So you’re Thinking of Investing in Wine

Following the superb 2005 vintages in Bordeaux and Burgundy, there has never been a better time to invest in wine - or has there?

If you're thinking of investing in wine the articles to follow are an essential reference point: stop here for everything you need to know before you get out your check or cheque book

First we’ll need a:
Glossary

Investment grade wine: A true blue chip wine which is widely regarded as possessing sound investment credentials.

Improving asset: Fine wine is an asset that improves over time - until of course it becomes undrinkable loses its value.

Wasting asset: For the revenue, wine is regarded as a wasting asset where it has a predictable life not exceeding 50 years. If, so it is generally exempt from Tax.

Liv-Ex. On-line international stock exchange for the trading of fine wines by member merchants.

Bond, in bond: Wine held 'offshore' in a bonded or tax warehouse so that duty and any local taxes are not applicable.

Fake wines, wine frauds: Counterfeit wines created with the express intention of defrauding buyers.

Mis-selling: Criminal or negligent selling of goods or services.

Trophy wines: The rarest, most expensive and bluest of blue chip wines. Usually First Growths or equivalent.

Garage wines: Modern micro-chateaux such as Valandraud and La Mondotte.

Small cap stocks: In wine, these are less expensive labels which can occasionally provide good returns.

Auction hammer price: Some merchants and brokers will offer 'an auction hammer price' to vendors. This is roughly what the wine would fetch at auction.

Provenance: Proof of authenticity and ownership history. Not to be confused with a wine's condition.

First growth: Translation from the French term 'Premier Cru' officially designated in the Medoc classification of 1855 - including Latour, Lafite, Haut-Brion and Margaux. Mouton Rothschild was elevated to First Growth Status in 1973 by official decree. It also encompasses other great classified Chateaux in St Emilion and unclassified properties such as Pomerol's Chateau Petrus.

Second growths: Translation of the French term Deuxieme Cru, officially designated in the Medoc Classification of 1855. Second Growths include Leoville-Barton and Cos d'Estournel.

Super seconds: The top performing Second Growths.

En primeur: French term for wine which is sold as futures before it is bottled. .

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(A series created by John Stimfig in cooperation with Berry Bros. and Rudd [BBR])

What are the advantages of investing in wine?

The underlying principles of wine investment boil down to the laws of supply and demand. On the supply side, there are relatively few (perhaps only about 75 in total) investment grade labels, whose production levels remain more or less fixed. On the demand side, there are a growing number of high net worth individuals around the world seeking to own and/or drink these wines. Ergo, the only way to ease the pressure is for prices to go up.

Investment grade wine is also an improving asset. As fine wines mature they become more desirable and therefore more valuable. At the same time, as the wine ages and comes into its drinking window, it begins to be consumed making it even more rare, which in turn adds yet more upward pressure on prices.

Fine wine has seen some astonishing returns, particularly in the last two years - after a period of several years in which prices generally didn't move very much. Since the start of 2006, The Liv-ex 100 index rose +43.2% to November outperforming other asset classes such as oil, copper and gold, the FTSE and Dow Jones.

In the last 20 years fine wine has also outperformed a number of equity and fixed income indices including the FTSE 100. For long term investors (as opposed to shorter term speculators) a well chosen and balanced wine portfolio should provide annualized returns of 10-12% per annum.

Wine is less volatile than stocks and shares, making it a less risky investment. Moreover it is not highly correlated with the stock market, which makes it attractive to investors looking to diversify a portfolio.

Generally, wine is also regarded as a wasting asset so doesn't attract Capital Gains Tax. (However, as this area of tax law is complex it is best to take advice from a tax lawyer or tax accountant.) Moreover, if you keep the wine in bond, you also avoid paying VAT and Duty.

It's also more fun than investing in pork bellies. And if the market does crash, you can at least take solace in drinking up your position.

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What is an investment wine?

