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Illiquid liquid:iInvesting in fine wine

May 30, 2017

Throughout history wine was seen as the fruit of the gods and meant to be enjoyed. But now some investors are betting that what was once a high-end niche market may indeed be a road paved with gold.

UK Wein als Investment Cheval Blanc
Image: Getty Images/O. Scarff

Creative investors leave no stone unturned in their search for the next big thing. More and more they are turning their attention to wine, and by no means as a thirst quencher. These investors are looking for high returns. Fine wine is being heralded as the future, but so far the road has been quite bumpy.

For centuries kings and the merely rich have built up large stockpiles of wine. This wine, often kept in barrels, was meant to be enjoyed privately. Rarely was it only seen as an investment. At the same time there are many stories from the 18th and 19th centuries about great speculation in wine. Merchants would buy, trade, horde and sell wine on a grand scale. Fortunes were lost and inevitably made.

By the 1980s the trade in fine wine became more international, later the internet made it truly global. These democratizing and disruptive changes allowed collectors to amass wine on a scale meant to surpass any potentate. For these investors wine is not just a status symbol, it's a commodity.

Weinflaschen  Funchal Madeira-Wein
The heavy glass bottle and cork stopper that we know today are relatively new inventions - only appearing in the 18th century. Bottle standardization was not settled until 1979 when the US finally set the benchmark at 750ml.Image: picture alliance/Arco Images

Look but don't drink

There are many ways to invest in wine at different stages during and after its production. A small cottage industry of brokers, auctioneers and specialists has sprung up around this growing market.

Investment funds have been created and offer portfolios to interested non-experts. Speculators hoping to make a profit in a few years can even invest in wine futures - called "en primeur" - while it is still fermenting in the barrel.

Auction sales seem to be generally stable at the moment, but have fluctuated massively. In 2000, global auction sales in wine totaled $92 million (82 million euros). In 2016, the total jumped to $338 million. This seems like a huge increase until compared with 2011's high of $478 million.

Schweiz Wein als Investment Cheval Blanc
Paying $100,000 for a bottle is not unheard of. Those who only invest or only drink their fine wines are a small minority.Image: Getty Images/AFP/F. Coffrini

Money doesn't grow on vines

Wines from the Bordeaux and Burgundy regions are generally the most sought after. Though the supply of these high-end wines is limited due to geography and laws, anyone seeking certainty should look elsewhere.

Yet one company in particular has made a positive impact on the trade in fine wine. Liv-ex is an exchange, logistics and data service in London dealing exclusively in wine and was started in 2000 by two stockbrokers.

Now the company runs much watched fine wine indices - essentially guides to blue-chip wines. Among them their Fine Wine 100 index is considered to be the industry benchmark and represents the most liquid and tradable wines. This Bordeaux-heavy list was up by 24 percent last year.

According to James Miles, co-founder and managing director of Liv-ex, the merchants who use their services and standardized contracts are responsible for well over 90 percent of trade market turnover. Miles' goal is to make "the wine trade more transparent, efficient and safe." Especially since it is opaqueness that held the market back in the past.

'Sour grapes' - buyers beware

Still the world of wine is one full of mystery and specialized jargon. It is the unknown and unknowable that fascinates wine lovers; but it is exactly these qualities that can lead to trouble. Names like Château Lafite Rothschild, Lafleur, Mouton Rothschild and Haut Brion are irresistible to trophy hunters.

Consequently there has been a string of high-profile cases of counterfeiting in recent years. Empty bottles have simply been refilled with inferior wine and resealed. Labels have been altered or new ones are made to look vintage.

Old wines are especially tantalizing for con artists because there are not many people who actually know what they should taste like - a conundrum of being rare. And in the end even the best connoisseurs and wine critics make mistakes.

On top of that there are no definitive tests to determine what is really in the bottle. Cork experts can have a look. Carbon dating or even radioactive isotope cesium 137 tests can only give approximations.

Deutschland Wein als Geldanlage
Most investors are really collectors and are in it for a mixture of reasons - passion and wanting to turn a profitImage: picture-alliance/dpa/A. Arnold

Pass the bottle

Ultimately the amount of French wine is limited. And globally only about 1 percent of all wine by value is investment grade. To make real money on wine you have to buy and sell a lot of it. This can seem an impossible task when some of the most respected producers only make a few hundred or thousand cases a year, and restrict the amount sold to one person.

Another problem with wine is the slow process of selling it. The irony of its illiquidity is not lost on some buyers, but getting rid of those valuable bottles in a pinch can be difficult.

To get their full worth, sellers have to wait for the next auction and pay auction fees. Selling to a broker is usually faster, but may result in less cash.

Besides transaction costs, ancillary expenses are also high. Wine is difficult to transport, takes up a lot of room and can easily be stolen or spoil when not stored properly. Can such a business be realistically scaled up?

James Miles thinks so: "In the past few years the market has spread out a lot - from classic Bordeaux into many other products. Now investors are taking Italian wines seriously, looking at Champagne, American and Australian wines. This year we have traded English and Chinese wines. Interest keeps growing."

Nevertheless, investing in fine wine may remain a rich man's game like classic cars and watches. Only more transparency and a common set of standards can one day make the fruit of the gods an investment opportunity for the rank and file.