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Fine wine – an alternative asset for all seasons

Updated: Oct 5

This article – guest-written by Aaron Rowlands, Research Editor at Cult Wine Investment – provides a compelling case for investors to consider fine wine as an alternative asset class in their portfolios.

 

Wine is no longer just for drinking. Fine wine is gaining increased attention as an alternative investment asset for its impressive return potential and track record of stability.


So far, fine wine investments have performed admirably during the recent difficult macroeconomic backdrop. The deteriorating growth outlook alongside inflation and rising interest rates has caused havoc with traditional 60-40 stock-bond portfolios, prompting many investors to take closer looks at alternative assets as a source of diversification. But the established benchmark index for fine wine trade, the Liv-ex 1000, was up 11.7% year-to-date and carried a 24-month streak of positive monthly gains through the end of August.


At Cult Wine Investment, we believe fine wine is not just an investment option for the current environment but an attractive long-term alternative asset. The potential benefits of a fine wine allocation include strong returns, stability through different market environments, and low correlation with equity and other mainstream assets. Here, we look at these benefits in more depth.


Return potential

No investment is attractive if it can’t deliver strong returns. In this regard, fine wine boasts appealing long-term figures. Cult Wine Investment’s total return since tracking began in October 2009 is 194%, equating to a compound annual growth rate of 8.89%[i]. The Liv-ex 1000 benchmark index, a core set of the world’s most sought-after and traded fine wines, also saw strong gains at 134% over the same period.


Figure 1 – Long-term performance

Cult Wine Investment index and Liv-ex 1000 since October 2009

Source: Pricing data from Liv-ex as of 30 June 2022. Past performance is not a guarantee of future returns.


Fine wine’s return potential stems from the structure of the market, which features an increasing supply-demand imbalance. Investment-grade wine improves as it ages, meaning demand typically grows with time as it approaches its drinking window.


This characteristic combined with inverse supply curve – scarcity increases with time as bottles are drunk, broken or not stored properly – creates the basic dynamic that drives prices higher.


But fine wine’s return potential often exceeds this core trend, spurred on by an expanding global market. As awareness spreads of fine wine’s usefulness as an investment, demand can increase either for the market at large or for a particular region or producer. Supply of fine wine cannot easily increase to meet a jump in demand. Only a handful of certain regions around the world are recognised as top wine growing regions and production levels are tightly regulated by local appellation rules. Greater demand alongside constrained supply is a recipe for price appreciation.


Recent sky-high returns from Burgundy and vintage Champagne highlight this potential for outsized price appreciation when demand jumps for rare wines. Since the beginning of 2021, Cult Wine Investment’s Burgundy holdings have returned 52.0% while our Champagne selections have jumped 57.2% (as of 30 June 2022; Cult Wine Investment’s performance calculated quarterly).


Stability

Alongside long-term returns, fine wine investment also has a track record of stability compared to several other assets. The chart below shows that the volatility of the Liv-ex 1000 fine wine index (annualised standard deviation of monthly returns) has been lower than some other mainstream financial assets since its inception in 2004 even though annualised returns have been similar or higher than the same assets.


Figure 2 – Strong returns alongside low volatility

Liv-ex 1000 index vs other assets

Source: Pricing data from Liv-ex and investing.com as of 31 Aug 2022. Wine = Liv-ex 1000, Commodity = Bloomberg Commodity Index, US Treasury Bonds = iShares 7-10yr, Gold = USD/oz, Equities = S&P500 TR. Past performance is not a guarantee of future results.


A large part of these long-term volatility figures stems from fine wine’s ability to remain a stable store of value even during macroeconomic downturns. We’ve seen this during the current inflation-driven volatility, but fine wine also proved more stable during the initial COVID-19 outbreak and the global financial crisis. The below chart shows fine wine, as measured by the Liv-ex 1000, at its respective lowest point in each of the three downturns.


Figure 3 – Fine wine’s downside protection

Comparison of major assets during peak of recent downturns

Source: Pricing data from Liv-ex and investing.com as of 31 Aug 2022. Past performance is not a guarantee of future results.


This does not mean fine wine will always remain immune to downturns, but the three main factors that underpin fine wine’s stability:

  1. Real asset - Similar to other rare collectibles, fine wine benefits from scarcity and value as a passion asset, which helps support demand during different market environments. This is especially important during periods of inflation – as a consumer product, wine prices tend to see upward price pressure.

  2. Lower liquidity – Fine wine holdings are not typically sold off to nearly the same degree when there is a shift in the macroeconomic outlook.

  3. Not leveraged – The fine wine market does not use leverage. Therefore, investors are not forced to sell holdings to meet margin calls, limiting the degree of panic selling and removing a need to sell into a down market.

Challenges to fine wine investing

Some of the characteristics that make fine wine an appealing investment also present certain challenges. Having lower liquidity compared to mainstream assets can help reduce sudden selloffs but also means that those investors may not be able to liquidate assets as quickly if their circumstances change.

Another challenge is access. Investing in wine typically means buying and holding actual physical bottles of the world’s finest and rarest wines. This forms the foundation of a strong stable investment but also means it isn’t as easy to buy bottles of a Domaine Romanée-Conti Grand Cru as it would be increasing an exposure to a particular stock. But this challenge of access is a core driver of the big return potential among Burgundy and similarly highly coveted top end wines.


Fine wine – a source of diversification

Ultimately, we believe fine wine’s role as an investment is to sit alongside equity and bond holdings as well as other alternative investments. Fine wine’s low correlation to equity markets adds to its diversification credentials. While this type of diversification is useful amid all market backdrops, it is particularly important during unsettled market environments when there is little confidence as to how markets might behave going forward.


Figure 4 – Comparison of correlation to S&P 500

Correlation of monthly returns to S&P 500 31 Aug 2017 – 31 Aug 2022

Source: Pricing data from Liv-ex and investing.com as of 31 Aug 2022. Fine Wine = Liv-ex 1000, Commodity = Bloomberg Commodity Index, Government Bonds = iShares 7-10yr, Gold = USD/oz. Analysis by Cult Wine Investment. Past performance is not a guarantee of future results.

Contact the author Aaron Rowlands at arowlands@cultwines.com.

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[i] Past performance is not indicative of future success. Returns were calculated in GBP and may vary depending on exchange rates. Any investment involves risk of partial or full loss of capital. The Cult Wine Investment Index is a hypothetical tool. The results depicted here are not based on actual trading and do not account for the Cult Wine Investment annual management fees. There is no guarantee of similar performance with an investor’s particular portfolio.




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