To be regarded as a good investment, a wine requires all or most of the following attributes:

*It must be an instantly recognized label or brand with a long track record of quality and high to very high prices
*It must come from a good or great vintage and be highly rated by leading wine critics on both sides of the Atlantic
*It must have strong, consistent global demand for previous vintages of similar quality. It must show consistent upward price movement beyond a minimum set return
*It must have the ability to age and improve over a long period of time.

Which properties and regions to consider

Bordeaux
Bordeaux represents 90% of the wine investment market and should take the lion's share in any portfolio. Here, the top Left Bank Classified Growths represent some of the bluest of Blue Chip wines. So look for First Growth clarets like Latour, Lafite, Margaux and Haut Brion. The Super Seconds (a select number of Second Growths) are also a good source of investment potential. So too are some 3rd, 4th and 5th growth chateaux such as Lynch-Bages.  On the Right Bank, the most sought after names include Cheval Blanc, Petrus, Le Pin and Ausone. Chateau d'Yquem can also provide solid returns from certain vintages.

Burgundy
Beyond Bordeaux, a select number of Burgundies qualify as investments. Here the names to look out for include Domaine de la Romanee-Conti, Coche-Dury, Comtes Lafon and De Vogue. However, the secondary market for Burgundy is much less developed and therefore much smaller.

Rhone
The same is true of the Rhone Valley, where wines like Guigal's single vineyard Cote Roties can sometimes (though not always) provide handsome returns. Generally though, the Rhone remains undervalued as a region and has yet to really establish its investment credentials.

Champagne
A number of prestige cuvee Champagnes are also worth considering for investment purposes including Krug, Crystal and Dom Perignon.

Italy, Port, the New World - and the Bordeaux cults
Outside of France, investors need to be much more wary. Port is no longer regarded as a good investment bet. Some Super Tuscan wines like Sassicaia can on occasion perform well, as can a handful of Spanish wines. Some Californian and Australian wines have also appeared on investors' radars, particularly in local markets. However, these generally more modern and less well established wines are more prone to the vagaries of fashion. New and Old World 'Cult' wines from California, Australia and Bordeaux 'garagistes' are not the darlings of the market that they once were and are best avoided in the current climate.

Which vintages?

Generally, the received wisdom when it comes to wine investment is to stick to the very great 'trophy wines' from Bordeaux (ie First Growths and top Pomerols and St Emilions) from the best vintages. The best Bordeaux investment vintages include:

1959, 1961, 1982, 1986, 1989, 1990 1996, 2000, 2005

However, there are always exceptions. As mentioned before, 'small cap' stocks like Chateau Lynch Bages can perform surprisingly well for investors, but only from great vintages. Similarly, great trophy wines can offer excellent value in good or under-rated vintages. Poor vintages should be given a wide berth by investors.

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How much do I need to invest?

You can invest as little as £500 in a case of wine. But a minimum investment of £10,000 will enable you to create a more balanced portfolio so that you can at least spread your risk across a few Chateaux and vintages. Wine should only be a small part of your total investment portfolio. Moreover, you should not invest more than you can afford to lose.

Do's

DO Develop a good relationship with your merchant or specialist wine investment company. Not only will you get better advice, you are more likely to get preferential treatment regarding highly sought after wines - particularly if you have bought good quantities of wine from them in the past. Most serious collectors/investors will also develop relationships with several merchants.

DO compare prices. The spread between merchants' prices for the same wine can still vary enormously despite greater transparency because of the internet. To quickly compare prices visit, www.winesearcher.com. Another good place for competitive, real-time prices is the Vintage Wine Fund's www.vwftrading.com. In addition, serious investors and collectors who require more current, historical and analytical price and market information would be well advised to subscribe to one of liv-ex.com's products at www.liv-ex.com For historical auction prices, log onto the Decanter Fine Wine Tracker at www.decanter.com.

DO check the provenance and condition of the wine before you buy it.

DO make sure that your wine is stored in perfect conditions so that it will mature properly and predictably. For longer term maturation, wine requires the correct temperature and humidity together with a lack of light and vibration.

