Considering making the jump in to fine wine investment? Follow our advice so you end up with the best of the bottles
Wondering how best to invest that £10,000 – or more – you have spare? Fine wine boasts one of the best performing asset classes of the last 20 years. And with the most expensive lot of wine ever sold going under the hammer in October (at a Sotheby’s auction in Hong Kong 114 bottles of Romanée-Conti Burgundy went for £1,035,000 – around £9,800 a bottle), buying high-end cases could be the answer to a luxurious early retirement. There are risks, of course, but here, with help from Cult Wines, are seven top tips to help navigate around the most common pitfalls
1. Only invest what you can justify losing … or drink
Most experts agree that in order to stand the best chance of making a decent go of fine-wine investment you should set aside upwards of £10,000. The same rule for any investment, or indeed gamble, applies: do not use money which is likely to be necessary for your living in the short- to medium-term. Only spend what truly won’t be missed. Returns are not guaranteed, however, grade wine is a valuable commodity and sales are increasingly impressive.
An element of that fillip is thanks to the upward curve in interest from Asia, and specifically China. The Chinese have acquired a taste for red wine – in part due to their new urban affluence, and also because of their fondness for a lucky colour (interestingly white is associated with death and funerals, and therefore not as popular) – so much so that in 2013 they bought 1.86bn bottles. Not only did that figure represent a 136 per cent increase over the last handful of years, it also shunted France into second place as market leader. As a knock-on effect this new demand is putting a strain on the already limited availability of these wines.
Did you know about the tax benefits of investing in wine? See more below, but don’t – whatever you do – be tempted to drink your own wine. You are gathering assets for profit, not a special tipple. You’ll regret uncorking it in the morning …
2. Purchase the very best you can afford
Some would insist you stick to the main châteaux of Bordeaux, and that’s an excellent tip, at least in terms of the likelihood of ticking over a decent, steady profit margin (Bordeaux Grand Cru Classés account for the largest part of the investment-grade market for fine wine at around 75 per cent). Certainly if both the vintage and provenance are good then you are likely to be quids in. The key is to invest in wines with a record, those which have a truly global secondary demand.
For instance, first-growth Bordeaux wines (the likes of Château Lafite Rothschild, Mouton Rothschild, Margaux, Latour, Haut-Brion etc) have provided sound returns for centuries. The top Burgundies and Rhones have performed well over the past five years, as have top wines from Champagne.
Super Tuscan wines such as Sassicaia, Tignanello, Ornellaia have performed very steadily in recent years. Similarly, some of the extremely rare micro-production Californian cult cabernets such as Screaming Eagle have increased in value significantly. However, these wines are increasingly difficult to source and the market is much less liquid, so should only form a smaller portion of an overall diversified strategy.
So, buy the best that you can afford, and it’s worth bearing in mind that a smaller quantity of the finest wines will serve you better than cheaper cases which will hit you in the pocket when you tot up the annual insurance and storage charges. Typically, you will pay £15 per case, per annum.
Also check the vintage, and try, if you can, to stick to the more impressive years.
3. Always check prices
The cost of investment-grade wines can vary dramatically, by as much as 20 per cent. Therefore, when buying for investment it’s vital to shop around and sniff out the best market price. It is easier to check prices online these days, and websites such as wine-searcher.com can help while Liv-ex, the global market price for fine wine, is an invaluable resource.
Make sure you do your homework, even if you choose to invest with a merchant. Provenance and quality is crucially important to determine – and prove – the value of your investment.
4. Invest for a minimum of five years
Fine-wine investment has almost always produced positive absolute returns in every five-year holding period, ever since the first recorded, back in 1999. When compared with global equities, fine wine outperformed 98 per cent of the time over any given handful of years.
The best investment-grade wines are produced in small quantities (up to a maximum of 20,000 cases) and it’s the demand-supply imbalance brought about through their consumption that drives prices higher over time. There is a finite number of bottles in existence, and for the best returns a medium- to long-term view needs to be taken. As the wines mature and improve they also become rarer and more desirable – which drives prices ever higher.
“As with any investment market, you can have boom-and-bust cycles, but due to fine wine’s unique characteristics (finite supply, increasing demand), if you invest with a medium-to-long term horizon you can avoid any short-term fluctuations and benefit from the remarkably consistent and low-volatile returns afforded by wine investment,” says Tom Gearing, runner-up in the 2012 edition of The Apprentice and owner of Cult Wines.
“For me, one of the best pieces of advice I can give anyone starting with an investment in the fine-wine market is to buy with a medium-to-long-term view. Fundamentally, fine-wine prices appreciate because through consumption they become rarer while at the same time they become more desirable as they improve with age, and it’s this unique dynamic which drives prices higher over the longer term.”
5. Store the wine you buy in government licensed bonded warehouses
When buying a precious asset such as fine wine – preferably in unmixed, sealed cases using original wood (OWC in trade-speak) – it is of paramount importance to ensure your bottles are stored professionally and correctly, in the right conditions. In doing so, you will help guarantee the future value of the wine when you come to sell.
The best way to prove unquestionable provenance is to store fine wine in wooden cases ‘in bond’ (IB), which means in a bonded, ‘duty-paid’ warehouse such as London City Bond or Octavian Vaults. These bonded warehouses provide the optimum environment for storage, with the temperature, humidity and other microclimatic factors carefully regulated.
Something else to consider: wines stored IB are not liable for Value Added Tax or UK excise duty as they are considered ‘in transit’. In fact, a case of IB wine may change hands multiple times without ever leaving the bonded warehouse, removing the risk of damage and disruption. (Being IB also stops the temptation to pull a cork at the end of a jolly evening.) Only when the wine is removed from bond are these taxes paid.
Also, a note on insurance: accidents happen – assets may be damaged or stolen. It’s important that you insure your stock in your own name, and at replacement value. It’s vital you know who has custody of your assets – there is nothing safer than your own, fully-insured account in a bonded warehouse. If you do use in a fund then make sure a genuine custodian is looking after both your cash and your stock.
6. Approach en primeur wines with caution
Commonly referred to as ‘wine futures’, en primeur is the process of purchasing wine while still in the barrel, with bottling and physical delivery likely to occur two or three years later, after the vintage release.
Traditionally this was believed to be the best way for investors and collectors to buy classified growth Bordeaux as it typically offers the chance for collectors to acquire stock at the lowest market price. Such wines also offer the greatest security of provenance, as collectors can deal with the châteaux directly.
However, buying en primeur means committing to the wines are at their youngest – with all the maturing to do, before the final blend and oak-ageing is complete – and is fraught with risk. The actual bottled product may turn out better or worse than then initial barrel samples indicated. As a rule, do not buy en primeur in advance of the prices being published. And if you are going to have a dabble with these young wines, only do so with blue-chip merchants with a good track record.
7. Be aware of the tax benefits – and speak to an adviser
Fine-wine investment is often advertised as ‘tax-free’, due to it being exempt from capital gains tax – it is deemed a wasting asset ‘whose predictable life does not exceed more than 50 years’ (Section 44(1) Taxation of Chargeable Gains Act 1992).
While fine wine certainly can be considered more tax-efficient than other forms of investment, there a number of key considerations to make and it is crucial to observe that legislation in this area is not always black and white. It’s best to consult with a tax adviser to see how to make the most of fine wine as an asset.
See full article here (telegraph.co.uk)