on behalf of individuals and institutions, I have seen some truly wonderful patches when across the board, wine prices rose, and it was not unusual for double digit annual growth. However, like all markets there are external influences which affect sentiment and prices can go down as well as up. Buying into fine wine portfolios in 2011 would have generally shown a decline in portfolio value for 4 consecutive years. Perhaps a paper loss of 35% which has now been recovered.
For conservative investors, tangible assets like real estate, fine wine, gold, platinum and silver, are often perceived as good options for long-term investments. Holding physical commodities brings with it challenges and costs whether it is maintenance on your building or storage and insurance costs in a bank vault or a bonded warehouse. Performance figures for wine investment tend not to take into account the hidden costs but despite the drag on returns, with correct guidance, the results can still be decidedly favourable.
The biggest element to consider with wine investment is the title to your asset. Land registry is safe for your home and custodians of precious metals are regulated but, wine companies are not! Therefore, when newcomers to the wine investment game offer clients a storage solution, my alarm bells ring. Should that company fail, for any reason, what is the title to the bottles which are allegedly mine? It is important to add that there are some big players in the fine wine market who are entirely trustworthy but once again, do your own research and to remove any element of doubt, set up your own bonded warehouse account.
Capital gains tax should not be the reason to make an investment and the problem with fine wine, held sensibly in a bonded warehouse, is that HMRC have made it plain as day that they would like to know about any transactions in wine exceeding £6,000 (I believe at the time of writing, that this is the threshold)
Where the waters are muddy is that HMRC seem not to have too many wine experts on their books and to prove a capital gain, there needs to be an offset against cost - so when going into actual accumulated costs, most CGT liabilities will be diminished to modest levels if declared.
As you can clearly see the pitfalls are many and without access to the inside track, it can be risky business investing in wine.
Out of the £86m I have invested for clients over the years, one Korean company was responsible for £27m of the total alone. The process on placing their funds took a little more than 6 months and was largely executed with essential anonymity, utilising membership of the online wine exchange known as Liv-ex. We still maintain our membership and continue to help investors, large and small, to minimise their risk and put them in a position to have a truly enjoyable asset to monitor and sometimes to taste.
You can read more about our investment service here https://lunzerwine.com/pages/wineinvestment
and please contact me here Peter Lunzer if you would like more detailed information.
“Start your own wine collection”
Since 2003 I have been involved in advising clients on the potential of investing in wines. Like all stock pickers in any asset, there are moments of glory and a few swiftly forgotten trades. The key for someone new to this asset is to start with a simple foundation based on a short checklist as follows:
* Create your own storage account in a bonded warehouse - I recommend Nexus
* Find the true value of a wine you are being advised to purchase. For that you need to know the bid to offer spread in the marketplace. Nobody minds an advisor making a profit but what is the percentage they are charging on the commodity?
* Aim to buy things you probably would not dream of drinking due to the price! This removes some risk from the corkscrew as well as minimising the volume of stock in your warehouse account.
* Be prepared to be patient - 5 years is a sensible minimum and by 10 years the wines should really have moved the needle positively.