DO try to buy amounts of three to five cases per chateaux. Larger quantities are always more interesting to Trade Buyers.

DO keep the wine in bond with a reputable professional storage company or wine merchant. Make sure that your wine is kept separate from merchants stock and is clearly identified as your own. Make sure that your wine is insured to its full market value.

 Don'ts

If you are investing for the medium to long term, DON'T bank on quick returns. You may be lucky (or clever) in that some wines will go up rapidly in value. Generally, wine prices don't go up in a linear fashion but tend to experience fairly short periods of upward activity. Timing is therefore everything when it comes to buying and selling fine wine. If you are speculating in wine over the short term, you may see some exceptional returns on your investment in the current bull run. But such speculation will always be a much more risky and volatile endeavour compared to a longer term investment strategy.

DON'T believe all the hype surrounding wine investment. Sections of the press have had a field day describing meteoric price rises of wines like 82 Le Pin which rose from £350 a case to £18,000 at one point. Such wines are not only very difficult to acquire, they are also extremely unrepresentative of the market as a whole.

DON'T buy wine which you happen to like, hoping it will go up in value. Stick to the tried and tested investment wines. Personal taste is irrelevant and has no place in investment decisions.

DON'T buy wine en primeur from a new merchant. If the merchant goes bankrupt you could be left high and dry with no wine to show for it.

DON'T try to sell split or opened cases. The desirability and value will plummet unless it has the full dozen in perfect condition in its original wooden case.

 Next we’ll look at  En pimeur vs older vintages and some tricks of the trade.

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En primeur vs older vintages

In the past, en primeur prices for First Growths were astonishingly good value as wines often rose quickly in value on the secondary market. The 1982 Latour, for example, came out at around £250 a case, and is now trading at around £9,000.

But in the last 10 years windfall profits for investors buying en primeur have all but disappeared as chateaux have priced their wines at full market value - and pocketed the proceeds themselves.

What that means is that while en primeur may still be the cheapest way to buy particular, highly sought-after wines, those wines don't necessarily make the best investment, especially as prices for vintages like 2005 are likely to plateau in the short to medium term.

As a result, wine investment professionals are increasingly looking at older wines for more profitable investment opportunities. Many regard the back vintages such as some 1986s, 1900s and 1996s as better value than more recent ones. This is simply because the wines are relatively (and sometimes actually) cheaper than their sibling counterparts. Moreover, with greater bottle age, they are going to be drunk earlier. This in turn will reduce supply and simultaneously fuel higher prices. Any such price anomalies as these present good investment opportunities.

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Tricks of the Trade

CONSIDER buying a few large format wines en primeur as these big bottles are relatively rare and often command a significant early re-sale premium over standard bottle sizes. However, you should only buy trophy wines from great vintages. If you are buying Yquem as an investment only buy halves. Do not buy large format Yquem. Half bottles of Yquem trade at a premium because they are more popular, because and are consumed more often. Conversely, large format bottles are consumed much less frequently so tend to hang around in people's cellars. Generally though, Sauternes is not regarded as a blue chip investment in comparison to the demand for top class claret.

READ around the subject as much as you can. Apart from reading decanter.com and Decanter, key critics to follow include Jancis Robinson, Steven Spurrier and, of course, Robert Parker in his Wine Advocate. For a more academic approach to wine investment buy Mahesh Kumar's book called 'Wine Investment for Portfolio Diversification', published by The Wine Appreciation Guild. For statistical information on how the wine market is moving check out livex.com's various wine investment indices and market updates. For auction prices, check out Decanter's Bordeaux and Port Indices.

PAY ATTENTION TO PARKER! The importance of Parker points cannot be stressed enough. According to recent research there is still a strong correlation between a highly rated Parker wine and its subsequent return on investment. In the last year, 99-100 point wines have generated twice the performance of 92-93 pointers. On average wines with less than 94 points have underperformed in comparison.   Be aware, however, that Robert Parker does not believe his point system should be used for investment purposes.

GO FOR A SMALL NUMBER OF HIGH VALUE ITEMS - rather than having lots of cases of more modest wines amounting to the same value. Not only do the top 100 point trophy wines tend to generate more profits, the storage costs of having a large number of cases will eat into your profitability.

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Where to buy?

At Auction You will get very good wine advice from the leading Auction houses specialist wine departments - but they are not investment specialists. However, the Auction market is very strong at the beginning of 2007 particularly for the top trophy wines. At present it is more of a seller's market and therefore not necessarily a good place to buy the very top wines right now for investment as they are fetching extremely high prices. Remember to factor in the buyer's premium which can be as much as 15% in the UK. (Currently, the auction market is an excellent place to buy more modest good quality wines for drinking.)

From a Merchant or Broker Remember that brokers and merchants tend to know more about wine than they do about personal wealth management: they are not qualified financial advisors. Nevertheless, some do offer a range of investment services including portfolio management services, cellar plans and advice on investment. Naturally some are better at this than others. So do shop around. Generally though merchants are in business to sell wines from a list and so have a vested interest in whatever wines and advice they are supplying.

Specialist Wine investment Companies Be very careful when dealing with specialist wine investment organizations. There are a few reputable companies who have been operating for over a decade and have a proven track record. But many others should be treated with caution. Do not agree to paying any up front commission fee. Some companies charge as much as much as 25% and are best avoided.

Do not deal with anyone who uses cold calling or strong arm sales tactics. Do not deal with anyone who operates via a PO Box. Be wary of anyone whose prices are too low or too high. Do check that the company is not one of the dodgy investment companies named and shamed on www.investdrinks.org website. Ask around to make sure that the company you are thinking about dealing with is well-known and above board.

Wine Investment Funds There are now several extremely successful and reputable wine investment funds around the world. The advantage of these professionally managed funds is that they tend to be run by ex City investment professionals who are literate in fine wine as well as high finance. Given the complexity of wine investment, it may make sense for some people to hand over the buying and selling decisions to these professional fund managers. Investors can also take advantage of these 'unit trust' funds to spread their risk more effectively. Successful funds have also been set up in such a way that investors avoid paying CGT on any gains accrued from selling the fund's units. Finally, a number of these funds have some FSA regulation.

Of course, investors do pay a variety of fees for the privilege of having their liquid assets managed on their behalf. Do check out what these are and what is the minimum subscription. Moreover, not every wine investment fund has provided gold-plated returns for its investors. In 2005, the AWM fund, an off-shore mutual wine fund run out of Geneva went into liquidation. In the same year, an Australian fund, Heritage Fine Wines also collapsed. Most recently, following the collapes of Uvine, the Amphora Fine Wine Fund has also been closed and its stocks liquidated. In which case, do as much research as you can before putting your money into a wine investment fund.

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Where to Sell?

At Auction If you have a large collection of great wines, a good auction house will negotiate down from its standard seller's fee of 10% commission. Given the current market conditions, the saleroom is almost certainly the best place to sell a stellar collection of trophy wines right now.

To a Merchant or Broker Generally, a merchant or broker will charge a commission of 10%. Some companies also offer an 'Auction Hammer Price.'

Online Private Collectors and investors can also sell (and buy) wines through the Vintage Wine Fund's new online Trading screens at www.vwftrading.com. This service provides live quotes of both buying and selling prices on top end fine wines.

How do I value my cellar

You could ask your merchant to value it. If the wines are in good condition and stored under bond, you should be able to get a figure quickly over the phone. For more substantial and complicated collections cellared at home, a private valuation may be required. Another way would simply be to take the lowest prices on winesearcher.com and deduct 10% as the broker's margin to leave you with a net value. A third way would be to subscribe to an on-line subscription-based product from liv-ex.com called 'Cellar Watch'. This allows investors to value their cellar using the most up-to-date prices.

10 great investment wines (and 10 not-so-good)

Figures supplied by liv-ex.com